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 considers the model of PBAs proposed in the Security of Payment discussion paper and particularly whether (if introduced) PBAs:
- could give rise to an “arrangement” for payment under the Building and Construction Industry Payments Act 2004 (Qld) (BCIPA) (if the PBA structure is one where the principal pays subcontractors directly); and
- may raise practical questions in their operation vis-a-vis the Subcontractors’ Charges Act 1974 (Qld) (SCA).
PROJECT BANK ACCOUNTS
As noted in the discussion paper, the aim of PBAs is to ensure that subcontractors are paid amounts owed to them under a subcontract in a timely manner.
A PBA operates as a mechanism for contracting parties to make and receive payments. It is not a means for determining amounts payable by or to the parties.
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 in the discussion paper for use in Queensland operates as follows:
- a ring fenced trust bank account is set up by the principal and head contractor. This bank account is for payment of both progress payments and retention monies;
- a trust arrangement is created, with the bank as trustee and the head contractor and subcontractors as beneficiaries;
- 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 will sign and submit a progress payment claim to the principal for work done (which will include the amounts due to each subcontractor);
- the principal (or the superintendant) will verify the work completed and the principal will 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
- on receiving this authorisation, the bank will distribute the funds in accordance with the signed progress payment claim to the head contractor and the subcontractors (at the same time).
PBAs principally benefit subcontractors. A PBA will:
- prevent head contractors holding onto funds received from the principal and not flowing them down to subcontractors within the prescribed time;
- depending on the terms of the PBA, provide subcontractors with shorter payment terms than the head contractor would typically agree (assuming that there are no payment disputes); and
- protect amounts owing to a subcontractor from entering the pool of assets available to creditors in circumstances where the head contractor becomes insolvent (thereby reducing the risk of subcontractors not being paid for work they have undertaken).
PBAs are less advantageous for head contractors. Under the proposed model, the head contractor is unable to access (or use) the total amount certified by the principal as owing to the head contractor, which reduces the control that the head contractor has over cash flow.
In addition, as payment is made simultaneously to the head contractor and subcontractors, the payment cycle (or time for downstream payments) is reduced. Importantly, this will limit the head contractor’s ability to maximise the return on funds because the funds, without a PBA in place, would have ‘belonged’ to the head contractor in the period between receipt from the principal and payment to the subcontractors and therefore capable of yielding a return for the head contractor.
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. In circumstances where the balance in the PBA is insufficient to meet the amounts owing to subcontractors, the head contractor is required to contribute funds to meet the amount certified.
Depending on the agreement between the principal and head contractor, the head contractor may also be required to bear some of the costs of establishing the PBA.
PRACTICAL IMPLICATIONS OF A PBA WITH EXISTING LEGISLATION PROTECTIONS
While a PBA provides security for payment of certified amounts, it does not (and is not intended to) resolve underlying disputes about payment.
In such circumstances subcontractors will still need to rely on their contractual rights and/or statutory rights under BCIPA or the SCA.
A PBA could potentially create an “arrangement” for payment under BCIPA between the subcontractor and the principal.
The term “arrangement” is not defined in BCIPA. The courts have held that an arrangement may exist where:
- a construction contract between a principal and head contractor contains a provision that states that the principal will pay subcontractors on behalf of the head contractor and notwithstanding that the principal was not a party to those subcontracts; 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 and similarly between a builder and its subcontractor for plastering work.
In each case, the courts carefully examined the factual circumstances and promises or representations made by a principal or third party to the subcontractor to determine if an ‘arrangement’ for payment existed.
It is important to note that where the promise to pay is in the form of a guarantee to payment, the arrangement may be excluded from the operation of BCIPA by section 3(3)(c)(ii) of the BCIPA.
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 find itself inadvertently a respondent to an action brought by a subcontractor under the BCIPA.
Subcontractors Charges Act
The introduction of PBAs may give rise to a number of potential questions about the operation of certain provisions of the SCA which legislation allow subcontractors to issue a statutory charge over monies payable by a principal to a head contractor (for an amount owed by the head contractor to the subcontractor).
For example, where there is a disputed amount payable (or to become payable) by the head contractor to the subcontractor and a subcontractor issues a statutory charge over monies payable by the principal to the head contractor:
- should the charge be placed over monies prior to them being paid into the PBA?
If so, and the charge causes a short fall in monies available in the PBA to pay other subcontractors, other subcontractors will find themselves in a position of relying on the head contractor to ‘top up’ the PBA – effectively denying them the benefit of the protection afforded by the PBA.
- will (or can) a charge attach to monies once they are in the PBA?
- will a principal still need to pay the claimed amount into court to discharge its obligations under the SCA pending final determination of the payment dispute or rather, after it has paid an amount into the PBA?
It is suggested that the operation of the SCA in conjunction with a PBA will require some clarification to ensure cohesion with both security of payment mechanisms.
Following close of submissions on the Security of Payment discussion paper (closes 31 March 2016), it will be interesting to see how the Queensland Government responds to industry feedback and whether:
- PBAs are further explored as a method of securing payment for subcontractors; and
- if so, what legislative steps are proposed to be taken to ensure consistency with existing security of payment regimes.