Chapter 10
A Statutory Construction Trust
10.1
Many submissions and witnesses, particularly from small and
medium sized businesses, indicated support for the creation of a mandatory
trust model for the construction industry. This arrangement was explicitly
recommended by the Collins Inquiry[1]
and the Law Reform Commission of Western Australia[2]
and mentioned positively by the Cole Royal Commission.[3]
A form of a mandatory trust scheme exists in Western Australia,[4]
has recently been introduced in NSW[5]
and is the subject of a discussion paper in Queensland[6]
and the Australian Capital Territory.[7]
10.2
Mandatory trusts are a feature of the construction industry in
comparative jurisdictions. A number of states in the United States[8]
and provinces of Canada[9]
have established trust schemes; a Bill before the New Zealand Parliament
proposes to do the same;[10]
and the United Kingdom requires a trust relationship for all government
contracts.[11]
10.3
This marks a clear change across the industry in only little more
than a decade. The final report of the 2003 Cole Royal Commission found that a
trust fund had considerable merit in ensuring subcontractors get paid monies to
which they are entitled. However, the report found that opposition to the trust
model 'is so entrenched' that 'it would very likely be vigorously opposed'.
While not making a recommendation to establish a trust model, Commissioner Cole
pointedly remarked that he 'should not be taken to be recommending against that
model'.[12]
Evidence before the committee at this inquiry suggests that entrenched
opposition has dissipated.
10.4
Problematically, despite broad support for the establishment of a
statutory construction trust, there was some confusion as to whether the trust
should apply to all monies owed or merely retention monies. At times, it was
not clear whether a witness advocated a retention trust account, as now exists
in New South Wales for certain projects, or a broader trust account over the
entire contract, as was recommended by the Law Reform Commission of Western
Australia and operates in relation to government contracts in the United
Kingdom. As will be elaborated below, a retention money trust account would
operate in a more limited manner than a trust over the entire project.
Exploring a statutory construction trust model for security of payments
10.5
It is important to set out the basics of a statutory construction
trust. This section briefly sets out the fundamentals of a trust scheme before
examining the advantages and disadvantages of a trust for the construction
industry.
What is a trust?
10.6
A trust is a structure that separates legal ownership from
beneficial ownership. It is a relationship whereby one party holds title to
property subject to an obligation to keep or use the property for the benefit
of another party. The person who holds the property for another's benefit is
called a trustee. The person who is benefited by the trust is called the
beneficiary. The property that comprises the trust is the trust property.
10.7
The trustee of a trust holds a fiduciary position and must
protect the interest of the beneficiaries of the trust. A trustee must not put
themselves in a position in which their duty conflicts, or has the capacity to
conflict, with these interests unless the beneficiaries agree to the conflict.
The use of trust funds is controlled either by legislation or membership rules
of professional associations.
10.8
The use of trust schemes is common within the legal, accounting
and stockbroking professions and the real estate industry as there is a
fiduciary relationship based on generally discrete and distinct financial
transactions between principals and agents where funds are held on trust for
some time. The use of retention money and progress payments in the construction
industry mirrors the arrangement in these professions and industries,
suggesting that a trust relationship may be an appropriate arrangement.
What is retention money?
10.9
Retention money is payment for a service or product that is
withheld pending the completion of a specified condition. In the construction
industry, ordinarily the contract will entitle the head contractor to withhold
between 5 per cent and 10 per cent of each progress claim until the maximum
value of retention is reached. Retention of monies is a feature of contracts at
each stage in the chain.
10.10
Once the subcontracted works are complete and a certificate of
practical completion is issued, the contract will usually provide that half of
the retention money is released to the subcontractor. The remaining half of the
retention money is not released to the subcontractor until the end of the
defects liability period—ordinarily
between 6 and 12 months. The security that is retained throughout the defects
liability period is for the purpose of rectifying any faulty and defective work
of the subcontractor.
Difference between a retention
trust and a trust over the entire project
10.11
A retention trust would operate over only the small amount of
money held back at each progress payment and the money held until the end of
the defects liability period. A trust applying to the entire contract would
include the entirety of each progress payment within its ambit.
