Construction Law Series No.2: Trust Issues with Retention Sum in the Times of COVID-19

by Naveen Sri Kantha ~ 16 June 2020

Construction Law Series No.2: Trust Issues with Retention Sum in the Times of COVID-19

Contributed by:

Naveen Sri Kantha (Associate)

Tel: 603-6201 5678 / Fax: 603-6203 5678




Economies all around the world are experiencing an unprecedented downturn amidst global concerns due to the Coronavirus (COVID-19) pandemic. As a result, on 18.03.2020 the Malaysian government had taken steps to curb the rampant spreading of the pandemic disease by implementing the Movement Control Order (MCO). The 1st and 2nd Phase of the MCO saw no construction activity and it was only until the 3rd phase of the MCO where specific construction sectors could resume work. Finally, on 05.05.2020, the Government issued Conditional Movement Control Order (“CMCO”) enabling all construction sectors to operate subject to social distancing practices and mandatory COVID-19 screening tests for construction workers, especially migrants. Now, this will inevitably take a huge toll on the construction industry and will potentially lead to many construction companies going bust. 

It was recently reported in an article by the National House Buyers Association on 05.05.2020 that a total of 17,000 companies would be affected, and these companies are the key drivers of the construction industry. They represent a majority of the personnel and labour workforce amounting to a total of 850,000 workers in the construction industry, based on 2018 statistics from CIDB.

Currently, while all classes of contractors are resuming to normality subject to approval, the damage, however, is certainly done. It is foreseeable that foreign workers may decide to return to their home country out of fear and uncertainties.  Amongst the need to comply with the onerous health and safety requirements, fear and anxiety of infection, elements of uncertainty and the reduction of foreign workers; the morale of the workers would have taken a heavy blow and their productivity disrupted in the process. Furthermore, there is an imminent risk that the supply chains may be disrupted and may not be re-established in the short term such as the suppliers of key building materials, equipment rentals and imported items.


The reality is that many construction firms will go into liquidation and the last thing contractor’s need at this moment is to be on the receiving end of a financial detriment. Sometime late last year, I wrote about how retention monies which are deposited at the start of the contract are not really yours to begin owing to the recent Federal Court case of K M&E Bersekutu Sdn Bhd v Pembinaan Legenda Unggul Sdn Bhd (In Creditors’ Voluntary Liquidation). Well, that article will be prevalent and significant in the current times of COVID-19 due to the substantial financial downturn that the construction industry has faced and will face soon.

Envisage a scenario where, as a result of the MCO and COVID-19, the Employer of the construction contract goes into liquidation, does the retention monies or performance bond which were deposited by the contractor at the start of the contract be regarded as trust monies or merely a simple debt owed? I will get to the intricacies of trust monies and simple debt as we progress further in the article herein.

In this article, I will expand further from the original article drafted and elaborate on the existing legal jurisprudence relating to retention monies in Malaysia. I will also go delve further into the prospective measures contractors can cultivate moving forward to safeguard their financial interest due to the ground-breaking decision by the Federal Court.



It is common for construction contracts to empower the Employer to retain a stipulated percentage of each payment which becomes progressively due to the contractor. This is termed as the “retention sum”, “retention monies” or “retention fund”. All standard form construction contracts in Malaysia with the exception of Public Works Department Contract PWD 203/A contain a provision for the retention of monies due to the Contractor by the Employer ultimately serving as a safeguard against the possibility of the Contractor’s failure to complete works or defective works. The retention monies are normatively portioned out into two moieties where the first moiety will be released upon Certificate of Practical Completion (“CPC”) of the Project and the second moiety being released upon Certificate of Making Good Defects (“CMGD”).


Some contracts like the P.W.D. Form 203A (Rev. 2010) is silent on the provision of retention sum and only contain a provision for the performance bond. Likewise, performance bonds are provided as a means of establishing financial security for the Employer for the Contractor’s failure to perform his contractual obligations. Performance bonds are common in the Malaysian construction industry.

