The adoption of Project Bank Accounts (PBAs) is one of the key elements in the Office of Government Commerce’s (OGC) drive to promote fair payment practices in the construction industry. So, with the draftsmen of the JCT, NEC and PPC2000 contracts vying for the prize of most OGC-compliant standard form, it comes as no surprise that they have all issued specimen PBA clauses for use with their respective contracts.
This post is the first of two examining the PBA documentation issued by the JCT. This week, I consider the format and purpose of the JCT PBA, together with the trust provisions that are intended to protect sub-contractors in the event of contractor insolvency.
Unusually, the JCT PBA has been published as a consultation paper and the JCT has invited comments and feedback on the proposals. This is fortunate, as the current drafting leaves much to be desired.
Format and purpose of the PBA documentation
The JCT PBA documentation comprises a set of Enabling Provisions to be inserted in the building contract, a PBA Agreement (to be entered into by the employer, the contractor and any sub-contractors identified when the PBA is set up) and an Additional Party Deed for subsequently appointed sub-contractors. The employer, the contractor and the PBA bank will also need to agree a form of bank mandate detailing the operational arrangements for the PBA.
The clear intention is to leave the employer as nearly as possible in the same position as if he were simply making payment under the building contract. PBAs confer no direct benefit on either the employer or the contractor; their purpose is to protect the supply chain against non-payment by, or insolvency of, the contractor.
Do the trust provisions work?
Clause 2.3 of the PBA Agreement states that monies paid into the PBA will be kept separate and held on trust for the contractor and each of the sub-contractors in the respective amounts owing to them. So, provided the amounts are clearly identified, they should be protected for the benefit of sub-contractors if the contractor becomes insolvent (Re Jartay Developments).
However, this only works if and when the PBA bank receives instructions as to how monies are to be allocated. The PBA Agreement envisages that instructions will be given before or at the same time as monies are paid into the PBA. However, there is no requirement for this to happen, nor any sanction if it does not. As a result, several days could elapse between the monies being paid in and instructions being given to the bank. If the contractor became insolvent during this period, it is doubtful whether sub-contractors would be able to enforce a claim to “their” monies. It may be argued that an implied or resulting trust exists by virtue of the terms of the PBA Agreement, but such an argument is by no means certain to succeed.
As currently drafted, the JCT PBA fails in its primary purpose of protecting sub-contractors in the event of contractor insolvency. Unless the JCT addresses this problem by amending its PBA, parties are unlikely to adopt it in any numbers.
In next week’s post I will consider the JCT PBA’s payment provisions and highlight problems with the JCT’s current drafting.
Note added: here’s that post on the JCT PBA’s payment provisions.