KEYWORDS: PROJECT BANK ACCOUNTS; SECURITY OF PAYMENT

KEY TAKEAWAY

Queensland is contemplating introducing "project bank accounts" to help ensure payments from principals flow down to subcontractors. Project bank accounts have been used in New South Wales, the Northern Territory, Victoria and Western Australia, typically on government projects.

These arrangements can be beneficial for subcontractors, but the surrounding legislation may give rise to some unexpected issues. If not properly prepared, a principal may inadvertently find itself a respondent to a claim from a subcontractor under security of payment legislation.

Overview

In December 2015, the Queensland government issued a Security of Payment discussion paper seeking industry feedback on ways to improve security of payment for subcontractors. One of the proposals flagged for consideration is the use of project bank accounts (PBAs).

This article assesses the PBA model proposed in the discussion paper and particularly whether PBAs:

  1. could give rise to an "arrangement" for payment under the Building and Construction Industry Payments Act (Qld) 2004 (BCIPA) (where the principal pays subcontractors directly); and
  2. may raise practical questions in their operation with the Subcontractors' Charges Act (Qld) 1974 (SCA).

Similar concerns may arise in other jurisdictions.

What are project bank accounts?

The aim of PBAs is to ensure that subcontractors are paid in a timely manner. A PBA is a mechanism for contracting parties to make and receive payments. It is not a means for determining amounts payable. Thus, PBAs do not prevent payment delays for amounts which are in dispute. In such circumstances, the relevant parties could rely on their statutory rights under the BCIPA (principally, to proceed to adjudication) or the SCA (principally, to issue a statutory charge).

Essentially, the PBA uses a trust arrangement to protect money owed to subcontractors from creditors (of the head contractor) should the head contractor become insolvent. The PBA model proposed for use in Queensland operates as follows:

  1. the principal and head contractor set up a ring-fenced trust bank account (the PBA) for payment of both progress payments and retention monies;
  2. a trust arrangement is created, with the head contractor and subcontractors as beneficiaries;
  3. the payment process starts when a subcontractor submits a payment claim to the head contractor under the subcontract. After the head contractor certifies the amount payable to its subcontractors, the head contractor submits a progress payment claim (which will include the amounts due to each subcontractor) to the principal;
  4. the principal (or superintendent) will verify the work completed and then sign the progress payment claim. The principal will then pay the certified amount into the PBA and forward the signed progress payment claim to the bank; and
  5. once authorised, the bank will simultaneously distribute the funds in accordance with the signed progress payment claim to the head contractor and the subcontractors.

Key benefits

PBAs principally benefit subcontractors by:

  • preventing head contractors from holding on to funds not passing them down to subcontractors within the prescribed time;
  • potentially giving subcontractors shorter payment terms than the head contractor would typically agree; and
  • protecting amounts owing to a subcontractor from entering the pool of assets available to creditors if the head contractor becomes insolvent.

Adverse impacts

PBAs are less advantageous for head contractors as the head contractor does not get access to the total amount that the principal certifies as owing to the head contractor.

In addition, as payment is made simultaneously to the head contractor and subcontractors, the payment cycle (for downstream payments) is reduced. This would limit the head contractor's ability to maximise the return on these funds.

Where the principal certifies a lesser amount than the head contractor for works undertaken by subcontractors, the difference is deducted from the amount to be paid to the head contractor via the PBA. Where the balance in the PBA is insufficient to meet the amounts owing to subcontractors, the head contractor must contribute funds.

How would PBAs sit with existing legislation?

While a PBA provides security for payment of certified amounts, it does not resolve underlying disputes about payment. Subcontractors would still need to rely on their rights under their contract, the BCIPA and the SCA.

BCIPA

A PBA could potentially create an "arrangement" for payment under BCIPA between the subcontractor and the principal. This characterisation could have serious consequences, especially for principals. The term "arrangement" is not defined in BCIPA. The courts have held that an arrangement may exist where:

  • a construction contract states that the principal will pay subcontractors on behalf of the head contractor notwithstanding that the principal is not a party to those subcontracts1 ;and
  • a third party has promised to pay a contractor for work. For example, the courts have held that there was an arrangement between the developer of a property and an architect because of an undertaking to pay for the work,2 and similarly between a builder and its subcontractor for plastering work.3

In each case, the courts carefully examined the facts, promises and representations to determine whether an "arrangement" for payment existed. It is important to note, however, that where the promise to pay is in the form of a guarantee, the arrangement may be excluded from the BCIPA regime under section 3(3)(c)(ii).

Essentially, whether a PBA will create an arrangement for the purposes of BCIPA will turn on the drafting of the construction contract and trust arrangements. If these documents are not properly prepared, a principal may inadvertently find itself a respondent to a claim brought by a subcontractor under the BCIPA.

SCA

PBAs may give rise to several potential questions about their interaction with the SCA.

The SCA allows subcontractors to issue a statutory charge over monies payable by a principal (to a head contractor) for money the head contractor owes the subcontractor.

For example, where a disputed amount is payable (or to become payable) by the head contractor to the subcontractor and the subcontractor issues a statutory charge:

  1. Should the charge be placed over money before it is paid into the PBA? If so, and if the charge causes a shortfall in the PBA, other subcontractors will need to rely on the head contractor to top up the PBA — effectively denying them the benefit of the PBA.
  2. Will (or can) a charge attach to money once it is in the PBA?
  3. Will a principal still need to pay the claimed amount into court to discharge its SCA obligations pending final determination of the payment dispute after it has paid the money into the PBA?

In short, if PBAs are to be required in Queensland or elsewhere, the new legislation will require careful drafting to ensure cohesion with existing payment legislation.

Footnotes

1 Okaroo Pty Ltd v Vos Construction and Joinery Pty Ltd [2005] NSWSC 45 (which has been followed in Queensland)
2 IWD No 2 Pty Ltd v Level Orange Pty Ltd [2012] NSWSC 1439
3 Walton Construction (Qld) Pty Ltd v Salce [2008] QSC 235

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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