The concept and legal nature of the guarantee retention.

In the literature, the issue of warranty retention is considered in various aspects. Although O. G. Yershov⁴ notes a lack of attention in the legal literature to the problem of warranty deductions. Research is mainly focused on the legal nature and security function of this mechanism, while the aspect of the return of warranty deductions has not been sufficiently studied.

Shadrin⁶ notes that, despite the popularity of guarantee retention in construction relations, there is no direct regulation of it in the civil legislation of the Russian Federation, and the position of the courts on this issue varies. For this reason, legal uncertainty is created for the parties to the contract during its execution or termination, in case of bankruptcy of the parties to the contract and in other situations.

In the works of N. B. Shcherbakov⁷, it is noted that the guarantee retention clause actually acts as an economic barrier for new contractors in the market. The author emphasizes the need to balance the interests of customers and contractors.

O.A. Belyaeva¹ concludes that guarantee deductions do not correspond to modern models of security transactions, and suggests considering bank guarantees as a more legitimate and effective tool for ensuring the fulfillment of obligations under the contract.

The construction industry does not have many ways to ensure the fulfillment of obligations, especially when it comes to protecting the interests of the customer. Often, this function is performed by traditional fines and penalties for delay or non-fulfillment (poor-quality performance) of work. At the same time, D. V. Bolokhov² strives to show that retention guarantees can be a useful tool for ensuring the fulfillment of contractual obligations in the construction industry, despite gaps in legislation.

In general, it can be argued that against this background, a more original and effective interim measure for a number of cases is a guarantee retention.

The warranty deduction is a part of the price of the work (usually 5-15%), which the customer retains until the expiration of the warranty period or the fulfillment of additional conditions (for example, the elimination of defects). Its purpose is to encourage the contractor to fulfill its obligations with high quality and compensate for the possible costs of the customer for correcting deficiencies.

Despite the absence of direct regulation in the Civil Code of the Russian Federation, its legal nature and conditions of application are shaped by judicial practice, including the positions of the Supreme Court of the Russian Federation. The courts recognize it as a legitimate way to ensure the contractor’s obligations (art. 329 – Ways to ensure the fulfillment of obligations, 421 – freedom of contract of the Civil Code of the Russian Federation).

According to clause 1 of Article 711 of the Civil Code of the Russian Federation, payment for works is made after their acceptance, but the parties have the right to change this procedure. In this case, the guarantee retention is considered as a deferred payment, and not an interim measure in the classical sense (art. 329 of the Civil Code of the Russian Federation). The legal nature of the retention guarantee remained controversial for a long time.

The Presidium of the Supreme Arbitration Court of the Russian Federation, in its Resolution No. 4030/13 dated 07/23/2013, indicated that «The inclusion of such a provision on payment for work in the contract does not contradict paragraph 2 of Article 746 of the Code» (payment for work). Thus, in fact, the guarantee deduction is qualified by the Supreme Arbitration Court of the Russian Federation as a special procedure for paying for contract work under a suspensive condition.

This position was later reflected in two Rulings of the Judicial Board for Economic Disputes of the Supreme Court of the Russian Federation dated 30.06.2017 in case No. 304-ES17-1977 and dated 12.03.2018 in case No. 305-ES17-17564. The judicial acts state that «from an economic point of view, such a payment procedure performs a security function, is relatively common in circulation and does not contradict paragraph 2 of Article 746 of the Civil Code of the Russian Federation (Resolution of the Presidium of the Supreme Arbitration Court of the Russian Federation dated 07/23/2013 No. 4030/13).»

Warranty retention is not provided for by law.

The Civil Code of the Russian Federation does not contain the direct concept of «guarantee retention». The only general rule on retention is fixed in clause 1 of Article 359 of the Civil Code of the Russian Federation, according to which the creditor who has the thing to be transferred to the debtor has the right to hold it until the corresponding obligation is fulfilled.

A guarantee retention is also not a retention within the meaning of art. 712 (contractor’s right to retention) The Civil Code of the Russian Federation, because the thing is being held, not the money, against the obligation to pay, and the creditor has the right to withhold it when the debtor is in arrears (according to the terms of the contract agreements, the contractor is not in arrears at the time the customer withholds the money).