Construction contracts often require a contractor to take out a performance bond, typically in the form of a bank guarantee which can be called upon by the employer to a specified limit representing a portion of the contract value in the event of the contractor’s breach of the construction contract.

Alternatively, which is seen in the under Clause 13.2 of the P.W.D. Form 203A, contractors can also opt to proceed with a performance guarantee sum which takes the form of money retained from progress payments due up until it reaches the aggregate of 5% of the Contract Sum. This bears similarities to the nature of a retention sum.


It is imperative that parties have agreed by contract for the retention sum to be impressed with a trust. If this is successfully done, the contractor’s claim to the retention sum takes priority over the employer’s general creditors in the event of the employer’s insolvency, and the appointed liquidator would be obliged to hand over the retention sum in full to the contractors and subcontractors involved. This is because the retention sum are not monies that belonged to the Employer in the first place and the contractor is the actual beneficiary of the said monies.

Conversely, if the retention sum is not regarded as a trust money but the claim for the same represents a simple debt owed in the event of insolvency on the part of the employer, the said retention monies will form part of the monies to be distributed pari passu in the winding-up, and the contractor will be regarded as an unsecured creditor. Therefore, the contractor may find themself in no better position than any other ordinary unsecured creditor.


In the Court of Appeal case of Qimonda Malaysia Sdn Bhd (in liquidation) v Sediabena Sdn Bhd [2012] 3 MLJ 422, The Employer and Contractor had entered into a contract for a project known as the 'Design and Build for Qimonda Global Module House Project at Senai, Johor'. Pursuant to the terms of the contract, the Employer shall release one-half of the retention monies to the respondent upon the issuance of the handing over the certificate and the second half of the retention sum monies to the respondents upon the issuance of the maintenance certificate or after the issuance of the certificate of statutory completion for the works by the relevant authority, whichever is the later. The retention monies of RM6,127,884.50 were not paid by the Employer to the contractor although the Project had achieved CPC and further, the DLP period had expired. Employer subsequently was voluntarily wound up. Therefore, the issue of contention before the Court in Qimonda was whether the retention money held by the Employer for the benefit of the contractor was regarded as a trust money.

The Court of Appeal held that it has always been implied that retention monies are by their nature and purpose, trust monies held by the Employer for the Contractor for specific purposes i.e. for payment on the costs incurred by the Employer to rectify defective works or to complete the works left uncompleted by the Contractors.

The usage of the word 'deduction' for the creation of retention monies from the certified sums under provision of the contract further corroborates the position that parties had recognized that retention monies are contractor's monies. Therefore, all the requisites of a valid trust were present and the parties had manifested a clear intention to create a trust since from the outset, the whole purpose of what had been done had been to ensure that the monies remained in the beneficial ownership of the respondents; and a trust is the obvious means of achieving this.

In a nutshell, just because retention monies are not separated from the Employer’s common fund prior to its liquidation does not change the status of the retention monies as trust monies. The Appellate Court delved further and considered the practical realities of the construction industry by forming the view that contractors would not want to jeopardize the commercial relationship of the parties when the contract was still subsisting. Further, contractors would not really apply their minds to taking such action to preserve the retention funds especially when the employer was paying monies under the payment certificates.


The facts of the Federal Court case of SK M&E Bersekutu Sdn Bhd v Pembinaan Legenda Unggul Sdn Bhd (In Creditors’ Voluntary Liquidation) [2019] 3 MLJ 281 was identical to Qimonda, and similarly dealt with the situation where retention monies were not paid to the subcontractor although the Project had achieved Practical Completion and the defect liability period had also expired. Correspondingly, the Main-contractor had subsequently gone into voluntary liquidation.

The questions of law before the Federal Court were as follows:

I. Where a building contract provides that a certain percentage of the certified sum for work done by a contractor is to be retained by the employer until the conditions for the release of the sum retained (‘retention sum’) are met:

(a) Is it implied by law that the retention sum is to be held in trust by the employer for the benefit of the contractor? or

(b) Is it a matter of construction (interpretation of contract) whether or not the retention sum is to be held in trust by the employer for the benefit of the contractor?