In favour of the trust
10.12
Many submissions and witnesses indicated strong support for the
adoption of a statutory construction trust at a national level, or across all
states and territories. The CFMEU was particularly vocal, urging that the
establishment of a statutory trust should be a 'central part of a suite of
measures'.[13]
The union considered that a trust arrangement 'offers a simple, cost efficient
and fair means of dealing with the insolvency problem and the peculiar
circumstances of the industry'.[14]
The Masonry Contractors Association of NSW & ACT agreed with the CFMEU,
explaining that they 'fully support' this approach.[15]
10.13
Mr Christopher Rankin, AMCA, considered that a scheme—whether a
trust arrangement, project bank account, or something else—to ensure retention
amounts are paid back quickly at the end of a project, 'would be of great
benefit to the nation'. However, Mr Rankin was clear that any system 'needs to
be federal'.[16]
10.14
Cbus Super and ARITA both drew the committee's attention to the
findings of the Collins Inquiry, and in particular, the recommendation that a
'retention money trust account regime' be established.[17]
Indeed, the Collins Inquiry was unequivocal in its recommendation.
There is no question that the statutory construction trust is
fully effective in protecting subcontractors against the loss of progress
claims paid by the owner to the head contractor and lost in the event of the
head contractor's insolvency.[18]
10.15
Cbus Super supported the Collins Inquiry recommendation. However,
Cbus Super went a step further, explicitly advocating for a broader
construction trust over the entire contract. It advocated:
...the merits in trusts being established through which
payments are set aside to ensure that those payments reach the sub-contractors
or suppliers that they are intended for and are not used up in cash purchases
for other related or non-related matters.[19]
10.16
Mr Robert Couper and Mr Leonard Willis, two Queensland-based
subcontractors, also supported a broader trust arrangement.[20]
As did Mr Patrick McCurry, Director of Mawson Group, who considered it 'an
outstanding suggestion'.[21]
10.17
Associate Professor Michelle Welsh preferred not to make a
comment on the effectiveness of a trust—either on the entire contract or merely
retention payments—until she had completed her study. However, Associate
Professor Welsh did note that any scheme that ensured people lower down the
contractual chain are getting paid would result in less insolvencies among
companies relying on that payment.[22]
10.18
Adjunct Professor Philip Evans, Notre Dame Law School, also
considered that a trust would 'greatly assist' in doing away with 'some of the
problems that are being experienced at the lower end of the contracting chain'.[23]
Mr Andrew Wallace, who conducted a review of the Queensland SOP Act, considered
the introduction of a retention trust account run by the state regulator 'a
no-brainer'.[24]
10.19
Some submissions suggested that a statutory trust arrangement has
the potential to curb illegal phoenix activity. The Subcontractors Alliance identified
the provision of meaningful security of payment legislation—that is, a
mandatory retention trust account—as a solution. It stated:
Had this legislation been in place, Walton and others would
not have been able to embark on his course of action. Phoenix trading of this
kind would disappear. This is now occurring with monotonous regularity and will
keep on doing so and the answer is clear and the answers have all been
identified.[25]
10.20
Mr Noonan, CFMEU, explained that the establishment of a statutory
trust fund has wider positive consequences. According to Mr Noonan, such action
would be beneficial across the entire industry and would not merely assist in
curbing illegal phoenix activity:
Trust funds would assist with phoenixing, but they would also
assist just in circumstances where a head contractor puts money into other
projects or other companies or uses it for development or uses it to pay debts
off his last [project].[26]
10.21
The committee heard that a mandatory retention trust would also
avoid the problem of false statutory declarations. Mr Coyte explained:
If I have a trust account, I do not have to go through the
paperwork of submitting statutory declarations to the client each month to
prove that I have paid everyone, because I am not paying everybody. It is
coming out of the trust account and going directly [to each subcontractor].[27]
10.22
The question of a statutory trust for the construction industry
has been considered before. The Law Reform Commission of Western Australia
considered the option of establishing a statutory trust in its 1998 Report on Financial
Protection in the Building and Construction Industry. That report
considered that the advantages of a trust scheme are that it:
-
provides a means of ensuring that a head contractor and
subcontractors are paid for their services and for materials supplied while
keeping contract moneys within the control of the parties to the project;
-
imposes ethical standards on the payment of participants in the
industry for work done or materials supplied in an industry which has failed to
use self‑regulation to control the use of various unfair or unscrupulous
practices;
-
reinforces good practice in the distribution of funds for a
project to the participants in the project and is consistent with the concept
of cooperative contracting, which is seen as way of improving the efficiency of
the industry;
-
means that because the moneys are held in trust, they cannot be
seized or frozen by a receiver or liquidator of the trustee or the trustee of
the estate of a bankrupt trustee. Thus, the position of a person further down
the chain can be secured and the payment of funds downward can still take place
because the project funds held in trust will not form part of property
distributed in the bankruptcy or winding up of the trustee;
-
makes available a wider range of remedies is available for a
breach or possible breach of trust than for a breach of contract;
-
may result in a speedier resolution of disputes between, for
example, a head contractor and a subcontractor, because generally the head
contractor cannot withdraw money from the trust fund until all the claims of
the fund's beneficiaries have been met. It removes the incentive for those
holding funds to create artificial disputes and to resolve them through purely
commercial pressure; and
-
may result in speedier payment of subcontractors.[28]
Opposition to the trust
10.23
Despite the apparent benefits of a statutory trust, some
submissions did note their opposition to its introduction. Concerns ranged from
the added administrative costs involved in managing a trust, to questioning
whether it would really solve the problem of insolvency in the industry.
