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Retention Money
Retention Money
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 ?
ost 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 Contractors 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
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 Contractors 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.
placed in a separate account and is not used for the purpose of the employers 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 Rayacks 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 EMore 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
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Topic
Date Saturday Time 9.00am 1.00pm Payment Claims, Valuations, Certifications and Final 28 June 2003 Account
Certificate of Practical Completion and Certificate of 12 July 2003 Making Good Defects Extension of Time and Loss & Expense Nominated Sub-Contractors and Suppliers Domestic Sub-Contractors and Suppliers Determiniation and Dispute Resolution 9 August 2003 26 July 2003 23 August 2003 6 September 2003
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 222 Jalan 2/109E, Desa Business Park, Taman Desa, 58100 Kuala Lumpur, Malaysia. Tel: 6(03)-7982 2123 Fax: 6(03)-7982 3122 Email: [email protected]
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