Federal Court: Retention Sums Under a Construction Contract Not Trust Monies
27 March 2019
In SK M&E Bersekutu Sdn Bhd v Pembinaan Legenda Unggul Sdn Bhd (In Creditors’ Voluntary Liquidation) (Federal Court Civil Appeal No. 02(f)-130-11/2017(W)), the Federal Court held that the retention sums under two construction contracts would not be treated monies which are held on trust for the sub-contractors.
The Federal Court held 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.
Although the Federal Court acknowledged that the absence of an explicit clause creating a trust does not necessarily negate the existence of a trust, their Lordships were “unable to discern” from the provisions of the two contracts in question “any clear intention or evidence of strong conduct from the parties that indicated the retention monies should be accorded the status of trust monies”.
The Court also noted that the contracts did not require the retention sums to be kept separate from the assets of the respondent and that the respondent did not take any additional steps, such as segregating the retention sums, that may indicate that the retention sums should be considered as trust monies.
This decision is significant as it overrules the Court of Appeal’s decision in Qimonda Malaysia Sdn Bhd (in liquidation) v Sediabena Sdn Bhd & Anor  3 MLJ 422, where it was held that retention sums were held on trust notwithstanding the absence of express provisions in the relevant contract that created a trust or required the retention sums to be kept in a separate account.
Although the question as to whether retention sums under a construction contract are trust monies will turn on the interpretation of the provisions of the contract in each case, the absence of clear words creating a trust and requiring the retention monies to be kept in a separate account are likely to result in a finding that such monies are not held on trust.
The principles laid down by the Federal Court may also apply to retention sums under other types of commercial contracts.