Richard Davis - If a contractor and client set up a construction trust to protect subcontractors and it is subsequently cancelled, is the contractor liable for breach of trust?
Construction law has always had an uneasy relationship with the law of trusts. Where a trust is negotiated the question sometimes arises whether the trustee's actions have exposed him to personal liability for breach of trust. So far, there have been no significant cases in English law of breach of a construction trust.

This is certainly not the case in Australia.

In Stork Electrical vs Leighton Contractors, the Queensland Court of Appeal (December 2000) overturned a finding of breach of trust.

An application is currently pending for leave to appeal again.

Leighton acted as managing contractor for the design and construction of the Brisbane Conference Centre for a guaranteed maximum price of A$138m. All sums payable by Leighton to subcontractors were to be paid by the employer into a designated bank account and held by the contractor on trust to pay the subcontractors on the terms of a separate trust deed. The execution of the trust deed by Leighton was made a fundamental condition of the managing contract.

In reliance on the trust arrangement, Stork entered into a subcontract with Leighton for electrical work. After about 80% of the work had been completed, the employer and the contractor varied the main contract by increasing the guaranteed maximum price and deleting the trust. As a result of the deed of variation, the employer's duty to fund the account ceased and the contractor assumed responsibility for the payment of subcontractors in the ordinary way.

The subcontractor maintained that the variation of the main contract, and the subsequent receipt of A$45m by the contractor for its own benefit, constituted breaches of the trust.

The judge pointed out the co-existence of a contractual and a trust relationship between the parties. In effect, the contractor had, by agreeing with the employer to amend the contract, allowed its own commercial interests to prevail over a fiduciary duty owed to the subcontractors.

It was no answer to a conflict of interest claim arising under a trust to point to rights available under a contract, where, as here, Leighton held aspects of its contractual rights to payment in trust. The trust property was not just the benefit of the bank account but extended to the employer's promise to make payments in respect of subcontractors' work direct into the account.

The Queensland Court of Appeal reversed the decision. Three provisions of the various agreements had been crucial.

First, the court inferred, from the fact that the managing contract provided for its own variation that the parties must have intended to reserve the right to revoke the trust. The court did not consider that such an all-encompassing power to vary could have been restricted to such parts of the contract that did not relate to the trust.

The contract was the real source of the trust. The trust property was therefore inherently flawed.

Second, the trust deed allowed the employer to terminate the trust. This power was never used but the court inferred that it was consistent with a power to delete the trust by amending the managing contract.

Third, the appeal court relied on a term of a direct agreement between the employer, contractor and subcontractor which provided that the employer owed no duty to the subcontractor. It was considered that this negated any duty to maintain the existence of the trust until completion. The judges did not apparently consider the possibility that it was simply a standard term of the direct agreement and not intended to create privity. The court took a contractual approach to what was in reality a question of equitable, proprietary rights.

The case may have gone differently in England. In Rafidain Bank vs Saipem (March 1994), the English Court of Appeal adopted a two-stage approach to a construction trust of the contract sum: first examine the position in contract; and then analyse the facts again by applying trust law. In that case, the contractor was applying for payment out of an account but could not get an essential document it needed to present to the trustee. It would have failed in contract but succeeded on trust principles. If the Australian court had taken this approach, it might well have come to a different conclusion.