10.24
The HIA declared its strong opposition to the introduction of a trust
scheme in the residential building industry. In HIA's view, trusts are 'an
unreasonable legislative interference in commercial transactions, adding costs
and uncertainty to the industry'.[29]
Both the Collins Inquiry and the Law Reform Commission of Western Australia
considered this concern in their reports. In their view, the introduction of a
statutory construction trust would not impose substantial additional
administrative costs. The Law Reform Commission noted in particular:
Doing
this will not necessarily require any more stringent book keeping than is now
required for the proper running of a business or to comply with taxation laws.
Even if there were increased costs they are likely to be offset by the interest
received on the trust moneys while they are held in trust. Further, any
additional accounting costs are unlikely to increase the cost of building
because those costs are likely to be more than offset by a more secure payment
system which will do away with or reduce the need to build into the contract
price a sum to cover defaults or delays in payment.[30]
10.25
The HIA raised a second concern—flexibility. According to the
HIA, a trust scheme would reduce the scope of contractors to divert money
received from one project to meet payments due on another project. They
explained:
Trust funds would further restrict the ability of a builder
to use money received from progress payments in a flexible manner, further
depriving them of working capital and forcing them to incur additional
financing costs.[31]
10.26
Many witnesses were unconvinced with this argument. Mr Michael
Ravbar, Secretary CFMEU Qld, contended that 'flexibility' is 'usually a code
for avoiding everything'.[32]
Adjunct Professor Evans agreed, noting that his personal view is that one
should not use 'other people's money to enhance your business interest', and
considered the suggestion 'unconscionable'.[33]
Mr Robert Gaussen, Adjudicate Today, went further, explaining that in his view
'moving funds from one job to another job is conversion, and that is illegal'.[34]
10.27
A third concern was discussed by the Law Reform Commission of
Western Australia. In its report, it noted that a construction trust scheme is
only effective if there is trust property to meet the claim of beneficiaries. A
difficulty arises where a deficit in trust funds arises in the absence of a
breach of trust along the chain. This could occur where there is a right of
set-off because of an incomplete or deficient job or deliberate under-bidding.
In both cases, it may be that a trust beneficiary will not be paid in full even
though there has been no breach of trust anywhere in the chain. So long as the
trustee pays all trust money it receives, it discharges its obligations even
though the beneficiary is not paid in full.
10.28
The Commission accepted that a trust is only effective if there
is sufficient property to meet the claims of beneficiaries. However, it
explained that a trust scheme may be able to deter net of tax tendering for two
reasons:
First, it
would be a breach of trust for trust funds from one project to be used to meet
financial obligations on another project. It would therefore no longer be
desirable to underbid on one project to obtain a cash flow to meet payments on
another project.
Secondly, if there
were insufficient funds available in the trust to pay all beneficiaries, the
funds would have to be distributed on a pro rata basis to the beneficiaries. The head contractor would not be
entitled to any of the trust fund. It therefore would not be in the head
contractor's interest to underbid or underquote for a project.[35]
10.29
The NSW Chapter of the Master Builders of Australia (MBA NSW) also
indicated their opposition to any trust arrangement. According to the MBA NSW,
the problem of insolvency is 'more about management practices and the
application of appropriate financial management skills'.[36]
10.30
Elaborating this point further yields a fourth potential issue
concerning a trust scheme—trust relationships impose fiduciary duties and
therefore require trustees undertake their responsibilities seriously. A
question arises as to whether participants in the industry have sufficient
financial acumen to manage a trust scheme, and whether licensing requirements
need to be strengthened alongside the introduction of a trust arrangement?
Adjunct Professor Evans considered this premise 'offensive and demeaning'.[37]
Committee's views
10.31
The committee accepts the view of the NSW Chapter of the Master
Builders of Australia that poor management practices and lack of financial
acumen are contributing factors to the high rate of insolvency in the industry.
However, as discussed in chapter 2, these factors are but two among many causes
of insolvencies and do not explain in any way the poor payment practices that
are endemic in the industry. It is clear that the pyramidal structure of the
industry places significant pressures on those on the bottom of the contractual
pyramid.