381.1 of the Civil Code of the Russian Federation (security payment), since the debtor must provide such security in the form of money himself. This article of the Civil Code of the Russian Federation refers to a security payment. The legal structure of a security payment is that the obligated party secures its obligation by depositing a certain amount of money in favor of the other party (security payment). The deposit by the obligated party and the retention by the eligible party are different constructions.

In case of non-fulfillment of a breach of obligations by the obligated party within the time period stipulated in the contract or termination of the secured obligation, the security payment is subject to refund.

In contractual legal relations, there can be no question of any refund, since this is a part of the payment that was withheld by the customer, i.e. the contractor himself did not pay the amount of the guarantee payment, and in addition, he did not receive the full cost of payment for the work performed in the amount of the guarantee deduction when paying for the work performed. The procedure for granting and refunding a security payment is a significant difference between the legal structures contained in art. 381.1. of the Civil Code of the Russian Federation and the guarantee deductions in the contract.

However, the Supreme Court of the Russian Federation, in Ruling No. 305-ES21-14922 dated 12/16/2021, indicated that such a structure can serve as a security payment (art. 381.1 of the Civil Code of the Russian Federation) if it is explicitly stipulated in the contract. It turns out that the withheld funds have the nature of a security payment, and not a part of the price of the work. This means that the obligation to pay the warranty deduction arises only if there are no claims to the quality of the work after the expiration of the warranty period.

The issue of warranty deductions is debatable in theory and law enforcement practice. For a long time, there was a perception that using warranty deductions was risky. This was explained by negative judicial practice, which boiled down to the fact that the guarantee deduction does not correspond to any of the methods of securing obligations, and the current legislation does not contain legal grounds not to pay the contractor extra for the work performed (resolution of the Federal Arbitration Court of the Moscow District dated 11/28/05 № KG-A40/11581-05-P-1,2).

Nevertheless, the legislation of the Russian Federation provides for the use by the parties of any means not prohibited by law to ensure the fulfillment of obligations (paragraph 1 of Article 329 of the Civil Code of the Russian Federation). Therefore, there are no grounds for non-application of the terms of the contract on the guarantee retention of the quality of the work performed by the contractor.

The guarantee deduction is part of the payment.

Thus, the guarantee retention is carried out by reducing the payment due to the contractor. Simply put, the settlement procedure agreed upon by the parties provides for a partial deferral of payment for completed works in the amount of, for example, 5% of the cost of work under the act of KS-2, because the withheld guarantee amount (part of the payment for work) is returned in equal installments after each calendar year in the absence of a guarantee case within 5 years from the date of receipt of the act. commissioning of the facility (the return procedure may differ in different contracts).

If we assume that by withholding funds from the obligation to pay, the parties have agreed to transform the funds into an interim measure (the legal nature is changing), then when the grounds for withholding disappear, the funds are transformed back (their interim measure is terminated) into an obligation to pay for the work performed. The absence of an indication of the reverse transformation in the terms of the contract is explained by the absence of a condition for the termination of the customer’s obligation to pay for the work performed in the amount of the guarantee deduction. I.e. by making a deduction, the customer receives a delay in payment, but continues to be due for the work performed.

Under these circumstances, after the obligation to refund the deduction arises (in the absence of a guarantee case), the legal nature of the funds is preserved or restored – this is part of the payment for the work performed.

A warranty retention is an interim measure only for a period strictly defined by the contract – from the moment the customer’s obligation to pay and the corresponding retention arises until the expiration of each calendar year in the absence of a warranty event, i.e. after this period of time, the obligation to pay for the work performed in the remaining 5 percent amount is resumed (the deferral has expired).

The consequence of the contractor’s breach of obligations under the contract is the customer’s right to use the required amount of money from the guarantee amount in his favor. This right correlates with the norm of art. 723 of the Civil Code of the Russian Federation, which provides for the right of the customer to a commensurate reduction in the price set for the work or reimbursement of his expenses for the elimination of deficiencies, i.e. at the expense of remuneration of the contractor.