II. Where in a building contract there exists an agreement (whether arising by implication of law or upon construction of the contract) that the retention sum is to be held in trust by the employer for the benefit of the contractor, can the trust of the retention sum be constituted without the employer first appropriating and setting aside the money as a separate trust fund?

Sometime around March 2019, the Federal Court answered the question I (a) and II in the negative and question I (b) in the affirmative. The Apex Court in Malaysia had departed from the principles distilled in Qimonda and concluded that for retention sums to be deemed as monies held on trust, there must be clear contractual language as well as a separation of the retention sums into a trust account.

The Federal Court held that a trust cannot be implied in law in the absence of an express clause to decipher that trust is in existence and that the word “deduction” of retention sums does not automatically manifest parties’ intention to regard retention sums as trust monies.

The rationalize of the decision of SK M&E Bersekutu was heavily influenced by the jurisprudence in the United Kingdom and Scotland. Under the JCT Contract in the UK, the employer undertakes to hold the retention sum on trust for the contractor. For instance, cl 30.5.1 of the UK standard construction contract JCT 1998 provides that the ‘employer’s interest in the retention is fiduciary as trustee for the contractor and for any nominated sub-contractor’. The effect of such a contractual provision is to impose upon the employer a personal obligation to appropriate and set aside as a trust fund the amount of retention money withheld. If this is successfully done, the contractor’s claim to the retention money takes priority over the employer’s general creditors in the event of the employer’s insolvency, and a liquidator of the employer would be obliged to hand over the retention fund in full to the contractors and subcontractors involved.

However, the position would be different where the contractor had gone into liquidation without having set aside as a trust fund the amount of retention money withheld. The question of trust does not arise in such a situation since there is no res to which the trust can attach. Thus, if the employer merely deducts the contractually agreed percentage from interim payments which he would have otherwise paid to the contractor, there is only a withholding of payment instead of the setting up of a distinct fund. There would consequently be no trust asset to which the contractor could have recourse in the event of the employer’s insolvency. Therefore, it is merely a contractual debt.

The Federal Court reverted to the basics of trust law that it is a mandatory requirement for there to be certainty of words, certainty of subject, certainty of object. The Federal Court overruled the case of Qimonda by stating that in the Court of Appeal found that there was a trust of the retention sum despite the absence of express trust clause or words to that effect in the contract and there were no unusual terms as well. However, no fund was set aside before the liquidation, nor had the contractor requested it. Although the court held that the ‘requisites’ of a valid trust were present, there seemed to be no evidence of either intention or trust property. To allow a creditor a restitutionary remedy in the interest of ‘doing justice’ in a specific case would only lead to that creditor jumping the queue of unsecured creditors and so bring about injustice in everyone else’s case’.


As alluded above, retention monies should be accorded the status of trust monies if the following are present:

  1. The contract should employ and identify by clear wordings that the retention monies are held in trust; and
  2. The Contractors should segregate this retention monies and keep them unmixed with other monies of the employer.

The upshot of this is that this allows for easier identification of the retention sums as trust monies.


The Federal Court in declining to take the approach of the Court of Appeal in Qimonda has certainly placed contractors and subcontractors in damaging position and leaving them exposed to high risk if their employers went into liquidation. With COVID-19 leaving a huge dent in the construction industry, cash flow is vital.

Under the 30.6 in PAM Contract 2006/2018 and the AIAC Standard form Contract 2019 (Red Book), retention fund is expressly regarded as trust monies and the Employer does act as a trustee for the contractors. However, the mere existence of express terms is insufficient to create a trust without any other action as it is clear that an express stipulation is not enough. The Federal Court stresses additionally on the importance of segregating this sum of monies separately from the common fund to signify the intention to create a trust. Therefore, possible solutions would be to enact legislation mandating retention monies to be placed in an authorized deposit-taking institution such as banks so that the failure to do so would invalidate the provision on retention sums in the contract.

