Certainty of payment using a Project Bank Account Agreement - dont bank on it!

Project Bank Accounts have been adopted by the Office of Government Commerce to encourage transparent and fair payment practices in the construction industry. According to its guidance, this could save the construction industry £750 million.

Project Bank Accounts are a trust bank account held jointly by the Employer and the Contractor for the payment of certified work and which are accessible, to a certain degree, by the Main Contractor and Sub-Contractors, Suppliers and Consultants in the project, in lieu of payment directly from the Employer or Main Contractor. The function of a Project Bank Account is to provide better security for payment to the supply chain, reduce the risk of monies disappearing on the insolvency of either the Employer or the Main-Contractor.

With the talk of green shoots of recovery in the UK on the one hand but on the other hand reports of more insolvency in the construction industry, it may be that the Project Bank Account provides improved certainty of payment for the supply chain which in turn encourages the growth of those shoots of recovery.

This all sounds good but do the Project Bank Account’s offer the certainty of payment? Well let’s take a brief look at the JCT 2009 Project Bank Account Documentation in this regard.

The JCT Project Bank Account Documentation includes the JCT PBA Agreement (PBA), the JCT Additional Party Deed and Enabling Provisions for the PBA.

The Enabling Provisions provide new ‘X’ clauses to be inserted in the Building Contract and new ‘Y’ clauses into the Sub-Contract(s). For the Employer and Contractor, the PBA must be entered into within 7 days of entering into the Contract. But there is no similar provision for the Sub-Contractor. Y.1 only provides what the Sub-Contractor is to do where it is or becomes a party to the JCT PBA. The problem with both of these scenarios is that it does not seem to cater for the real world in that:

• contracts are seldom signed and so the debate, when did the Contract come into existence/ when was the contract entered into will come into play?

• there seems to be little the Sub-Contractor can do to force the Main-Contractor and Employer to add a Sub-Contractor as a party to the JCT PBA if it has doubts as to the Contractor’s ability to pay.

Where the Contract is entered into, the JCT PBA provides that the Employer and Contractor (the Account Holders) shall sign the Bank Mandate within 21 days of the PBA. What this fails to take account of is that by the time the Contract and the JCT PBA have been ‘entered into’ and the mandate and terms have been agreed and signed by the Account Holders, the final date for payment for first interim payment under the Contract and Sub-Contract may have already arisen sometime ago. It is likely that amendment will be required here to take account of such event.

An interesting point is that the ethos of the JCT PBA is that the Employer is the party responsible for paying monies into the Project Bank Account and Account Holder. This begs the question: what will happen when one of the Sub-Contractor’s (that has become a party of the PBA) incurs Loss and Expense caused solely by the Contractor and claims this in its application for payment? If the Contractor cannot recover these monies from the Employer, it is unlikely that the Employer will place sufficient funds into the Project Bank Account to cover the Sub-Contractors Loss and Expense claim in this instance. Clause Y.2 in the Enabling Provisions provides: “The Sub-Contractor acknowledges that payment into a PBA shall discharge the Contractor’s obligation to make payment under the Sub-Contract to the extent of that payment”. Call me over cautious but, this provision seems to be too loose and it is arguable that it does not cater for the Contractor’s debt rising from the Loss and Expense due to a breach which only the Contractor is liable. In the event of the Contractors insolvency, then the risk of non payment of the Loss and Expense here significantly increases. Amendment to Clause Y.2 is probably required here.

Even with the JCT PBA in place, the same old issues do not go away for both the Contractor and Sub-Contractor. We still have the risk of the Employer’s insolvency and the collapse of the bank holding the funds to be aware of. Simply if there are no monies being paid into the Project Bank Account due to shortage of Employer funds or the bank account ceases to exist, then it is obvious that no monies will be paid out...well not on time any way and not for the amount claimed/certified.

So back to the real world, the only good certainty of payment is the solvency of the payer and its funders. However, PBA Agreements (with some further tweaking) are a step in the right direction where cash flow is concerned.

For other means of securing payment or recovering monies please do not hesitate to contact me.

Author: Scott Milner

Date: February 2010

Scott Milner

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