It is precisely this effect that the customer pursues by withholding the guarantee amounts, saving his money, by delaying payment of the amount of money owed to the contractor for the work performed. Therefore, the warranty deduction is nothing more than a part of the payment to be transferred to the contractor in the absence of defects in the work.

Has the obligation to pay ceased after the guarantee retention?

If the parties did not stipulate a condition for termination of the payment obligation, then it was postponed for the period of the guarantee retention, i.e. the obligation cannot be considered terminated solely on the basis of the guarantee retention.

In accordance with Article 407, obligations are terminated in whole or in part by virtue of a law or contract. Termination of an obligation on the initiative of one party is allowed only in cases stipulated by law or contract.

Chapter 26 of the Civil Code of the Russian Federation names the following grounds for termination of obligations: proper performance, provision of compensation, set-off, coincidence of debtor and creditor in one person, innovation, debt forgiveness, actual or legal impossibility of performance, death of a citizen, liquidation of a legal entity.

The guarantee retention is not one of the grounds listed by the Civil Code of the Russian Federation.

In our opinion, payment with retention cannot be considered a proper fulfillment of the obligation to pay for the work performed. If the contract does not provide for the termination of the obligation to pay for the work performed in the amount of the guarantee deduction, then the parties have not given the guarantee deduction the basis on which the obligation is terminated.

This is especially true if the parties have agreed in the contract that the proper fulfillment of the payment obligation by the customer will be the «transfer of funds to the contractor’s current account.»

By itself, withholding does not terminate the obligation to pay, unless the parties have agreed on it (this should be explicitly stated in the contract), that withholding terminates the obligation to pay (Clause 3, Article 407 of the Civil Code of the Russian Federation).

The customer’s obligation to pay for the work performed by the contractor from the guarantee deduction can be terminated only by offsetting (art. 410 of the Civil Code of the Russian Federation) and only when the customer has counter-monetary claims, and they can arise only in case of violation of obligations by the contractor.

Therefore, the parties must explicitly stipulate a condition for termination of the payment obligation, otherwise it should not be considered terminated. Withholding under the terms of the agreement is not a transfer of funds in favor of the withholding person, it is a temporary suspension (postponement) of the fulfillment of the obligation to pay.

Only in the event of a breach of obligations by the contractor does the right arise to transfer funds in favor of the retaining person. If such a violation does not occur, then the withheld amount (and this is part of the payment, according to the position of the Presidium of the Supreme Arbitration Court of the Russian Federation in Resolution No. 4030/13 dated 07/23/2013) must be paid (refunded) to the subcontractor by crediting it to his settlement account – this moment ends the proper fulfillment of the payment obligation by the customer.

Terms of the agreement: how to avoid ambiguity

The key aspect is the wording contained in the contract:

• The amount of deduction (fixed amount or percentage of the stage).
• The return period (for example, after signing the commissioning certificate or expiration of the warranty).
• The purposes of use (covering the costs of eliminating defects, penalties, etc.).

If the conditions are not clearly formulated, the courts may recognize the deduction as part of the price of the work, which entails the obligation of the customer to pay it, taking into account art. 711 of the Civil Code of the Russian Federation. For example, in the Decision of the Administrative Court of the Volga Region No. F06-9379/2021, the court ordered the customer to return the warranty deduction, since the shortcomings of the work had not been proven.

Is it possible to charge a contractual penalty for the delay in payment of completed works for the arrears of the guarantee deduction?

According to the position of the Supreme Court of the Russian Federation set out in Definition No. 305-ES21-14922 dated 12/16/2021, the contractual penalty for late payment of works does not apply to the guarantee deduction, since it is not part of the price. However, if the parties have explicitly stipulated in the contract a penalty for violating the terms of repayment of the guaranteed amount withheld, the courts will recover it.

The position of the Supreme Court of the Russian Federation

In Definition No. 305-ES21-14922 dated 12/16/2021, the Supreme Court of the Russian Federation distinguished:

• Penalty for late payment of work — is applied to the basic price of the contract.
• Interest under art. 395 of the Civil Code of the Russian Federation is charged on the amount of the guarantee deduction if its refund is delayed.

