Limits of Employer Liability to Subcontractors: Direct Payments, Assignment of Retention Sums and Unjust Enrichment
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Limits of Employer Liability to Subcontractors: Direct Payments, Assignment of Retention Sums and Unjust Enrichment
Issues
It is not uncommon for an employer to make direct payments to a subcontractor at the request of the main contractor. But would such payments create a contractual relationship between the employer and subcontractor, rendering the employer liable for outstanding payments owed by the main contractor?
What if the main contractor assigns its rights to retention sums to the subcontractor? Would the assignment be subject to the employer’s rights of deduction and set off, and who bears the burden of establishing whether any retention sum remain payable?
Further, where the employer has benefited from the subcontractor’s completed works, can the subcontractor pursue a claim against the employer under section 71 of the Contracts Act 1950 or for unjust enrichment, notwithstanding the absence of a direct contractual relationship?
These questions arose before the High Court in Hew Tong Sang (trading as Jupital Electrical Trading) v Seri Alam Properties Sdn Bhd [High Court of Malaya at Johor Bahru Civil Appeal No. JA-12B-14-04/2026].
Brief Facts
The brief facts of the case are as follows:
- Seri Alam Properties Sdn Bhd (“Employer”) developed a housing project in Johor Bahru. Haji Said Binaan Sdn Bhd (“Main Contractor”) was its main contractor, having replaced an earlier contractor under novation agreements (“Previous Contractor”)
- In 2017, the Main Contractor appointed Hew Tong Sang, trading as Jupital Electrical Trading as the sub-contractor to undertake street lighting and related electrical works (“Subcontractor”). The Subcontractor completed the works, and no complaint concerning their quality was established.
- At the Main Contractor’s written request, the Employer paid the Subcontractor RM350,000.00 directly in three instalments. The payments were made on the Main Contractor’s behalf and deducted from the Main Contractor’s account.
- A balance of RM294,306.82 remained due from the Main Contractor to the Subcontractor. The Main Contractor requested payment from the retention sum and subsequently executed an “Assignment of Right” in favour of the Subcontractor for that amount.
- The Employer refused payment, maintaining that the retention sum had been fully utilised and that the Main Contractor owed the Employer more than RM1.8 million. The Main Contractor was subsequently wound up.
- The Subcontractor initiated a suit against the Employer in the Sessions Court to claim for the balance of RM294,306.82.
- The Sessions Court dismissed the Subcontractor’s claim, finding, amongst others, that there was no contract with the Employer, the retention sum had been exhausted, and unjust enrichment had not been established. The Subcontractor appealed to the High Court.
Issues before the High Court
The principal issues before the High Court were:
- Whether the direct payments and alleged assurances established a contractual relationship between the Employer and Subcontractor;
- Whether the Employer was liable under the assignment of retention sums, including the effect of deductions and set-off and the respective burdens of proof; and
- Whether the Subcontractor could recover under section 71 of the Contracts Act 1950 or for unjust enrichment.
Direct Payment and Privity of Contract
The High Court affirmed that the contracts between the Employer (Defendant) and Main Contractor (HSB), and between the Main Contractor and Subcontractor (Plaintiff), remained separate. The direct payments were made on the Main Contractor’s written instructions, on its behalf and against its account. The character of these payments was decisive.
“11. The SCJ was correct that there was none. There were two separate contracts : the Defendant with HSB and HSB with the Plaintiff. The Plaintiff accepted in cross-examination that he was appointed by HSB and his letters of award do not mention the Defendant.
12. The direct payments do not change this. They were made at HSB’s written request, on HSB’s behalf and deducted from HSB’s account. The payment voucher records that the sum was to be deducted from HSB’s Progress Payment No. 27 and the Plaintiff accepted in cross-examination that the payments were made on HSB’s behalf. Payment on the main contractor’s instruction does not create a contract between the employer and the subcontractor…””
The Subcontractor also alleged that the Employer’s representatives had orally assured payment. The High Court found that assurance unproved and distinguished Low Fatt Choon v I.Z.A. Construction Co. Sdn Bhd [2009] MLJU 1211 and RM Leopad Sdn Bhd v Sime Engineering Sdn Bhd (Dahulunya Dikenali Sebagai Sime Crest Sdn Bhd) [2010] CLJU 2157, in which evidence supported a separate oral arrangement or express payment assurance. In the case before the court, the High Court found that there was no comparable corroboration:
“16. There is no comparable evidence here. SD1 denied any such representation, there is no corroborating document and Mr. Freddie Lee was not called by either party. Every direct payment was made on HSB’s written request and against HSB’s account, as the Plaintiff accepted and HSB’s own letter of 25 May 2018 and its assignment treat HSB as the party liable to pay. Accordingly, this ground fails.”
The direct payments therefore did not, without more, create an independent contractual obligation on the Employer to pay the outstanding subcontract sum.
Assignment of Retention Sums: Existing Equities and Burden of Proof
The High Court accepted that the assignment was valid under section 4(3) of the Civil Law Act 1956, without requiring the Employer’s consent. Validity, however, did not establish that the assigned sum was recoverable. The Subcontractor could acquire only the Main Contractor’s existing entitlement, subject to equities between the Main Contractor and Employer:
“18. But an assignee takes only what the assignor had, subject to the equities between the assignor and the debtor. This follows from the words “subject to all equities” in section 4(3) Act 67 itself. He cannot stand in a better position than the assignor…”
The assignment directed payment from the retention sum. Having considered the documentary and oral evidence, as well as the extent to which the deductions against the retention sums were challenged at trial, the High Court upheld the Sessions Court’s finding that the retention sums had been fully utilised.
