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Case Update: Retention Sum in a Construction Contract is Not Held on Trust

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CONSTRUCTION CONTRACT
Retention sum – Whether retention sums under a construction contract are held on trust? – Creation of trust – Standard term building contract – Voluntary winding up – Liquidation – Qimonda Malaysia Sdn Bhd (in liquidation) v Sediabena Sdn Bhd & Anor [2012] 3 MLJ 422

SK M&E Bersekutu Sdn Bhd v Pembinaan Legenda Unggul Sdn Bhd (in creditors’ voluntary liquidation) and another appeal
[2019] MLJU 211, Federal Court
- see the grounds of judgment here

Facts Pembinaan Legenda Unggul Sdn Bhd (‘the Respondent’) engaged the Appellants as sub-contractors to complete two separate projects which requires a certain amount of money to be held as retention sums under the term of the sub-contract. The said retention monies were never released to the Appellants and eventually the Respondent became insolvent and was placed under the creditor’s voluntary winding up. The Respondent claimed that the retention monies owing to the Appellant are unsecured debts. On the contrary, the Appellants claimed that the retention monies were held on trust. Relying on the Court of Appeal decision in Qimonda[1], which stated that even if there was no express clause providing for the creation of a trust over the retention monies, a trust could still arise due to the fact that there was a provision for the release of the retention monies upon any rectification work on any defect completed, the High Court held that the retention sums were being held on trust by the Respondent. Subsequently, the Court of Appeal reversed the High Court decision and further stated that there could be no trust because of the lack of an express clause or clear conduct from the parties and that the retention monies were never segregated. Hence, this present appeal.

Issue Whether retention sums under a construction contract are held on trust?

Held In dismissing the appeal, the Federal Court affirmed the Court of Appeal approach and disagreed with the approach in Qimonda, due to the absence of express contractual words or conduct of the parties suggesting a trust had been intended. Furthermore, the source of the trust property from which the retention sums may be derived was not identifiable since the Respondent had not taken any steps to segregate the retention sums that might then indicate that the retention sums should be considered as trust monies. Hence, there was no certainty of subject matter.

 
 
[1] Qimonda Malaysia Sdn Bhd (in liquidation) v Sediabena Sdn Bhd & Anor [2012] 3 MLJ 422

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