The court pointed out that the guarantee retention has a different legal nature — it is a security mechanism, and not part of the payment. Consequently, the general conditions for late payment penalties do not apply to him if the contract does not contain a direct indication of responsibility for the delay of this particular amount.

Examples from judicial practice:

• In case no. A40-63799/2020 (Resolution of the Moscow District Arbitration Court no. F05-2818/2021), the contractor demanded a penalty for late repayment of the warranty retention. The court refused, citing the fact that the penalty clause in the contract applied only to the main payments, and not to the deduction.
• Refusal to collect a penalty: In case no. A40-125377/2015 (Definition of the Supreme Court of the Russian Federation no. 305-ES16-7657), the court dismissed the claim, stating that the penalty for late payment of work does not apply to the guarantee deduction, as it has a different legal nature.
• Collection of interest under art. 395 of the Civil Code of the Russian Federation: If the contract does not provide for a penalty, the customer is obliged to pay interest for using other people’s money from the moment of violation of the refund period (Definition of the Supreme Court of the Russian Federation No. 305-ES21-14922).

How to provide for a penalty in the contract?

To collect a penalty for late repayment of the warranty deduction, it is necessary:

1. Explicitly state in the contract that the guarantee deduction is part of the price of the work, and its delay is equivalent to late payment.
2. Specify the conditions for calculating the penalty specifically for the amount of deduction, separately from the general provisions on payment.
3. Eliminate ambivalence of interpretations. For example:

«In case of violation by the Customer of the warranty retention refund period (clause 5.3 of the Agreement) The contractor has the right to demand payment of a penalty in the amount of 0.1% of the retention amount for each day of delay.»

An example of a successful formulation from the Resolution of the AU of the Far Eastern District No. F03-10/2022:

«The guarantee deduction in the amount of 10% of the cost of the stage of work is subject to refund within 10 days after signing the act of commissioning the facility. For violation of the refund deadline, the Customer pays the Contractor a penalty in the amount of 0.05% of the retention amount for each day of delay.»

In this case, the court satisfied the claim for the recovery of a penalty, since the condition was unambiguous and did not cause disputes about the nature of the deduction.

Development of judicial practice in judicial acts of the Supreme Court of the Russian Federation since 2013:

Resolution of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 4030/13 dated 07/23/2013: The Court confirmed the validity of the guarantee retention clause, indicating that the parties have the right to agree on postponement of payment of part of the price until additional conditions (for example, acceptance of the object) are fulfilled. This decision became the basis for subsequent disputes.

Definition of the Supreme Court of the Russian Federation No. 305-ES17-17564 dated 12.03.2018: The Court emphasized that the deduction is not a set-off, but is a special payment procedure conditional on the proper fulfillment of obligations.

Definition of the Supreme Court of the Russian Federation No. 305-ES21-14922 dated 12/16/2021: The key conclusion is that the warranty retention is not included in the price of the work, therefore, violation of the deadline for its return does not fall under the conditions of a late payment penalty.

After the Ruling of the Supreme Court of the Russian Federation No. 305-ES21-14922, arbitration courts take a stricter approach to assessing the terms of the contract (courts have begun to apply new approaches):

• If the penalty is not provided for the guarantee deduction, only interest is charged under art. 395 of the Civil Code of the Russian Federation. For example, in the Decision of the Moscow District Arbitration Court dated 05/08/2024 in case no. A40-219073/2023, the court refused to collect a contractual penalty, stating that the general conditions of liability for late payment «do not apply to a special mechanism of guarantee retention.»
• If there is a penalty condition, but the deadline for the return of the deduction has not been determined, the courts may declare it not concluded. So, in case no. A41-90130/2023 (Resolution of the Tenth AAC dated 04/09/2024), the court refused to recover, since the contract did not contain a clear time frame for repayment.
• Resolution of the Judicial Court of the West Siberian District dated 02/13/2025 in case no. A27-8996/2024. The case involved a dispute over the recovery of a guarantee deduction and penalties. In the ruling, the court confirmed that the guarantee deduction can be considered a security payment, and interest can be charged for its delay under art. 395 of the Civil Code of the Russian Federation.

