What is the recent position on Retention Sums in Malaysia?

The practice of holding back or setting aside a portion of monies due to the Contractor by the Client (normally referred to as the Employer under construction contracts) is an entrenched practice within the construction industry the world over. This monies held back is referred in the industry as Retention Sum, which is it normally stipulated and spelled out clearly as one of the clauses in the condition of contract.

The purpose of such retention sum is to protect the Employer in the event when the Contractor fails or defaults in its performance under the contract, such as abandonment or the works is of poor or defective quality.

The construction contract usually states that this money set aside as Retention Sum is to be kept by the Employer “fiduciary as trustee” for the Contractor. This basically requires the Employer to set up a trust fund on behalf of the Contractor. A trust fund is basically holding on behalf of another party’s monies or property without the right to use or invest the monies or property.

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