1. What is “retention sum” commonly referred to in construction contracts?
Retention sum is a sum retained by an employer against interim sums payable to the contractors for work done and will be released to the contractor at a later stage upon fulfilment of certain conditions (depends on the terms and conditions of the construction contracts).
2. What is the purpose of a retention sum?
Retention sum is a form of security given to the employer for the due performance of the construction contract by the contractor.
3. How is the retention sum calculated?
The construction contract would encapsulate how the retention sum shall be calculated. In Malaysia, it is common for the employer to retain 10% of the certified sum in its interim progress certificate.
4. Is there a limit on the amount of retention sum?
It depends on the terms and conditions of the construction contract. However, it is a common practice for parties to set the limit of retention sum at 5% of the contract sum.
5. When will retention sums be released?
Usually, the 5% retention sums will be released in 2 tranches. The 1st moiety will be released upon the issuance of the Certificate of Practical Completion (“CPC”) whereas the 2nd moiety will be released upon the issuance of the Certificate of Making Good Defects (“CMGD”).
6. What is my legal recourse if the employer or main contractor refuses to release the retention sum?
For contracts that fall within the definition of a “construction contract” under Section 4 of the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”), you may commence an adjudication claim against the employer for the release of the retention sum.
Apart from commencing adjudication proceedings, you may also commence court proceedings or arbitration (depending on the dispute resolution clause in your construction contract) against the employer.
7. Can the contractor commence CIPAA proceedings if the construction contract does not make any reference to CIPAA?
Yes. The right to commence CIPAA proceedings is a statutory right conferred by CIPAA. Unlike arbitration, there is no necessity to have a specific adjudication clause in a construction contract.
8. Can the employer set-off its claim for liquidated ascertained damages (“LAD”) against the retention sum due to the contractor?
Whether the employer may set-off its claim for LAD against the retention sum due to the contractor depends on the terms and conditions of the construction contract. All the conditions precedent must be satisfied before the employer is entitled to exercise its right to set-off any claims for LAD against the release of the retention sum.
9. Can the contractor claim for the release of retention sums in adjudication proceedings if the CPC or CMGD has not been issued?
Under Section 25(n) of CIPAA, the Adjudicator is empowered “to decide or declare on any matter notwithstanding no certificate has been issued in respect of the matter.” Hence, the non-issuance of CPC or CMGD is not a bar to the contractor’s claim for the release of the retention sums.
10. What is the contractors’ legal recourse if the employer has been wound up prior to the release of retention sums?
Unless the retention sums are segregated as trust monies, retention sums owed by the employer to the contractors are debts due and payable to the contractor as an unsecured creditor. Under these circumstances, the contractor can only file a Proof of Debt against the employer and the appointed liquidator will make a determination on whether to admit the debt.
However, an admission of debt by the liquidator does not guarantee that payment will be made. Unsecured creditors will be the last in the list to be paid after the debts of preferential and secured creditors have been discharged.
11. What are the contractors’ rights against the retention sums if it was set-aside and categorized as trust monies?
In the event the retention sums are set-aside and categorized as trust monies prior to the insolvency of the employer, the retention sums will not form part of the employer’s assets and it will not be used for debt repayment to its creditors. Instead, the employer will be holding the trust monies in trust for the contractor. Accordingly, the fact that the employer has been wound up does not alter the position of the contractors who are the ultimate beneficiaries of the retention sums.
Under these circumstances, the contractor’s claim will take priority and the employer’s liquidator is duty-bound to hand over the trust monies to the contractors.
12. A contractor wants to claim that retention sums are trust monies, despite the employer’s failure to segregate the retention sums. Can that contractor rely on the contractual terms that the retention sum is to be held in trust by the employer for the benefit of the contractor to make the claim?
In order to constitute as trust monies, the retention sums must be segregated into a separate account by the employer and this must be done before the employer’s insolvency (See Federal Court in SK M&E Bersekutu Sdn Bhd v Pembinaan Legenda Unggul Sdn Bhd (in creditors’ voluntary liquidation) and another appeal (2019) 3 MLJ 281)
The mere fact that there is a contractual obligation imposed on the employer to hold the retention sums as trustee for the contractor does not automatically render the retention sums as trust monies.
Hence, the contractor would not be able to rely on the contractual terms that the retention sum is to be held in trust by the employer for the benefit of the contractor to claim for the release of the retention sums if the employer failed to segregate the retention sums.
13. What is the prescribed time for the contractor to bring an action against the employer for the release of retention sums?
The limitation period to bring a claim in civil courts against the employer is 6 years from the date of accrual of the cause of action to file their claims.
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Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.