A commentary on Sediabena Sdn Bhd v Qimonda Malaysia Sdn Bhd by Lam Wai Loon and Tan Lai Yee.

It is common to find a provision in a standard form building contract which allows an employer to retain and hold a specified percentage of the amount certified in an interim certificate of payment for the work done and materials supplied by the contractor to ensure repair by contractor within the defect liability period of any defect in the construction works.
 
Based on English law, the contractor will not be able to claim for the release of the retention monies in the event the employer goes into liquidation or has a winding up petition presented against it, if the employer has not put the retention monies into a designated account separate from its general funds. This is the position notwithstanding that the contract specifically provides that the retention monies are to be held by the employer as fiduciary on trust for the contractor.
 
In the recent case of Sediabena Sdn Bhd & anor v Qimonda Malaysia Sdn Bhd (in liquidation), the High Court decided not to follow the English position, but instead held that the retention monies under the contract are monies held in trust by the employer in favour of the contractors, and as such, the contractors as beneficiaries of the monies were still entitled to claim for their release after the employer has gone into liquidation even though the retention monies were not set aside in a designated account separate from the employer's general funds.
 
BRIEF FACTS
 
The Plaintiffs were the Defendant’s contractors for a project known as the ‘Design and Build For Qimonda Global Module House Project at Senai Johor’ (“Works”) which adopted the Singapore REDAS Design and Build Contract (“Contract”). Retention monies were deducted by the Defendant from the Plaintiffs’ interim certificates for the purpose of making good defects in the Works carried out by the Plaintiffs during the liability period (“Retention Monies”). The Contract did not expressly state that the Retention Monies were held by the Defendant as a ‘fiduciary’ for the Plaintiffs.
 
The Defendant went into voluntary liquidation before the Retention Monies were released to the Plaintiffs and Liquidators were appointed over the Defendant. The Retention Monies were not set aside in a separate account prior to the Defendant’s liquidation.
 
The Plaintiffs requested that the Retention Monies be released to them under the Contract. However, the Liquidators refused to do so contending, in the main, that the Retention Monies are not trust monies as there was no express trust provision which provided for the Retention Monies to be held by the Defendant as a ‘fiduciary’ in favour of the Plaintiffs. The Liquidators also contended that as the Retention Monies were not separated prior to the liquidation of the Defendant, they had become part of the general liquidation fund and that the release of the same to the Plaintiffs would constitute a preferential treatment to the Plaintiffs over the other creditors of the Defendant who have a right to the liquidation fund.
 
As a result, the Plaintiffs sought a declaration in the High Court that the Retention Monies were held in trust by the Defendant for the Plaintiffs and for a further order that the Retention Monies be released to the Plaintiffs.
 
DECISION OF THE COURT
 
The issues for decision by the High Court were, in the main, whether the Retention Monies held by the Defendant were trust monies; and whether the Plaintiffs were still entitled to claim for the release of Retention Monies which had not been set aside in a separate account prior to the Defendant's liquidation.
 
The High Court granted the declaration sought by the Plaintiff, namely that the Retention Monies were trust monies and further ordered the Defendant to release the same to the Plaintiffs.
 
The Learned Judge took the view that the Retention Monies was, by its nature and purpose, trust monies because the Retention Monies could be deducted by the Defendant for only one purpose, namely, to rectify any defects during the liability period. The absence of any express provision for trust in relation to the Retention Monies did not dilute the Plaintiffs’ beneficial interest in such monies. His Lordship was of the opinion that there was a legitimate expectation on the part of the Plaintiffs that the Retention Monies would be released to them if no claim was made against them under the Contract for defective or uncompleted Works.
 
The Learned Judge also took the view that there was no requirement for the Plaintiffs to take steps to ensure that the Retention Monies were set aside before the Defendant's liquidation in order to safeguard the Plaintiffs’ beneficial interest in such monies. The fact that the Retention Monies were not set aside prior to the Defendant's liquidation did not raise the issue of preferential treatment to the Plaintiffs over the other creditors as the Retention Monies did not belong to the Defendant in the first place.
 
The High Court held that the act of separating the Retention Monies would be useful, but by no means conclusive evidence of the creation of a trust. The Judge took the view that the requirement for the separation of the Retention Monies would impose an extremely high obligation upon the contractors to safeguard the retention funds during the performance of a contract, and more often than not, would not reflect the commercial reality of the construction industry, particularly in the Malaysian context.
 
The Learned Judge also highlighted that the reported case laws in Malaysia would reveal only a handful of cases where the contractor had actually applied for the preservation of the retention monies during the pendency of a contract, and there could be many reasons why the fund was not set aside, the obvious ones being that the contractor would not want to jeopardise the commercial relationship of the parties when the contract was subsisting as the contractor would not really apply his mind to taking such action to preserve the retention funds especially when the employer was paying monies under the payment certificates.
 
In coming to its decision, the High Court chose not to follow the long line of established cases in England for the proposition that the failure by a contractor to take steps to ensure that the retention monies are set aside in a separate account would result in the contractor losing its right to claim for their release in the event of the employer’s liquidation.
 
With this decision, contractors in Malaysia will be assured that, notwithstanding the liquidation of the employer, their beneficial interest in the retention sum will be safeguarded even though the employer did not set aside the retention sum in a separate account prior to its liquidation. This High Court decision is certainly one that all contractors in Malaysia will welcome.
 
CLOSING NOTE
 
The Defendant's appeal to the Court of Appeal against the decision of the High Court has been fixed for hearing on 12 July 2011.