Important conclusions from judicial practice:

• The guarantee deduction is recognized as a security payment, since its function is to cover the possible costs of eliminating work deficiencies.
• Interest is charged for late repayment of such amounts under art. 395 of the Civil Code of the Russian Federation, even if the contract does not contain a direct penalty clause.
• The Court emphasized that the deduction is not part of the price of the work, but serves as a guarantee of obligations.

The examples given confirm that without a special penalty clause in the contract, only interest can be collected for the delay in the return of the guarantee deduction under art. 395 of the Civil Code of the Russian Federation. At the same time, the examples illustrate how the courts distinguish between the nature of the guarantee deduction (payment vs. part of the price of work), which is critical for determining liability measures.

But there are exceptions where retention is recognized as part of the price of work. In the Decision of the Administrative Court of the North-Western District No. A56-90094/2020, the court levied a penalty, since the contract directly linked the retention to the payment of the stage, and not to securing obligations.

In 2024-2025, there were disputes where the courts collected a contractual penalty for delaying the return of the guarantee deduction, but only if there were clear conditions in the contract.

Practical examples:

1) Case no. A40-122131/21-110-823 (Resolution of the Moscow District Arbitration Court dated 06/10/2024)

• The essence: The contractor demanded to collect from the customer 1.2 million rubles. penalties for late repayment of the warranty deduction (5% of the cost of work).
• Court decision: The penalty was collected, as the contract explicitly stipulated that the guarantee deduction was part of the price of the work, and its delay was equivalent to late payment.
• The key argument: «The terms of the contract do not allow us to qualify the guarantee retention as a security payment. The parties agreed that the deduction is subject to refund 10 days after signing the act, and a general late payment penalty is applied for violation of the deadline.»

2) Case no. A56-46919/2023 (Resolution of the Administrative Court of the North-Western District dated 07/10/2024)

• Outcome: The Court refused the penalty, since the contract did not contain a special condition for a penalty for late repayment of the retention.
• Conclusion: «The guarantee deduction has a different legal nature than the payment for work. In the absence of a direct indication of a penalty for its delay, only interest is applied under art. 395 of the Civil Code of the Russian Federation»

3) Case no. A04-2834/2022 (Resolution of the Administrative Court of the Far Eastern District dated 03/14/2024)

• Successful example: The Court collected a penalty because the contract:

o Clearly linked the guarantee deduction with the payment of the stage of work;

o Contained a separate clause: «For violation of the warranty retention repayment period, the Customer pays the Contractor a penalty of 0.1% of the amount for each day of delay.»

• Bottom line: The requirement is 100% satisfied.

Trends in 2024-2025:

1) If there is a direct condition for a penalty in the contract, the courts will recover (for example, case No. A40-122131/21-110-823).

2) If there is no condition or the wording is vague, only interest is applied under art. 395 of the Civil Code of the Russian Federation (for example, case no. A56—46919/2023).

3) It is critically important to distinguish in the contract:

o Warranty deduction as part of the price of the work (then a penalty is possible);

o Guarantee retention as a security payment (then only interest).

To ensure that the penalty is collected, include a separate clause in the contract, for example:

«For violation of the return period of the warranty retention, the Customer pays the Contractor a penalty in the amount of ___% of the retention amount for each day of delay.»

Conclusion.

Courts often take the position that the nature of the guarantee deduction differs from the payment for work performed, and if the contract does not specify separately the right to charge a penalty for late repayment of the guarantee deduction, then it is unlawful to charge a penalty for late payment.

The possibility of collecting a contractual penalty for late repayment of the guarantee deduction depends on the wording in the contract. The Supreme Court of the Russian Federation and arbitration practice consistently adhere to the position that if the withholding is of the nature of a security payment, only interest is applied under art. 395 of the Civil Code of the Russian Federation. To protect the interests of the contractor, a direct penalty clause is necessary, and customers should avoid ambiguity in determining the legal nature of the retention.