Are retention sums held by Employer deemed to be held on trust?
SK M&E BERSEKUTU SDN BHD V PEMBINAAN LEGENDA UNGGUL SDN BHD & ANOTHER APPEAL  2 MLRA 511
- SK M&E Bersekutu Sdn Bhd and another (“Contractors”) were the subcontractors of Pembinaan Legenda Unggul Sdn Bhd (“Employer”) pursuant to the construction contracts for the projects (“Contracts”).
- Pursuant to a clause in the Contracts, a sum of monies were retained by the Employer as retention monies (“Retention Sums”), which were to be released by the Employer to the Contractors in tranches upon completion of the works/project.
- However, the Employer failed to release the Retention Sums to the Contractors.
- The Retention Sums were not held by the Employer under any separate bank account.
- Subsequently, a creditors’ meeting was held and a special resolution was passed for the voluntary winding-up of the Employer.
- The Contractors instituted actions at the High Court against the Employer and for the Employer to be ordered to keep the Retention Sums in a separate account pending the final determination of the arbitration and/or adjudication proceedings.
- The High Court held that the Retention Sums were being held on trust by the Employer and granted the orders sought by the Contractors.
- The Employer, through its liquidator, appealed to the Court of Appeal.
- The Court of Appeal reversed the High Court’s decision and held that there could be no trust because of there was no express clause as such in the Contracts or from the conduct of the parties and the Retentions Sums were never segregated.
- The Contractors appealed to the Federal Court.
FEDERAL COURT DECISION – APPEAL DISMISSED!
The Federal Court agreed with the Court of Appeal and dismissed the appeal on the following basis:
- An agreement intending to create a trust must be clear that a trust was created.
- There was also no presumption that monies held in a separate account must necessarily be held on trust. Therefore, each case is dependent on the parties’ specific intention as expressed in the relevant contract.
- The evidence did not disclose any facts to support the finding that a trust was in existence especially since there were neither express contractual words nor conduct of the parties suggesting that a trust was in existence.