Construction contracts commonly give employers the right to retain a percentage of the certified sums of work done, known as retention sums. The purpose of the retention sum is to secure performance by the contractor, and it will usually be released upon certain milestones such as the issuance of the Certificate of Making Good Defects.
Disputes surrounding the release of retention sums from the employer is unfortunately a familiar situation for many contractors. The situation worsens when the employer goes into liquidation, since the contractor will not be a secured creditor.
In the Federal Court case of SK M&E Bersekutu Sdn Bhd v Pembinaan Legenda Unggul Sdn Bhd (in creditors’ voluntary liquidation) and another appeal [2019] 3 MLJ 281, the issue to be considered was whether retention sums are equivalent to trust money, and therefore should be released to the contractor even in the event of the employer’s liquidation.
Background Facts
- This case consists of 2 different appeals with 2 different Appellants, who are the Sub-Contractors, who sued the same Respondent, the Main Contractor, to claim for the retention sums.
- The legal actions started when the Main Contractor went under voluntary liquidation. At that time, it owed approximately RM8.2 million in retention sums to 128 creditors, which included the Sub-Contractors here.
- The Main Contractor did not keep separate bank accounts to segregate the retention monies.
High Court Decision
- In relying on the Court of Appeal decision in Qimonda Malaysia Sdn Bhd (in liquidation) v Sediabena Sdn Bhd & Anor [2012] 3 MLJ 422, the High Court found in favour of the Sub-Contractors, by deciding that the retention sums were being held on trust by the Main Contractor.
- Although there were no express clauses in the contracts stating that a trust was created in respect of the retention sums, a trust could still arise because there are provisions for the release of the retention sums upon the complete rectification of defects.
Court of Appeal Decision
- The Court of Appeal reversed the High Court’s decision as it found that the nature and purpose of retention sums cannot create an implied trust.
- Construction contracts do not operate through a trust. Any property (including monies) must be separately identifiable for a trust to be inferred, which is not the case here since the retention sums were not in separate bank accounts.
The Federal Court’s Decision
Issues before the Federal Court
- The Sub-Contractors filed an appeal to the Federal Court where the apex court was tasked to determine whether:
- it is implied in law that retention sums are to be held in trust;
- it is a matter of interpretation of contract that retention sums are to be held in trust; and
- if so, whether a trust can exist without setting aside these retention sums as a separate trust fund.
Federal Court’s Findings
- Guided by case laws in the United Kingdom, the Federal Court ruled that for a trust to be exist in respect of the retention sums, the contract should contain clear wordings stating that the retention sums are to be held in trust and that a separate trust fund for these retention sums be established. It cannot be implied in law that a trust exists simply because of the nature and purpose of the retention sums.
- In the present case, there was no clear intention from the parties that the retention sums are trust monies, which negates the element of certainty of intention to create a trust. The certainty of subject matter of a trust is also missing when the Main Contractor did not separate these retention sums from the pool of monies owing to its creditors.
- In recognising that such decision exposes the contractors to high risk in the event the employer goes into liquidation, the Federal Court proposed for the enactment of legislation for retention sums to be placed in financial institutions such as banks, or to deem retention sums as trust monies. Such approach is adopted in Australia and New Zealand.
Key Takeaways
While the Federal Court has cleared the air on the status of retention sums, it has caused great concerns among the contractors on their claim for the release of their retention sums particularly when the employer goes into liquidation. This issue is particularly pronounced for sub-contractors who do not use standard form contracts, or which may not clearly identify retention sums as trust monies intended for the contractors’ benefit. Therefore, it is crucial for contractors to seek legal advice to establish contractual safeguards such that their rights over the retention sums are not unduly diluted.
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This article was written by Sean Ferdinand Ng (Associate) from Donovan & Ho’s dispute resolution practice.
Donovan & Ho is a law firm in Malaysia, and our employment practice group has built a reputation for providing strategic employment advice to local and global organisations. Our team of employment lawyers provide advice on employment law and industrial relations including review of employment contracts, policies and handbooks, advising on workforce reductions, and managing dismissals of employees for poor performance or misconduct. We also represent clients in unfair dismissal claims and employment-related litigation. Have a question? Please contact us.
