Legal blog: When things go phut

It was February 1994 that Sir Michael Latham came to Chambers to quiz me about investigating want of trust and money in our industry. “Okay, Bingham,” said Sir Michael, “what’s your view?” His job was to recommend remedies, to Her Majesty’s Government, to lick our construction game into shape. Carillion in 2018 brings memories flooding back. A big outfit goes bust. Black hole. Hurt. Anger. 

The big outfit that went to the wall in 1992 was Olympia & York. The firm had built worldwide major financial office complexes including One Canary Wharf in London Docklands. By the time it opened, the property market had collapsed. The creditors included well-known main contractors. They were owed a great deal of money by Olympia & York – and in turn, of course, owed a great deal themselves down the supply chain. 

The subcontractors squealed because the subcontract small print had “pay when paid” clauses. Yes, yes, it was the small guys that were driven to the wall. Just a few of them did what I recommend you victims of Carillion now do: nudge your MP. Coax him or her to “do something”. That’s how we got the Latham review in 1994 and, eventually, the most striking improvements in construction into getting paid. Do the same. Prod your MPs please, and the MPs will say, “What’s to be done?”

Each month in the same way: the qs forecasts the next interim payment, the money goes in, the work is done, the payment certificates are issued – and the cash is paid

Oh, the time is ripe. This Carillion disaster has occurred at exactly the same time as the Construction Act that was born out of the Latham review is up for parliamentary review. And this is what I want: I want what Latham wanted all those years ago, but didn’t get into the Construction Act. He wanted, and so do you, a fail-safe system for the money owed when any outfit on the project goes phut. Look, employers go bust, main contractors go bust, and subcontractors go bust, and when that happens to any one of those job participants the result is pain. The trick is to have the project money paid monthly in advance into the job bank account. Latham called it a trust account. Scotland calls it a project bank account, and it is a must on their public sector works. It is simply a ring-fenced bank account from which payments are made directly and simultaneously from the account to the construction supply team – that includes the architect, the quantity surveyor, the subcontractors and the main contractor. 

I want a tweak. In return for this fail-safe system, the employer should be given a direct and separate contingency contract with the subcontractors. That device is in place so that if any Carillion-type collapse happens, the employer has a direct line to the subcontractors to continue the works. And the subbies’ money is and was safe.

The Carillion affair has left many small operators in severe straits. Some will be personally ruined. Nudge your MP.

Day one of the project sees the project bank account (PBA) already in place. It applies whether this is a public procurement building or a private developer building his next office block. The QS forecasts the amount due in the first interim payment, yet to come. That sum of money is transferred into PBA on day one. The PBA owns the cash. The works begin. The subcontractor’s groundworks people are doing their stuff. The first interim valuation is on the cards. The contract administrator issues the certificate, all in the usual way. At the same time, the main contractor’s QS values and certifies the work of the groundworks subcontractor and any other subcontractors on site too. These certificates are put in the hands of the person managing the PBA (a trustee), who then pays out the main contract certificate less the subbies’ certificate, which goes direct. I will come to the complications in a moment, but can you immediately see that the cash is safe? The machinery is operated each month in the same way: the QS forecasts the next interim payment, the money goes in, the work is done, the payment certificates are issued – and the cash is paid.

True enough, the employer is forking out for the works a month or so earlier than it otherwise would. But it gets something back from the supply chain: they promise in return to be liable to the employer, via a leapfrog contract to also carry out their works for the employer direct and to put right defects too, if a Carillion-type disaster happens. Another saving for the employer is to dump the cost of a bond. There is simply no need for it. The subcontractors don’t go away when a main contractor goes phut. And if, as happened to Olympia & York, the employer fails, then the PBA has the money held safe for the works done. 

The mentality here is that each and every project is treated as a joint enterprise. The PBA holds the cash for that job. It is not a lump of money that goes into a general pot, a general account for all creditors. The cash is ring-fenced, which is vital because we are always talking big money. Nobody is getting paid in advance. Works are done, works are certified, and the money is paid in arrears. But that money is secured.

What if there is a dispute, a set-off, or abatement? The adjudicator will decide whether a certificate is in error, or if a pay less notice is correct. The PBA receives the certified amount due and the pay less notice and pays the latter sum, or a sum ordered by the adjudicator. The PBA has at its heart a safe system of tracing. The Carillion affair has left many small operators in severe straits. Some will be personally ruined. Nudge your MP.