Retention sum in construction contracts

Abstract

The construction industry in Malaysia is currently going through hurdle being the pandemic hits the country for a discursive period of more than a year. Adding with the repetitious re-enforcement of lockdowns and the current hike in construction material prices. Henceforth, myriad business sectors in country are severely impacted, thereby it seems pessimistic to the construction by which most construction works are suspended thoroughly, cope with the lack of labour due to the standard of operation enforced to contend the pandemic. It is unavoidable that major players from the construction industry suffers both operationally and financially. Apparently, the suspension of works contributes to delay completion thus dilatory revenue of property sales, which finally led to suspension of payments to the main contractors subsequently to the sub-contractors and even the suppliers. In view of that, it is now the undesired reality that many construction companies being the property developers, contractors or supplier are now at greater risk of insolvency due to financial constraint, many industry players are sauntering on the road to liquidation. One of the concern lest any insolvency occurs is the remuneration of the Retention Sum. The Retention Sum is a sum retained by the employer from the contractor’s work done amount certified in every claims (usually 10% of total work done certified thus subjected to a limit of 5% of contract sum), the purpose of the Retention Sum is to be substantiated as a security for the performance of the contractor and to secured against the quality of the workmanship. The recent Federal Court decision of SK M&E Bersekutu S/B v Pembinaan Legenda Unggul S/B & Another Appeal [2019] 4 CLJ 590 had somehow reversed the retrospective court decision of Qimonda Malaysia Sdn Bhd (in liquidation) v Sediabena Sdn Bhd [2012] 3 MLJ 422, which the Federal court reserved the principal of Retention Sum that the retention money is no longer be impulsively a trust money, thus induces the Contractors/Sub-Contractors as unsecure creditors lest event that the Employer goes insolvent or liquidation amid the period of new normal of economy downturn. This issue was promulgated by Sr Jaspal Singh in his recent article concerning retention sum titled New Normal On Retention Sum – A Judicial Paradigm Shift published on QS Link magazine issue 2020, Sr Jaspal Singh dwelled over the issue concerning the remuneration and release of the retention sum during these trying times as employers and contractors are on the verge of insolvency, Sr Jaspal Singh also brought up the issues imposed by the Federal court on the recent reversed decision and principal on the retention sum, while the retention sum retained is not defined as a genuine ‘trust’ anymore hence it is merely a contractual debt rather a sum retained designated to the contractor under the contract. Sr Jaspal Singh also highlighted in this article that the most enviable approach is to keep the retention sum into a segregated bank account in the joint name of the employer and contractor so that trust will be established.