Project bank accounts under the spotlight

Project bank accounts are an admirable idea, but their inclusion in JCT contracts require some scrutiny, says Simon Lewis, partner (construction), at Dickinson Dees

The issue: the JCT Project Bank Account agreement works in general, but there are some points in the drafting that should be considered.

The implication: It is unclear what would happen in the event of an employer witholding monies from the contractor and how this fits in with existing contractual notice provisions. There is also the question of authorisation of a withdrawal and what authorisation means in this context.

The adoption of project bank accounts (PBAs) is one of the central elements in the Office of Government Commerce's drive to promote fair payment practices in the construction industry. As usual, the JCT, NEC and PPC 2000 contract draftsman are in competition for the prize of the most OGC-compliant standard form. Consequently, they have all issued specimen PBA documents.

The JCT has, unusually, issued its PBA agreement for consultation. The consultation period concludes on 30 October 2009, so if you have any comments on either the PBA documentation or project bank accounts generally, now is your opportunity. Details are on the JCT website.

Broadly speaking, the PBA does two things: it sets up a bank account that protects the money by creating a trust in favour of the contractor and the subcontractors and the Bank Mandate then regulates the payment to the contractor and the subcontractors to reflect the payment mechanism in the building contract. Generally, the JCT PBA agreement works, but there are some points in the drafting that need to be addressed. A few are set out below.

Clause X.1 of the PBA agreement (the X clauses are to be inserted in to the building contract) states that the parties (employer, contractor and subcontractors) enter into the PBA within "seven days of entering into the contract". The employer and the contractor then agree pursuant to clause 3.1.1 that they will sign the bank mandate "as soon as reasonably practicable following execution" of the PBA agreement and, in any event, within 21 days of the date of the agreement.

Extended period

Clearly, it is anticipated that the PBA agreement will be entered into at about the same time as the building contract. Hopefully this will be the case or this time period will extend. If the agreement is completed late and then the full 21 days is taken, it could be fairly close to a month before the PBA is in place. What happens during this time? That is not really dealt with in the agreement.

What happens if the employer decides that it wants to withhold monies from the contractor? As things presently stand, the JCT05 contracts provide mechanisms which reflect sections 110 and 111 of the Housing Grants, Construction and Regeneration Act 1996, but this is not reflected in the PBA agreement.

Clause X.4 of the agreement specifies that the employer notifies the contractor that it intends to pay less than the amounts set out in the contractor's application together with the amount now due to the contractor "so that payments can be made on time through the PBA". How is this supposed to fit in with the existing contractual notice provisions?

The answer is that in fact this wording is supposed to reflect the proposed revisions to sections 110 and 111 in the Local Democracy, Economic Development and Construction (LDEDC) Bill, which is currently on its way through Parliament. This assumes however that, first, the Bill will, when it comes into force, have the same wording and, secondly, that it will come into force before the PBA documentation is finally issued. Given that the consultation on the PBA concludes at the end of October 2009, we can assume a period after that before final documentation is issued. The JCT may be hoping that the LDEDC Bill catches up with it. If it does not, then this may have to be re-examined.

Finally, clause 2.4 of the agreement refers to the position where the total amount of monies in the PBA is less than the total amount which has been "authorised" by the employer and the contractor for payment to the subcontractors and the contractor. Is this linked in any way to clause X.4? It may be, although it is not clear. It is also rather puzzling: if the "authorisation" is by the Account Holders, that will include the employer who has then deposited less than it authorised.

It seems strange that the employer would authorise a payment and then pay less and certainly that would not fit in with the current mechanism in the 1996 Act. Also, if this does refer to the operation of the withholding notices in the 1996 Act, how can the payment be "authorised" by the contractor? What does "authorisation" mean in this context? Clause 2.4 envisages a pro rata allocation of deductions as between the contractor and the subcontractors, which seems to contradict clause X.4.

So will it work? We will probably see PBAs becoming more common but perhaps not that quickly. As things presently stand, it is likely to be adopted more by public sector clients yielding to OGC pressure than by the private sector. Certainly, a number of issues in relation to the JCT PBA will need to be clarified before it should be issued as a finished product.