Criteria Disputes between Employer and Contractor caused by Retention Fund

Introduction of Criteria Retention is an important feature of the construction industry. The retention system has been part of the construction industry for many years and most standard forms of building contracts provide for the deduction of retention from sums otherwise due to main contractor and sub-contractor.

Retention fund is deducted first by the employer who has employed the main contractor and then the deduction of retention is usually mirrored in all subsidiary contracts throughout the supply chain. Although the retention sum has been earned by the main contractor, it is not yet payable because of other contract provisions providing for its deductions. The retention fund is intended to provide the employer with some protection against the failure by a contractor to remedy defects in the work, and it is usual practice for one half of the retention to be released on practical completion of the works and the second half following the making good of any defects.

The Construction Industry Development Board (CIDB) Form of Contract

for Building Works has its retention sum provision under clause 42.3. The CIDB contract goes further to state that the retention sum is to be kept by the employer in a separate bank account as well as to provide to the Contractor statement of account when making interim payments to the Contractor. Whereas the PAM and IEM contracts are silent as to the retention money held in trust is to be kept in a separate account. What Is The Recent Position On Retention Sums in Malaysia by the Entrusty Group.

The retention fund has been the cause for many disputes between the Employer and

Contractor. First of these is that the Employer never set up a trust fund for the retention fund. Secondly, when the time comes for the releases of the retention sum, the Employer refuse to release the retention sum; usually citing its right to set-off against monies due from the Contractor for the Contractors alleged defaults. It is not very fair to the Contractor. Due to the set-off of Employer, It may cause many disputes between Employer and Contractor.

Issue Statement

In the High court case of Teh Ah Khoon Enterprise Sdn Bhd v Puncakdana Sdn Bhd [2005] 2 AMR 52. In this cases, Plaintiff The Ah Khoon Enterprise is the Contractor and has entered into a contract with the Defendant, Puncakdana Sdn Bhd who is the Employer for the construction of a condominium project under the PAM 98 Contract. After disputes have arisen, the Employer determined the employment of the Contractor and set-off from the retention sum for Liquidated Damages claim against the Contractor for its failure. The Contractor then applied to the court to have the Employer to keep the retention sum in a separate trust account and restrain the Employer from using the retention sum. The cases above had proof that, the Contractor is really dissatisfied because of the Employer release of the retention sum, usually citing its right to set-off against monies due from the Contractor and also the Employer never set up a trust fund for the retention sum. Another statement, Ang Su Sin (2006) in his Payment study on Present Payment Issues The Present Dilemmas of Malaysian Construction Industry mentioned that the construction industry is always in dispute prone. It is therefore common for the claimant pursuing his claim for works and services rendered to meet with a cross claim instead for defective work, delayed completion etc. So, payment is always postponed until the resolution of the dispute.

Solution In real practice, the employer is rarely set up a trust account for the retention fund. And this had formed a risk to the contractor. It is the obligation of the employer as a trustee to set up a trust fund to keep the retention sum for the employer to set off against the claim for liquidated and ascertained damages. The contractor should have the employer to create trust account in precedent to protect and promise the retention fund is receivable by the contractor. (The Entrusty Group 2006) As some employers are refuse to release the retention fund by citing the right to set off against monies. It is a good practice to have a set off or recover the costs incurred from the Performance Bond but not from retention fund. (Oon, Chee Kheng. 2002). JKR sub-clause 48.2 allows the Engineer/SO to make good such defects, shrinkages or their faults if the Contractor fails to comply and to deduct the costs incurred in making good the defects from the monies due or recover from the Performance Bond or as liquidated demand in money. If the defects, shrinkages or other faults are impracticable or inconvenient to the Employer to have the Contractor make good these defects and faults, JKR sub-clause 48.3 allows the Engineer to ascertain the diminution in value of the Works due to the said defective or faulty works and deduct such value from the Performance Bond or as liquidated demand in money. Reference The Entrusty Group. (2006). What Is The Recent Position On Retention Sums In Malaysia? Master Builders 1st Quarter 2006.

Oon, C.K. (2002). Standard Construction Contracts in Malaysia. CKOON & Co. Advocates and Solicitors.