10.32
The committee notes that the overwhelming majority of submissions
that considered the issue argued in favour of the establishment of retention
trust accounts. This position is consistent with the Collins Inquiry and the
Law Reform Commission of Western Australia's Report. The committee believes
that a trust model for the construction industry has considerable merit and
offers the prospect of ensuring subcontractors are paid, potentially reducing
insolvencies down the contractual chain.
How would the trust operate?
10.33
As noted above, statutory trusts for the construction industry
exist in some states within the United States and Canada, operate in relation
to government contracts in the United Kingdom and are being actively explored
by New Zealand, Queensland and the ACT. In Australia, Western Australia and the
Northern Territory and New South Wales already provide for two different forms
of trust schemes. This section examines the two approaches in Australia, as
well as a third model used in the United Kingdom and currently trialled in
Western Australia and New South Wales—the Project Bank Account.
10.34
The basic approach of a statutory trust for the construction
industry was explained by the HIA. They noted that in general, a trust scheme
operates as follows:
Under a
deemed trust arrangement, a contractor receives progress payment upon trust to
pay workers, subcontractors and suppliers. Only after these parties have been
paid does the balance go to the builder.[38]
10.35
This basic approach has been followed, with slight differences in
the relevant Australian jurisdictions.
Approach in Western Australia and
the Northern Territory
10.36
In Western Australia and the Northern Territory, many
standard-form subcontracts provide for the principal to deduct from payments
due to the contractor a specified amount, as security for proper performance of
the contract. The effect of such a provision is to oblige the principal to set
aside these retention monies in a trust fund for the contractor, subject to the
principal's entitlement to access these funds in the event of any
non-performance of the contractors' obligations.
10.37
Where a contract does not have a written provision concerning the
status of money retained by the principal for the performance by the contractor
of his or her obligations, the Construction Contracts Act prescribes
that the principal is to hold the money on trust for the contractor until the
following occurs:
-
the money is paid to the contractor;
-
the contractor, in writing, agrees to give up any claim to the
money;
-
the money ceases to be payable to the contractor by virtue of the
operation of this contract; or
-
an adjudicator, arbitrator, or other person, or a court, tribunal
or other body, determines that the money ceases to be payable to the
contractor.[39]
Approach in New South Wales
10.38
In 2014, the NSW Government introduced regulations to further
ensure the effectiveness of their security of payments regime. The Building
and Construction Industry Security of Payment Amendment (Retention Money Trust
Account) Regulation 2014 partially implemented recommendations of the
Collins Inquiry. Applying to contracts between head contractors (or principals)
and subcontractors for non-residential building projects worth over $20
million,[40]
the changes:
-
require head contractors to deposit subcontractors' retention
money into approved accounts with authorised deposit-taking institutions. These
retention monies will not be available to head contractors for their general
use;
-
require head contractors to undergo an annual audit for each
account in operation;
-
ensure that retention monies will only be available for the
purposes specified in the contract between the parties;
-
set a maximum penalty for breach of the Regulations at 200
penalty units—currently $22,000;
-
require account holders lodge an annual audit report for each
account that they hold; and
-
increase investigative powers for compliance officers so that
they can better review and seek information on individual accounts.
10.39
While the Western Australia and Northern Territory model creates
a trust where parties do not provide otherwise in their contract, the New South
Wales model applies to all contracts over $20 million.
10.40
The most important factor in the development of each model is the
absence of a statutory construction trustee. That is, neither model has a
central regulator which operates and administers the trust fund; rather the
contractors themselves must administer it.
Project bank accounts (PBAs)
10.41
Project bank accounts (PBAs) are a project-based bank account
with trust status that facilitates the direct payment of monies owed by a
project principal to both the head contractor and subcontractors participating
in the PBA. Instead of contracted payments being made by the principal into the
head contractor's usual bank account, payments are deposited into a dedicated
project trust account. The account is established by the head contractor and
operated not by the head contractor, but by the bank with whom the account is
held.
10.42
Payments to subcontractors are made by the bank from the PBA in
accordance with payment instructions issued by the head contractor based on its
contractual obligations. The PBA can also hold any retention monies required to
be held in accordance with the head contractor's contracts with its
subcontractors. PBAs provide security and certainty of payment while at the
same time reduce unnecessary costs associated with short-term financing,
debt-chasing and administration.
