Your Contractual Questions Answered. Entrusty Group, a multi-displinary group of companies, of which, one of their specialisation is in project, commercial and contractual management, has been running a regular contractual questions and answers section for Master Builders members in the Master Builders Journal. In this instalment of this series, Entrusty Group will provide the answer to the frequently asked question - Should retention sum be placed under a separate bank account ?

Most standard forms of construction / building contract have a provision for the retention of a certain percentage of the amount due to the Contractor. The main purpose of retention monies is to serve as a protection mechanism for the Employer from the Contractor’s failure or default in his performance under the contract e.g. rectification of defective work. However, the retention monies are normally to be held by the Employer fiduciary as trustee for the Contractor. The said monies belong to the Contractor and the Employer only holds the retention monies in trust. Usually, the retention amounts often not exceeding ten (10) percent and is limited to five (5) percent of the contract sum Standard Forms of Contract (Relevant Clauses) PAM Form of Building Contract PAM 69 Clause 30 (3) & (4) and PAM 98 Clause 30.4 and 30.5 deals with retention fund and its applicable rules. Both forms stipulate in similar wordings that, the Employer’s interest in any amounts so retained shall be fiduciary as trustee for the Contractor (but without obligation to invest). The monies so retained belong beneficially to the contractor. It further states that the Employer has the right to deduct from such sum due or to become due to the Contractor from payment of any amount he is entitled under the provisions of this Contract, as certified by the Architect. There is no express clause under the PAM form providing for the placement of the retention sums under separate bank account. However, based upon recent case law precedence, it would appear that the Employer should and if not, can be compelled by Court, to place the retention monies under separate bank account. (Refer to Relevant Case Law section below.) JKR/PWD Form of Contract (203A – Rev 10/83) There is no provision for retention monies under JKR Form.

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However, Clause 37 obliges the Contractor to deposit a Performance Bond with the Government, equal to five percent of the contract sum for due observance and performance of the contract. The Government or SO can utilise the said Bond to make payments or deductions from it if the Contractor fails to execute the contract or commits breach of his obligations under the contract. IEM Conditions of Contract Clause 30(3) and (4) deal with retention monies. The provision for retention monies under IEM Form is similar to PAM. CIDB Form of Contract for Building Works Clause 42.3 deals with retention monies. Sub-clause 42.3 (c) (ii) states clearly that the Retention Monies shall be placed in a separate banking account designated as being held by the Employer. It further requires the Employer to provide statement of the said account to the Contractor when making payments on interim certificates. It entitles the Employer to full benefits of any interest accrued in the said account, without having to account for it to the Contractor.

Like the PAM form, sub-clause 42.3 (c)(iii), it allows the Employer the right to deduct any amounts certified by SO for deduction from the Retention Monies, which only arises after it is due for release or after the determination of the Contractor’s employment. It is worth noting that the bank should be informed in writing that the monies so placed in separate account are held on trust on behalf of the Contractor, the beneficiary. Relevant Case Law In the case Rayack Construction Ltd v Lampeter Meat Co Ltd (1979) 12 BLR 30, it was held that clause 30(4) under JCT 63 (similar to PAM 69) required the Employer to establish a separate trust account to protect the interest of the contractor. The Rayack case was also cited in the Malaysian case, Lee Kam Chun v Syarikat Kukuh Maju Sdn Bhd (1988) 1 CLJ52 in which Peh Swee Chin J with approval on retention matter. In another case, Wates Construction (London) Ltd v Franthom Properties Ltd(1991) 53 BLR 23 the Court of Appeal upheld Judge Newey’s (as Official Referee) decision that the Employer should have deposited the retention monies in a separate bank account, as provided in the contract, when he granted the injunctive relief sought by the Contractor to compel the Employer for failing to do so. Citing Newey J :-

“…the only way in which the interest of the beneficiaries (the contractor and sub-contractors) in the retention fund could be safeguarded and preserved is if that fund is

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placed in a separate account and is not used for the purpose of the employer’s business or hazarded it in any other way…”

In another Malaysian case, Arab-Malaysian-Toda Construction Sdn Bhd v Shencourt Sdn Bhd (1999) MLJU249 Azmel J was also persuaded by the Rayack’s and Wates’ cases in his decision requiring the Defendant to make payment of the retention money to a separate bank account. The contract was PAM Form, with reference made to clause 30 (4). In E’More Builder Sdn Bhd v Krisari Sdn Bhd (1998) - unreported Shim J in allowing application by Originating Summon to set aside the retention money in separate account, adopted in support, the following cited cases ; Rayack Construction Ltd v Lampeter Meat Co Ltd (1979) 12 BLR 30 Wates Construction (London) Ltd v Franthom Properties Ltd(1991) 53 BLR 23 J F Finnegan Ltd v Ford Stellar Moris Development Ltd (1991) 53 BLR 42, and Lee Kam Chun v Syarikat Kukuh Maju Sdn Bhd (1988) 1 CLJ52 However in a recent Malaysian case Teknik Cekap Sdn Bhd v Villa Genting Development (2000) 6MLJ 513 Abdul Malik Ishak J held that the condition set out in the PAM contract were not applicable and the provisions of clause 30 (4) did not bind the parties at all. Also there was no obligation to set aside any retention monies in separate identifiable account. It must be noted that in this case circumstances (procuring the contract by fraud, dishonest breach of trust, etc) giving rise to the aforesaid decision, which may appear to contradict the other cases. Conclusion All construction / building contracts in Malaysia, apart from the PWD203 form, allows the Employer to retain a certain percentage of the monies due to the Contractor as a form of protection from the Contractor defaulting from his obligations under the contract. All retention monies are only held in trust by the Employer on behalf of the Contractor and the monies so held belongs to the Contractor as the beneficiary. Although it is not specifically stated in the PAM and IEM forms, the retention monies should be placed in a separate bank account and should not be used by the Employer for any other purpose. The next issue will be providing the answer to the question, When must retention sum be released and paid ? The Entrusty Group includes Entrusty Consultancy Sdn Bhd (formerly known as J.D. Kingsfield (M) Sdn Bhd), BK Burns & Ong Sdn Bhd, Pro-Value Management and Proforce Management Services Sdn Bhd. Apart from project, commercial and contractual management services, the group also provides risk, resources, quality and value management and recruitment consultancy services to various industries, particularly in construction and petrochemical, both locally and internationally. Entrusty Group is currently running a modular course on Practical Construction Contract Administration/Management. The coming modules are :-

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Topic

Date – Saturday Time – 9.00am – 1.00pm

Payment Claims, Valuations, Certifications and Final Account

28 June 2003

Certificate of Practical Completion and Certificate of Making Good Defects

12 July 2003

Extension of Time and Loss & Expense 9 August 2003

Nominated Sub-Contractors and Suppliers 26 July 2003

Domestic Sub-Contractors and Suppliers 23 August 2003

Determiniation and Dispute Resolution 6 September 2003

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• Those interested can obtain further information from Candy Kwan at the contact details as listed below. Entrusty Group will provide a 30 minutes of free consultancy with prior appointment to MBAM members on their contractual questions. Kindly contact HT Ong or Wing Ho at 22-2 Jalan 2/109E, Desa Business Park, Taman Desa, 58100 Kuala Lumpur, Malaysia. Tel: 6(03)-7982 2123 Fax: 6(03)-7982 3122 Email: ntrusty@entrusty.com.my

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