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When is a trust created over retention monies?

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Authored by: KK Cheung

Hip Hing Construction Company Ltd v Hong Kong Airlines Limited [2024] HKCFI 370, concerned clause 32.5 of the General Conditions of the Standard Form of Building Contract (2005 Private Edition) (GCC 32.5) which relates to retention money. It provides that the retention shall be held upon trust by the Employer for the Contractor and any Nominated Sub-Contractor or Nominated Supplier, subject to the rights of the Employer to have recourse to it for payment of any amount which he is entitled to under the Contract or at law or to deduct from it any sum owed to him by the Contractor. The Plaintiff (HH) sought a declaration from the court that the Defendant (HKA) held $56,321,000 as retention money on trust for HH, pursuant to GCC 32.5, which was incorporated into the contract between HH as main contractor and HKA as employer (Contract). The court did not grant the declaration because it found that the trust failed for lack of certainty of subject matter, as the retention monies were not kept in a segregated account that could be identified.

Issue in dispute

The $56,321,000 was the retention money withheld by HKA under the Contract and as certified under an Interim Payment Certificate issued by the Architect (Retention Monies). The Retention Monies had never, been paid into any separate bank account of HKA, nor segregated from the rest of HKA’s receipts and funds held.

HKA had defaulted in payment of sums due for work carried out by HH under the Contract, under which the remaining balance of the Contract sum, including the Retention Monies, were to be paid within 90 days from issuance of the occupation permit. HH had commenced a High Court action and obtained summary judgment for HKA’s payment of $192 million, with leave granted to HKA to defend the balance of HH’s claim for $21 million. A winding-up petition was subsequently presented against HKA, and a scheme of arrangement (Scheme) and restructuring plan (Plan) were sanctioned by the court for HKA.

The issues before the court focused on whether there was a trust validly created over the Retention Monies held by HKA, and whether and to what extent, segregation of the funds was necessary for the creation of a trust. If the Retention Monies were trust assets belonging to HH, HH could take the money for itself, bypass the equal distribution under the Scheme and not share in the general pool of HKA’s assets with other creditors.

Applicable legal principles

For the creation of an express trust, there must be certainty of intention, certainty of subject matter and certainty of object. According to HKA, there was no identifiable trust property, in the absence of segregation or setting aside by HKA of any funds for the purpose of GCC 32.5 or the retention referred to under it and that the trust must fail for lack of certainty of subject matter. The question before the court therefore, was whether there was certainty of subject matter, and whether the property said to be subject to the alleged trust could be identified.

Having considered the two lines of conflicting case authorities, on the issue of whether segregation or appropriation is a necessary requirement for the existence of a valid trust, without which there can be no certainty of the subject matter, the court concluded that each case must be decided on its particular facts, taking into account the nature of the asset which is claimed to be the subject matter of the trust, and whether and how it can be identified with certainty. Segregation, it said, was one, but not the only, relevant factor.

The court said that what could be gathered from the case authorities in which certainty of subject matter was upheld by the court was that there had been clear identification of the property, which was not mixed with property of the alleged trustee and there was no problem in identifying the mass of what was held on trust and there were means of identifying and distinguishing the subject matter of the trust.  For example in one case, the money was put into a designated “customer trust account” and in another into designated client accounts. In another, “the proportionate share of the undivided bulk” to which each account holder was entitled could be identified with certainty.

The court said that it is clear that an intention to create a trust, and the existence of a certain and identifiable subject matter of the trust, are both important and whilst segregation is normally an indicator of a trust, the mingling of funds is not fatal, and the court should look at all the circumstances as there may be other indicators of the trust.

Was there a valid trust?

The of GCC 32.5 makes clear provision for a trust, the court said. The clause in the Contract expressly provided that the Retention Monies “shall be held upon trust” by HKA for HH, which was a clear manifestation of the parties’ intention to create a trust over the Retention Monies; GCC 32.5 did not simply confer a contractual right to require HKA to establish a trust, or to set aside funds to be held on trust.