Notwithstanding the abovementioned safeguards and appropriate practices, I respectfully am of the view that the Apex Court has not taken into consideration the commercial realities of the construction industry, particularly in the Malaysian context. The reported case laws in Malaysia would reveal that there were only a handful of cases where a contractor had actually applied for the preservation of retention monies during the pendency of the contract and was done so after the Employer had gone into liquidation. There could be many reasons why the fund was not set aside; the obvious ones being that the contractor would not want to jeopardize the commercial relationship of the parties when the contract was still subsisting.


  1. If I have adopted the PAM Contract 2006/2018, is my retention sum regarded as trust monies in the event of insolvency?
  • No, although Clause 30.6 of the PAM had expressly regarded retention monies as monies held on trust by the Employer on behalf of the Contractor. There must be a positive act of segregating this sum of monies in separate fund/account.  
  1. If I have adopted the PWD Standard Form Contract 203A/203 2010, is my retention sum regarded as trust monies in the event of insolvency?
  • Now, as reiterated above, under the PWD Contract, there is no express provision governing retention monies. There are two provisions to safeguard the completion of works and that is performance bond & performance guarantee sum, i.e Clause 13.1 and 13.2 of PWD Contract respectively.
  • Performance Bond – In the event the Employer goes into liquidation, this does not affect the contractor, as the monies are held by the third-party bank.
  • Performance Guarantee Sum – This bears similarity to the nature of the retention monies as 10% of each progress payments are withheld until the full satisfaction of the net aggregate of 5% of the Contract Sum. If these monies retained are not kept in a separate fund/account, the performance guarantee sum will not be regarded as trust money in the event of insolvency.
  1. If I have adopted the AIAC Standard Form Contract 2019 (Red Book), is the retention sum regarded as trust monies in the event of insolvency?
  • At first blush, the answer is No. This is because like the PAM, although Clause 30.6 of the AIAC Contract had expressly regarded retention monies as monies held on trust by the Employer on behalf of the Contractor. There must be a positive act of segregating this sum of monies in separate fund/account.  
  • However, Clause 30.6 (c) of AIAC Contract expressly states that  the duty of the Employer to hold the Retention Fund as trust monies shall remain irrespective of whether or not the Retention Fund has been paid into a separate trust account before its release, and the Retention Fund shall at all times remain as trust monies even after the Employer has gone into liquidation or (bankruptcy and shall not form part of the general funds upon liquidation or bankruptcy of the Employer.
  • Therefore, such a clause is clearly distinguishable from the facts of the Federal Court, court should give full effect to the Clause 30.6 (c) as parties have clearly agreed that there retention monies are to be regarded as trust monies irrespective of the failure to segregate this sum. It is therefore arguable to suggest that under the AIAC Contract, retention sum should be regarded as trust monies in the event of insolvency.


As stated earlier, the decision of the Federal Court has led to negative implications on contractors in the construction industry in Malaysia. Therefore, time has come for Malaysia to consider reforms initiated by the United Kingdom, Australia and New Zealand in enacting legislation to mandate retention monies to be kept in third party institutions. For ease of reference, the reforms of the said countries are reproduced below:

