Avoiding unintended consequences

The Building Industry Fairness (Security of Payment) Act 2017 (BIF) contains new provisions designed to protect payments to subcontractors in building projects by setting up a form of statutory trust, of which subcontractors are beneficiaries.

Chapter 2 of the Building Industry Fairness (Security of Payment) Act 2017 (BIF) contains new provisions designed to protect payments to subcontractors in building projects by setting up a form of statutory trust, of which subcontractors are beneficiaries.

For non‑construction lawyers, the provisions may seem esoteric and not relevant to their day to day practice.

The provisions have broader interest however, because of the way in which the legislative drafters approached their task. The purpose of this note is to draw attention to the means by which the unintended consequences of cognate legislation can and should be dealt with when dealing with concepts which spread beyond one area of law.

BIF requires project bank accounts to be set up in certain circumstances. Those circumstances presently are where a contract is at least 50% building work, the principal under the contract is a government department and the contract price for the work is between $1 million and $10 million.

Where those circumstances exist, all payments made by the principal to the head contractor are required to be paid into separate accounts which are set up for the purposes of the particular project.

Three accounts are set up. A general project bank account, a disputed payments account and a retention account.

Under the legislation the amounts paid into that account are, by section 9, a trust over the amounts which are paid in.

Each of the subcontractors involved in the project and the head contractor itself are said to be beneficiaries of that trust. The head contractor is also the trustee of the trust.

Chapter 2 of BIF is designed to contain a standalone regime which uses the concepts of trusts in order to protect the interests of the subcontractors, who are generally left with very little where a project in which they are involved is insolvent.

For drafting purposes it was obviously considered necessary to deal with legislation which might otherwise have application. In particular given the nature of the interests sought to be protected and the means by which it was being achieved, it was necessary to deal with both the Trusts Accounts Act 1973 and the Trust Act 1973. Section 60 of BIF provides:

“The Trust Accounts Act 1973 and the Trusts Act 1973 do not apply to a project bank account or a trustee or beneficiary of a project bank account.”

Because the concept of a project bank account and the trust relation set up by the project bank account is one which is intended to be standalone and dealt with almost exclusively by BIF, it was necessary to exclude the operation of these two Acts.

However (and perhaps somewhat curiously) section 48 of BIF provides:

“Equity in court’s jurisdiction preserved

1. 1. The principle of equity relating to trusts applies for a project bank account except to the extent that the principle is consistent with this Act.
   2. Nothing in this chapter affects a court’s inherent jurisdiction to supervise a project bank account as a trust.“

Trusts Act 1973

The Trusts Act 1973 contains remedial provisions which deal with powers of a trustee for all trusts to which the Act applies. It enables a trustee to invest, to buy and sell, and to deal with the assets of the trust generally. The reason why BIF excludes the provisions of the Trusts Act are relatively clear. Under BIF there is no power on the part of the trustee (being the head contractor) to invest the moneys which are held in the project bank accounts. Under BIF the only investment available for money in a project bank account is bank interest which is capable of being withdrawn monthly and paid to the head contractor. Other than that, a head contractor is not entitled to exercise the power which would otherwise be available to a trustee to invest the money.

So much may be readily be accepted. However there are provisions in the Trusts Act 1973 which are useful and beneficial for a trustee which have not been replicated in BIF. BIF provides by section 46 a right on the part of the head contractor as trustee to apply to the court for directions as to how the assets of the trust must be used. However unlike the Trusts Act section 60, which provides protection for a trustee when it acts in accordance with the directions of the Supreme Court, no similar provision is provided for in BIF. It would be helpful if section 60 of the Trusts Act were replicated in BIF so as to protect a head contractor as trustee from the exercise of its powers by reason of it applying to and obtaining directions from the court as to how the assets of the trust should be dealt with.

Trust Accounts Act 1973

The provisions of the Trust Accounts Act needed to be excluded because of the way in which project bank accounts are set up.

The standard requirement for a trust account is that one account is opened into which moneys for various beneficiaries are held. The means by which they are held are dealt with in the Trusts Account Act. Under BIF however it is a requirement that three separate bank accounts be opened for each project in which a project bank account is required. A head contractor as trustee is not entitled simply to open one trust account and to deal with the interests of the various beneficiaries of that trust by the use of trust ledgers as is the case with, for example, a solicitor’s trust account.

Again however there are provisions which are beneficial in the Trust Account Act which could usefully be replicated in BIF. For example BIF does not contain any provisions requiring the auditing of the trust accounts, as there is in the Trust Accounts Act. Given the nature of the interest held by the head contractor in a project bank account – that is as both trustee and beneficiary of certain amounts held in the project bank account – it would be useful for there to be a requirement for auditing of project bank accounts in order to ensure that the purposes of the Act are being met.

Saving of court’s jurisdiction

The most interesting question that arises for a lawyer is the effect of section 48 which preserves the power of the court in its inherent jurisdiction to supervise a project bank account as a trust. Until these provisions come before the court, it is invidious to foreshadow just how they may be used. We think it will likely be in circumstances where there has an insolvency and the competing interests of the parties will need to be dealt with.

The nature of the trust and the interests and the duties of a head contractor as both trustee and beneficiary of a project bank account will be considered. In particular the nature of the duty owed as a fiduciary to the subcontractors will need careful examination. The traditional arrangement between a head contractor and a subcontractor is simply one of contract with no further duties imposed. However under the Project Bank Account Scheme a head contractor as trustee of a trust will owe duties as a fiduciary to the beneficiaries of that trust including the subcontractor. Just how that works itself out in practice will, as we say, depend on cases which will we suspect inevitably be heard by the courts in due course.

The Project Bank Account Scheme is intended by the government to be introduced more widely later in this year. The initial limitation of the project bank account being available only for certain government projects is intended to be widened with more projects being caught and the likelihood of recalcitrant or insolvent principals and head contractors heightened given the involvement of private industry in the mix. We suspect that only then will the interrelationship between these provisions be properly explained and understood.