The court went on to consider the intended subject matter of the trust. It said before a valid trust can come into existence, there must be certainty of the subject matter and the nature of the property must be considered. In this case, the intended subject matter was the sum of money certified as payable to the contractor, HH, and which was to be (and was) withheld by HKA. Although fungible, HH could only identity it as all the money in any and all bank accounts of HKA. There was no other evidence to show that the Retention Monies could be specified with more particularity, as to where the money was held, whether in one specific bank account, or several bank accounts named. A monetary amount of HKA’s general funds was all that had been identified, and so the court concluded that there was no certain or identifiable subject matter to be impressed with the trust.

The Retention Monies in this case were said to be the identified part of a larger but identified mass, comprising (according to HH) all the money in all the bank accounts of HKA. The court said that it depended on whether the “mass” or so-called “general funds” could be identified or identifiable, with sufficient certainty. It noted that the mixing of money is not a bar to the existence of a valid trust and the absence of segregation by itself does not mean that there can be no trust intended, or that the subject matter of the trust must be uncertain. The facts of the case and evidence available as to the mass have to be considered.  In the present case, GCC 32.5 expressly stated that HKA was to hold the percentage of the certified sum payable to HH as Retention Monies on trust for HH. The purported trust was, the court said, over a part (i.e. the specified percentage) of the bulk of the money or funds of HKA. 

It was clear from the authorities and analyses made by academics on co-ownership interests, the court said, that it is important to identify the relevant bulk. If there is no identified bulk, or the property is completely unspecified, problems as to uncertainty may arise.  If the transferor is free to choose to select the relevant property from any source, then the transferee cannot possibly acquire an ownership interest in any particular bulk, as the situation is simply one of an intended transfer of property which is completely unidentified until the transferor makes the necessary choice and until such identification, it is impossible for the transferee to obtain a property interest.

It was not disputed that HKA had not at any time paid any Retention Monies into any specific account which could be identified. All that could be argued for HKA was that the trust was in respect of all and any of the bank accounts of HKA where its funds were kept. If there had been one, or even more than one but specified bank accounts from which the Interim Payments had been made to HH, it might be argued that the Retention Monies should have been withheld from the funds in these accounts, and form the bulk to be co-owned with HH.

The argument was simply that HKA held $56,321,000 of its money and funds, on trust for HH. Adopting the co-ownership argument, this meant effectively that HKA held all its money and funds as co-owner with HH. On the argument that it should make no difference from which source or account HKA should allocate the Retention Monies to HH, this may be extended to mean that HKA may, at different times, even allocate particular assets such as its receivables or other debts, of a value equivalent to the Retention Monies, to the trust. This, the court said rendered the subject matter of the purported trust too vague and uncertain, and it would be difficult if not impossible for the court, at the beneficiary’s request, to enforce or regulate the trust, by tracing or otherwise.

Court’s ruling

The court concluded that for lack of a sufficiently identifiable bulk of which the trust money was said to form part, the trust failed for lack of certainty of subject matter. It said that, bearing in mind that the intended purpose of GCC 32.5 is to protect contractors against the insolvency of the employer, it was unfortunate that the contractor in this case had been deprived of the intended protection as a result of the employer’s breach and failure to put the intended trust property into a segregated account. It added that contractors, can only be advised to be vigilant in safeguarding their rights and to apply to the court at an early stage of the project, to ensure that the trust property is preserved and protected, rather than to wait at its own risk in the event that the employer becomes insolvent or the trust property is otherwise dissipated. Accordingly, at the material time of the Scheme, there was no valid trust of the Retention Monies and they formed part of HKA’s general assets, to be dealt with in accordance with the terms of the Scheme.


This judgment highlights the difficulties in recovering retentions from the employer after it has become insolvent. The law in this regard is not straight forward. The standard forms of building contract do not require the employer to produce any proof that the retention monies have been placed in a separate account. Contractors simply do not know whether it has been done and seldom ask for such proof. Contractors following the advice of the judge, reminding contractors to be vigilant in safeguarding their rights and to apply to the court for setting aside the retention in a separate account, may be seen as unduly aggressive by employers, unless an express obligation to produce proof of segregation of retention monies is added to the standard forms of building contract.

Key Contacts

Kwok Kit (KK) Cheung

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9427

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