Tony Bingham - The use of trust funds to protect against client insolvency is a very good idea. So why did parliament reject the idea 10 years ago? And is it ready to reconsider?
SIR MICHAEL LATHAM IS BEATING A DRUM.
Can I beat with him? It’s a great noise. The rhythm goes like this: on day one of the building project, the employer’s QS forecasts what the employer is likely to pay out to the builder in the first valuation a month hence. So on day one, the employer pays that lump of money into a trust fund. When the certificate values the work done and the money due, that money comes out of the trust fund. And so the cycle begins again.
No, the contractor is not being paid in advance, perish the thought. No, the employer is not “losing any money” because he will earn the interest on that lump in the separate account. So what’s the all the banging in aid of? It’s all about comfort zones, and how often main contractors get stung when an employer goes bust while owing that lump of money. The comfort comes from the fact that the employer paid the money into limbo. The account holding the money is a trust account. The money in there is ringfenced. I can see all you main contractors smiling: in a minute you will be limbo dancing to the beat of this drum.
New? No. Latham is repeating what he said 10 years ago in his famous report. I spotted all this in a recent letter of his to Nigel Griffiths, the construction minister. These were “personal thoughts”, not those of the review panel looking at adjudication and payment rules. Latham regrets that the trust fund idea didn’t pass muster and become part of the legislation that gave us the new payment rules. Parliament went wobbly over the idea, saying that there wasn’t any real support in the industry.
I don’t think that was true then and I don’t think it is true now. If we lined up a hundred main contractors against a wall and asked which of them wanted to see the money put in trust each month, 199 hands would go up (counting the unfortunate one-armed main contractor). To be fair, the construction minister at the time did say that “conditions may change and the industry may find this a good thing to do”. Let’s pretend that conditions have changed. Come and beat the drum. Let’s have trust funds between employer’s and main contractors. Are you drumming yet? Limbo dancing?
If we lined up a hundred contractors and asked who wants the money in trust each month, one hundred and ninety-nine hands would go up
Actually, there were two more reasons for not inventing statutory trust funds. The first was that the subcontractors liked the idea, too. Well, they said, if it’s a good idea to protect main contractors from insolvent employers, it is also a good idea to protect us from insolvent main contractors. The subbies wanted the ringfenced money in the trust fund to be ringfenced again.
The second problem was the complicated rules about insolvency law. The Insolvency Act’s procedures do not like one creditor being protected while all the others are shut out. So, while you as main contractor may be a happy chappy inside your ringfence, your fellow creditors can go swing. The minister said at the time that “deflecting some of its funds into a trust will exacerbate the problems of financial viability within the industry. We would not wish to see that happen”. So, while, there is nothing to stop an employer and main contractor contractually now, today, agreeing a trust fund and very little will torpedo its effect save unusual circumstances, parliament didn’t want to make it mandatory because it would be unfair to those creditors who sell pencils and loo-rolls to the employer.
So apart from JCT and ICE and NEC popping it into their standard forms, are we any more ready for statutory backing? Oh yes! Just look at all those hands that went up.
But did any hands go down at the thought of subcontractors being ringfenced? If they did, let’s try a bold move: don’t include subcontractors in the drum beat. Instead, take it slowly. Begin with trust funds in statute between employers and main contractors only. We stumbled 10 years ago because we were trying to be too clever by giving everyone an interest in the pot. But if we keep it between employer and main contractor, we can see what snags come up. … And in five or 10 years’ time, we can get out Latham’s drum again.
Tony Bingham is a barrister and arbitrator