Relying on the Court of Appeal case of Kinu Sdn Bhd v Kerajaan Malaysia (Jabatan Kerja Raya Malaysia) [2025] 5 MLJ 162 [Read our update HERE], the Subcontractor also argued that the Employer bore the burden of proving the retention sum was exhausted. The High Court distinguished Kinu as that case concerned statutory direct payment under section 30 of the Construction Industry Payment and Adjudication Act 2012, whereas the case before the High Court concerned a legal assignment subject to the debtor’s existing equities and rights of set-off.
Importantly, the High Court drew a distinction between the legal burden of establishing the assigned debt and the Employer’s responsibility to account for the retention sums it held:
“22. I accept that the Defendant, as the party holding the retention sum, had to account for it. But Kinu Sdn Bhd does not assist the Plaintiff, for three reasons –
(a) First, the legal burden remained on the Plaintiff. Even in Kinu Sdn Bhd, the claimant had to show on a balance of probabilities that money was due or payable…“
Unlike in Kinu, the Employer in this case had provided a contemporaneous itemised account, maintained in subsequent correspondence that the retention sums had been exhausted, and called the relevant witness to give evidence and be cross-examined. On the evidence and pleadings before it, the High Court found no basis to disturb the finding that nothing remained in the retention sums upon which the assignment could operate.
Section 71 of the Contracts Act 1950 and Unjust Enrichment
For section 71, the High Court accepted that the works were lawful, non-gratuitous and beneficial to the Employer. But the decisive question was whether they had been done for the Employer (Defendant), rather than for the Main Contractor under the subcontract. The evidence showed that the Main Contractor, HSB, appointed the Subcontractor (Plaintiff), gave its technical instructions and received its accounts:
“28. …The works here were lawful and not gratuitous, and the Defendant benefited from them. SD1 accepted that they enabled the Defendant to deliver vacant possession to purchasers. The question is whether the works were done for the Defendant.
29. On the evidence, they were done for HSB. The Plaintiff accepted in cross-examination that he was appointed by HSB, that all technical instructions and the scope of works came from HSB, that his statements of account were addressed only to HSB and that he was waiting for HSB to pay him because HSB bore the contractual responsibility to do so. The Plaintiff says the Defendant’s staff pressed him to complete the TNB meter applications. Even so, SD1 accepted that those applications fell within the works under HSB’s main contract and the Plaintiff billed them to HSB. There is no evidence that the Defendant assessed or certified the Plaintiff’s works, or paid for them other than on HSB’s written instructions.”
The Court distinguished Mega Mayang M&E Sdn Bhd v Utama Lodge Sdn Bhd [2018] 1 LNS 1452 and Wah Loon (M) Sdn Bhd v Icon City Development Sdn Bhd [2021] MLJU 2970, where the developers had a materially more direct role in nomination, control, valuation, certification or payment arrangements. The Court explained those distinguishing features as follows:
“30. I have considered them carefully, particularly Mega Mayang M&E Sdn Bhd, which binds this court and is close on its facts. There, the Court of Appeal found that the developer had direct control and influence over the subcontractor, supervised its work and assessed and paid for it. The direct payment arrangement was a term of the contract itself, so the employer “was never to pay [the main contractor] and then for [the main contractor] to pay the appellant”. In Wah Loon (M) Sdn Bhd, the developer had itself nominated the subcontractor, whose work was valued and certified by the developer’s engineer and paid by the developer’s cheques and the court treated the case as falling within the Mega Mayang M&E Sdn Bhd exception. Outside such facts, the court recognised that a subcontractor should pursue its contractual avenue of claim, particularly where the intermediary has been wound up, since a direct restitutionary payment would offend the pari passu principle…”
The High Court also found no error in the Sessions Court’s dismissal of the unjust enrichment claim. The Employer (Defendant) received the works under its contract with the Main Contractor (HSB) and accounted to the Main Contractor for them. The unpaid balance represented the Subcontractor’s (Plaintiff’s) loss from non-payment, rather than a restitutionary entitlement against the Employer:
““32. As for unjust enrichment, the SCJ accepted the Defendant’s submission that the retention sum had been applied to HSB and third parties on HSB’s instructions. She also held, correctly, that a claim in unjust enrichment gives a restitutionary remedy, not damages and that the claim for the unpaid RM294,306.82 was in substance a claim for the Plaintiff’s loss from non-payment rather than for restitution. [See : Dream Property Sdn Bhd v Atlas Housing Sdn Bhd [2015] 2 MLJ 441]. The Defendant received the works under its own contract with HSB and accounted to HSB for them. It was not unjustly enriched at the Plaintiff’s expense. I see no error.”
DECISION OF THE HIGH COURT
Accordingly, the High Court dismissed the appeal and affirmed the Sessions Court’s decision. The Subcontractor’s contractual remedy remained against the Main Contractor, notwithstanding its winding up.
Key Takeaways
The key takeaways from the High Court’s decision are as follows:-
- Direct payment does not in itself create contractual liability. An employer’s payment to a subcontractor, made on the main contractor’s instructions and deducted from the main contractor’s account, does not by itself establish a contractual relationship between the employer and subcontractor.
- An assignment transfers no greater rights than the assignor possesses. An assignee of retention sums takes subject to the employer’s rights of deduction and set-off. While the assignee bears the legal burden of establishing the debt, the employer must account for deductions relied upon to establish that the retention sums have been exhausted.
- An employer’s benefit from subcontract works does not automatically establish unjust enrichment. Where the works are performed for the main contractor under the subcontract, the employer’s receipt of their benefit does not, without more, establish liability under section 71 of the Contracts Act 1950 or unjust enrichment.
ABOUT THE AUTHOR
Andrew Heng Yeng Hoe
Senior Partner
LL.B University of London
LL.M University of Northumbria
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