10.43
In September 2009, the UK Government Construction Board decided
that Central Government Departments, their agencies and Non-Departmental Public
Bodies would be required to adopt PBAs for government funding construction work
unless there was a compelling case not to do so.[41]
10.44
On 26 June 2013, the Western Australian Government announced it
would trial PBAs on construction projects managed by the Department of Finance's
Building Management and Works.[42]
The PBA model being trialled has been developed in consultation with the
construction industry, and feedback during the trial is being used by Building
Management and Works to refine the model. The trial is expected to end in
February 2016 when a report outlining the findings of a review into the trial
is provided to the WA Minister for Finance. This review will seek feedback from
PBA project participants and will help inform any decision regarding the future
use of PBAs in Western Australia.
10.45
In New South Wales, a trial of PBAs on selected government
projects commenced in 2014 and will run for two years until the end of 2016.[43]
The trial is along very similar lines to that being undertaken in Western
Australia.
Conclusion
10.46
The committee has already noted its support in chapter 9 for
Commonwealth security of payments legislation to be enacted for the
construction industry.
10.47
In the view of the committee, there is one principle and one
principle only that should be observed in relation to security of payment in
the construction industry. It is a fundamental right of anyone who performs
work in accordance with a contract to be paid without delay for the work they
have done.
10.48
The overwhelming majority of submissions and evidence to this
inquiry support the establishment of a retention trust or similar mechanism to
facilitate the prompt payment of contract payments to subcontractors. Such a
mechanism would be in addition to security of payment legislation that provides
for rapid adjudication processes in relation to payment disputes.
10.49
As noted above, the final report of the Cole Royal Commission
considered a trust fund model and found that it had considerable merit in
meeting the objective of ensuring subcontractors get paid monies to which they
are entitled, thus preventing insolvencies and their associated hardships and
suffering. However, the report found opposition in the industry to the
establishment of a trust model to be so entrenched, that any recommendation
would very likely be vigorously opposed. While not making a recommendation to
establish a trust model, Commissioner Cole pointedly remarked that he should not
be taken to be recommending against that model.
10.50
That was in 2003. In the view of the committee, the evidence and
submissions to this inquiry indicate that industry opposition to a trust model
have softened markedly in the intervening years. Witness after witness,
submission after submission—from subcontractors, the legal profession,
liquidators, employee organisations, regulators, Treasury and ASIC—all told the
committee that a trust model would act to reduce substantially the number of
insolvencies in the industry, improve business cash flows and promote
innovation and other productivity improvements in the industry.
10.51
The committee agrees with the evidence and submissions of the
many witnesses and submitters who have supported the concept of a trust account
model for securing payments to subcontractors and reducing the incidence of
insolvency in the industry. The committee believes that PBAs, as employed in
the United Kingdom and currently being trialled in Western Australia and New
South Wales, have the very strong potential to resolve the payment problems
that have beset the industry. The committee believes further that PBAs can help
minimise the great harm that the high level of insolvencies in the industry is
inflicting on thousands of businesses and the people who run them and work in
them every year.
10.52
PBAs can complement harmonised national security of payments legislation.
Any disputes in relation to payments or the head contractor's payment
instructions to the bank can be resolved through access to the security of
payment and rapid adjudication legislation the committee recommends in chapter
9.
10.53
The committee believes that further consultation is required in
examining the preferred scope of any statutory construction trust/PBA as a
means by which security of payment can be achieved through Commonwealth
legislation, including in particular to what scale of projects it should apply
to and whether it should apply only to retention payments or to the entire
contract.
10.54
The committee recognises that the Commonwealth is a major funder
of construction in Australia. The Commonwealth has a responsibility, as in all
fields, to be a model industry participant. In the view of the committee, the
Commonwealth has a responsibility to be a model participant in the construction
industry by promoting the adoption of best practice payment systems. The best
way to do so would be to require construction projects that receive
Commonwealth funding to adopt a best practice model.
Recommendation 29
10.55 The committee recommends that commencing as soon as
practicable, but no later than 1 July 2016, the Government undertake a two year
trial of Project Bank Accounts (PBAs) on no less than twenty construction
projects where the Commonwealth’s funding for the project exceeds $10 million.
Recommendation 30
10.56 The committee recommends that after the trial has
concluded, a timely evaluation of the trial of PBAs on Commonwealth funded
projects be conducted with a view to making the use of PBAs compulsory on all
future Commonwealth funded projects and mandating extending the use of PBAs to
private sector construction projects.
Recommendation 31
10.57 The committee recommends that, while the
Commonwealth trial of Project Bank Accounts is underway, the Attorney-General
refer to the Australian Law Reform Commission for inquiry and report a
reference on statutory trusts for the construction industry. This inquiry
should recommend what statutory model trust account should be adopted for the
construction industry as a whole, including whether it should apply to both
public and private sector construction work.
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