TO TRUST OR NOT-TO TRUST, A RETENTION OF UK’S INSPIRATION

I had taken the liberty to update this article. Back in 2019, The Electrical and Electronics Association of Malaysia (TEEAM) has approached The Malaysia Institute of Architects (PAM), the custodian of the PAM Form of Building Contract, the most widely used Form in the construction industry in Malaysia, to amend its clause 30.5 to include a provision that such retention sum to be placed under a ‘trust’. Subsequent dialogues with the other stakeholders i.e., CIDB, REHDA and MBAM didn’t bear fruit as each stand were taken myopically. More importantly, the lack of political will to introduce another bill, Retention Trust Account, for fear of moving the risks of the developers back to the home-buyers, compromising political status quo. In summary, it is again another showdown that ‘strength’ does matter. 

The recent decision of the Federal Court’s case of SK M&E Bersekutu v Pembinaan Legenda Unggul[1] has been a novelty, depart from the traditional view as in Qimonda v Sediabena[2], as the FCJ has drawn upon some, on-going debates for legislative-reform on the ‘retention-money’ in the UK and abroad, to hold that the ‘retention-money’ cannot be construed as a ‘trust’ unless it has been deposited in a ‘trust-account’ or something similar to that of the escrow-account[3] and that the contract has to specifically state-so, i.e. “a positive duty on the Employer to hold the Retention Fund as trust monies irrespective of whether or not the Retention Fund is segregated into a separate trust account. Further 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.”[4] Thus, the general issue here is whether such a ‘maverick’ move by the FCJ will give any repercussion to the industrial player and if so, what are these against the experience felt by the other common-law jurisdiction particularly from the UK, where the ‘inspiration’ was derived from?
 
A lot have been written about the ‘novel-shift’ of the ‘retention-money’, previously thought to have been the contractor’s money, arising from SK M&E Bersekutu, it is now, found to be solely, the employer’s money instead. The position of the common law pertaining to the law of trusts - “the employer’s interest in the retention is fiduciary as trustee for the contractor and for any nominated sub-contractor”, impose an obligation on the employer to appropriate and set aside a sum equivalent to the retention money in a separate trust fund.[5] As there was no trust until a sum of money was set aside in a separate account and until that was done the contractor was merely an unsecured creditor[6], of which the contractor can obtain a mandatory injunction for the employer to set up a trust.[7] The trust is not payable until the retention becomes payable and the employer retains all rights of set-off.[8] A trust is a legal relationship, enforceable in equity where the trustee holds the property on behalf of another.[9] To establish this, it must be shown that the promisee intended the benefits to be enjoyed by third party and such promise is irrevocable.[10] As such the 1999 Act[11] offers greater flexibility compared to trust as trust is irrevocable and not subject to defence and set-off, of which we do not have such Act in Malaysia.

Retention can be huge and may cause cash-flow issues to contractors, in the UK, and such clause in standard-form may not comply with HGCRA, on requirements for the withholding of payments. In the UK, the proposal is to put retention in a ‘trust-account’, thus abolishing retention by 2025. In 2017, the UK government published the Pye-Tait Review[12], seeking to assess costs and benefits of retention and alternative mechanisms and found that reasons of non-payment; delayed-payment were disputes over defects; insolvency of contractors; non-payment to higher-tier of the supply-chain; an off-set of claims, thus results in higher-overheads; poor-relationships; risks of insolvencies. As a result, a consultancy under the practice of cash-retention for construction-contract was launched by the UK government.[13] In 2018, the collapse of Carillion sent shock-waves throughout the construction-industry in the UK[14], with contractor-bodies urged the government to pursue on ‘zero-cash retention’ no later than 2025. In 2018, a bill was introduced in the UK Parliament to ensure that the retentions are now statutorily required to be held under a third-party trusts.[15] In 2019, saw a ‘surprising-twist’ to the debate of the Bills, with introduction of minimum-standards use of retention in the building-industry[16]; consultation launched in the Scotland; and the Construction Leadership Council (CLC) endorsing the ‘zero-cash retention’ road-map[17]. In 2020, arising from the Covid-19 pandemic, the debate took a step-backward with many other ‘considerations’. In short, it is not settled-law in the UK.
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Apparently the ‘novel-approach’ or the ‘maverick-attempt’ of the FCJ, in holding to such a judgement, is to push the construction industry into a quantum-leap, towards ‘zero-cash retention’ or as a ‘trust’, if the parties to the contract, agreed to such, but very unlikely, as the developer, now has an ‘upper-hand’ not to partake. Why should they agree to, in the first place? Money in ‘my’ pocket, is better than in ‘yours’! ‘Knee-jerk’ reactions can be felt, when sub-contractors associations begin lining-up to knock on the doors of PAM, IEM, CIDB, and the others to seek for an amendment to their published standard-form of contract, to mandatorily, include a clause, that ‘the employer shall put the retention-money into a trust-account’.

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[1] (2019) 4 CLJ 590
[2] (2012) 3 MLJ 422
[3] An escrow account is an account where funds are held in trust whilst two or more parties complete a transaction. This means a trusted third party will secure the funds in a trust account. The funds will be disbursed to the merchant after they have fulfilled the escrow agreement.
[4] Jaspal, “New Normal on Retention Sum – A Judicial Paradigm Shift” (QSLINK, 2020): clause 30.6(c) of AIAC Standard Form of Building Contract 2019 Edition
[5] Wates v Franthom (1991) 53 B.L.R. 23
[6] MacJordan Construction v Brookmount (1991) 56 B.L.R. 1.
[7] Rayack Construction v Lampeter Meat Co (1979) 12 B.L.R. 30
[8] Hussey v Palmer [1972] 1 W.L.R. 1286
[9] Les Affreteurs Reunis v Walford[1919]AC801
[10] Vandepitte v Preferred Accident[1933]AC70
[11] Third Party Rights Act 1999 (UK)
[12<https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/654399/Retention_Payments_Pye_Tait_report.pdf>
[13] <https://www.gov.uk/government/consultations/retention-payments-in-the-construction-industry>
[14] <https://www.theconstructionindex.co.uk/news/view/carillion-report-the-summary>
[15] Construction (Retention Deposit Schemes) Bill 2017-19
[16] <https://builduk.org/news/2019/06/build-uk-moves-forward-on-achieving-zero-retentions/>
[17]<http://www.constructionleadershipcouncil.co.uk/wp-content/uploads/2019/12/Press-Release-09_12_19.pdf>