Construction contracts commonly include provisions allowing an employer to withhold a portion of the payments due to a contractor as security for the contractor’s performance of its obligations under the contract. These withheld payments are known as “retention monies”.

Hip Hing Construction Company Limited v Hong Kong Airlines Ltd

 [2024] HKCFI 370 was whether and to what extent segregation of funds is a necessary condition for the creation of a trust over retention monies in circumstances where the employer has become insolvent. This is a question that was left open by the Court of Appeal in 

After reviewing case law from various common law jurisdictions, Mimmie Chan J concluded that segregation is only one of relevant factors in determining whether there is a valid trust. Each case must be considered based on its own facts, taking into account the nature of the trust asset involved and how the trust asset can be identified with certainty (§14).

On the facts, the relevant contractual provision expressly stated that the employer was to hold the retention monies on trust for the main contractor. However, the retention monies have not been segregated into any specific bank account prior to the employer’s insolvency.

Mimmie Chan J held that, whilst a trust can exist over fungible assets by identifying the trust asset as part of an undivided bulk, there was no valid trust in this instance because the employer did not place the retention monies in any specified bank accounts. There was no sufficiently identifiable bulk of which the trust money can be said to form part, and the lack of segregation rendered the subject matter of the trust too vague and uncertain (§§57-65).

 instructed by Norton Rose Fulbright Hong Kong, acted for the Applicant (contractor)

 instructed byLatham & Watkins LLP, acted for the Respondent (employer)

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