Tan Lai Yee reports on the decision of the Court of Appeal in the Sediabena v Qimonda Case.

In the previous issue of Legal Insights, we reported in "Yours or Mine?" that the High Court decided in Sediabena Sdn Bhd v Qimonda Malaysia Sdn Bhd that retention monies are monies held by an employer in trust for its contractors even though such monies were not kept separately from the employer's own funds prior to its liquidation.
 
On 12 July 2011, the Court of Appeal upheld the decision of the High Court in favour of the Respondents/Plaintiffs (“Respondents”).
 
This follow up commentary discusses the Court of Appeal’s decision in dismissing the Appellant/Defendant’s (“Appellant”) appeal.
 
DECISION OF THE COURT OF APPEAL
 
The Court of Appeal considered the question as to whether a trust can be implied where a contract does not contain an explicit provision that the retention monies be held on trust by the employer. The Court relied on the Supreme Court case of Geh Cheng Hooi & Ors v Equipment Dynamics Sdn Bhd and anor [1991] 1 MLJ 293 for the proposition that the Court could and should consider all the facts to determine whether a fiduciary relationship existed in the circumstances.
 
In this respect, the Court held that the question was whether in substance, a sufficient intention to create a trust had been manifested. The Court would consider the circumstances governing the relationship between the parties and the arrangements as to how monies were deducted from the progress payments under the contract.
 
Their Lordships cited Re Kayford [1975] 1 All ER 604 as authority that it was settled law that a trust could be created without the words "trust" or "confidence" or similar expressions being used. The Court of Appeal referred to Geh Cheng Hooi & Ors v Equipment Dynamics Sdn Bhd and Other Appeals [1991] MLJ 293 where the Supreme Court held that a trust could be implied even where the agreements themselves did not contain an express clause for the creation of a trust.
 
The Court held that the retention monies are monies already earned by the Respondents, as contractors, for works already done and formed part of the progress payments claimed and certified for payment to the Respondents in accordance with the contract.
 
The Court was satisfied that under the terms of the contract, the purpose of deducting the retention monies was to make provision for making good the defects only, and if such monies were not applied for that purpose, it was understood that the monies would be returned to the Respondents after the expiry of the defect liability period.
 
The Court further held that the use of the word “deduction” in the contract for the creation of the retention monies from the monies due to the Respondents supported the fact that the parties recognised that the retention monies belonged to the Respondents.
 
Their Lordships were satisfied that all requisites of a valid trust were present in the instance case. The parties had manifested a clear intention to create a trust from the outset and this was backed by the whole purpose of what had been done had been to ensure that the retention monies remained in the beneficial ownership of the Respondents. As such, the Court held that the retention monies held by the Appellant did not belong to the Appellant and were held by them as trustees for the Respondents.
 
The Court also relied on several authorities, namely F.R. Absalom Ltd v Great Western Garden Village Society [1933] AC 592 and Lee Kam Chun v Syarikat Kukuh Maju Sdn Bhd [1998] 1 MLJ 444, which suggested that until such time when the retention monies were actually disbursed to the employer for rectification of defects, the property in such monies resided with the contractor even though the monies may be held by the employer. As such, the employer’s interest in the retention monies was “fiduciary” in nature, in that the employer is trustee for the contractor in respect of the monies in question.
 
Their Lordships also took cognisance of the fact that that the Appellant’s consulting engineer had issued a Certificate of Practical Completion for the project concerned and the absence of any claim made by the Appellant against the Respondents for rectification cost for the work done.
 
The Court of Appeal rejected the Appellant's contention that the Respondents were not entitled for the release of the retention monies since no part of those monies had been set aside before the liquidation of the Appellant. The Court held that the failure to separate the retention monies before the liquidation of the Appellant did not, and could not, defeat the trust. The Court also held that there was no requirement for the Respondents to request for the monies to be kept in a separate bank account.
 
The Court of Appeal declined to follow the English case cited by the Appellant in support of its foregoing contention, namely Rayack Construction Ltd v Lampeter Meat Co Ltd [1979] BLR 34. Their Lordships held that the apex court of Malaysia in Geh Cheng Hooi had recognised the principle laid down in Re Kayford Ltd and noted that this principle had been followed by the Malaysian Courts in Syarikat Pembinaan Woh Heng Sdn Bhd v Meda Property Services Sdn Bhd (unreported) and Merino O.D.D. Sdn Bhd v PECD Construction Sdn Bhd [2009] MLJU 671.
 
The Court of Appeal held that the setting aside, release or preservation of the retention monies where the Appellant is under liquidation would not amount to a preferential payment under Section 223 of the Companies Act 1965 for the simple reason that the said monies were trust monies which did not belong to the Appellant in the first place. Their Lordships also held that the monies could not be treated as part of the general funds of the Appellant as that would only result in the other creditors of the Appellant being unjustly enriched.
 
In coming to its decision, the Court of Appeal also recognised the hardships that contractors would face if a requirement was imposed that the retention monies must be kept in a designated account during pendency of the contract. The Court of Appeal agreed with the High Court that such an onerous obligation would not reflect the commercial reality of the construction industry, particularly in the Malaysian context.
 
SIGNIFICANCE OF THE DECISION
 
The decision of the Court of Appeal suggests that the question as to whether or not a trust can be implied in cases where a contract does not contain any express provision that retention monies are to be held on trust by the employer, turns on the facts of a particular case and would to a large extent depend on whether a fiduciary relationship existed in the circumstances and whether sufficient intention to create a trust has been manifested.
 
In deciding whether the requisites of a trust are present, the Court will take into consideration the terms of the contract and examine the arrangements as to how the retention monies are created, the conditions for its release and whether parties intended that the beneficial ownership thereof is to remain with the contractors.
 
The Appellant has applied for leave to appeal to the Federal Court. The application has been fixed for hearing on 31 October 2011.