  1. UK and Scotland
  • The legal jurisprudence in the UK and Scotland appears to similarly suggest that even if the contract provides a mechanism whereby the retention sums deducted are to be held on trust for the contractor, the mere existence of express terms is insufficient to create a trust without any other action.
  • Carillion plc was one of the largest multinational construction firms in the UK. They which went into liquidation was regarded in the UK as the “largest ever trading liquidation in the UK”. As a result of Carillion’s insolvency, an estimated 30,0000 SMEs in the UK construction industry were left without any recourse to recover retention monies. On 9 January 2018, just days before Carillion’s collapse, a Private Member’s Bill - the Construction (Retention Deposit Schemes) Bill - was introduced in the House of Commons under the Ten-Minute Rule and, unusually, passed its first reading.
  • The Bill was developed with a ‘large contractor insolvency’ nightmare in mind. The second reading of the Bill has been repeatedly delayed due to the distractions of Brexit, and the last date of March 2019 has come and gone with no new date being announced.
  • The Bill seeks to amend the Housing Grants, Construction and Regeneration Act 1996 and broadly contains three limbs. Firstly, the creation of ‘retention deposit schemes’ to safeguard retention monies withheld in connection with construction contracts and make it easier to resolve disputes relating to those retentions. Second, a prohibition on retentions that are not placed into a retention deposit scheme. Lastly, a duty to refund that any retention which is not placed into a retention deposit scheme. This must be refunded within 7 working days after it was withheld.
  1. Australia/New Zealand
  2. New South Wales
  • New South Wales: Building and Construction Industry Security of Payment Amendment (Retention Money Trust Account) Regulation 2014. The provisions seek to protect subcontractors’ retention money in trust for major construction projects, including if a construction company becomes insolvent.
  • Head contractors are required to establish and maintain a retention money trust accounts for the benefit of sub-contractors
  • The retention sum to be deposited into a separate retention money trust accounts with an authorised deposit-taking institution
  1. Western Australia: Construction Contracts Act 2004
  • Mandates that retention sums are held in trust so that it can be returned in the event of insolvency.
  1. New Zealand, Ministry of Business, Innovation and Employment, Construction Contracts Amendment Act 2015, 8 February 2019
  • New Zealand recently implemented a statutory regime where a trust is imposed over retention monies regardless of whether they are held in a separate trust fund.
  • Under the New Zealand model, the mixing of retention monies with other sums has no bearing on their status as trust monies.


The upshot of the decision is alarming leaving a vulnerable set of circumstances for contractors and subcontractors. Considering the decision of the Apex Court, the following safeguards can be taken by contractors concerning retention sums being declared as trust monies:

  1. At the outset, it is prudent for contractors and sub-contractors to review their contracts and identify whether the said contract makes it clear that the retention monies are expressly regarded as trust monies;
  2. If the contract makes it expressly clear that retention monies are regarded as trust monies and the Employer is regarded as the trustee for the benefit of the contractor, the contractor should ensure that the Employer places this sum of monies in a separate account, i.e trust fund, escrow account, banking institution;
  3. If the Employer refuses to comply with what was prescribed for in paragraph (b) above, the contractor is entitled to move for a mandatory injunction compelling the Employer to do the same;
  4. Alternatively, at the inception of a contract or tender stage, contractors should make it clear to set-up a trust fund;
  5. Ensure your accounting or project management software is correctly set up to manage and record retentions;
  6. As soon as possible after your part of the contract has been completed, submit a ‘claim for practical completion’ for half the retention sum (typically 2.5 per cent of your contract value;
  7. Note in your calendar the end of the DLP and when it is over. Therefore, promptly submit a ‘final claim’ for the balance of your retention;
  8. In the absence of the above, having an exchange correspondence to manifest clear intention of parties to regard retention monies as trust monies.


Employer and main-contractor insolvency, poor payment practices, heavy debts and low-profit margins are a perennial feature of the Malaysian construction industry, provoking much worry in the supply network. There is always the threat of insolvency on the part of clients and contractors, especially in a volatile economic climate that we are facing today. To make things worse, the decision of the Federal Court certainly exposes contractors and sub-contractors to detrimental financial burdens. When profit margins of contractors are generally hovering at 1.5% to 2%, the retention monies far exceed any profit on a project and ensures contractors are operating at a loss until it is paid.

Therefore, legislative reforms should be implemented to mandate that all retention monies withheld by an employer under a construction contract are to be regarded as trust monies. At the inception of the construction contract, contractors must take proactive steps to ensure that the employer deposits such monies into a separate trust account. I think the time has come for Malaysia to wake up and grasp that steps are also being taken by other international jurisdictions to safeguard and protect contractors from the effects of upstream insolvency. It goes without saying that reforms, as guided by the international nations, would prevent a situation which warrants the rich from getting richer and the poor from getting poorer which is the case for sub-contractors and contractors.