Improving Security of Payment Building and Construction Industry

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4. Trusts Page 25National Public Works Council IncImproving Security of Payment in the Building and Construction Industry4.1 Recommendations• We describe trusts in the following way:- Single trust - a single trust is where there is one trust entity responsible for theone building and construction contract for the one project site for a singlelayer of Subcontractors.- Cascading trust - a cascading trust is where there is one trust entity responsiblefor one or more building and construction contracts for one project site and formultiple layers of Subcontractors and/or Sub-Subcontractors.- Multiple trust - a multiple trust is where there is one trust entity responsiblefor a number of building and construction contracts for a number of projectsites for a single layer of Subcontractors.• If trusts are to be introduced into the Building and Construction Industry, it wouldseem appropriate that they be introduced across the board rather than within individualsections of the industry. This would probably require legislation to be introduced tothe effect that a standard form building contract such as AS2124-1992 be used by theBuilding and Construction Industry so that trust provisions are properly documented.• We would suggest cascading trusts as opposed to single or multiple trusts be used.These trusts should be set up pursuant to a standard form contract. We believe that theCanadian privity of trust/privity of contract approach introduced into various Provinceswithin Canada would be an appropriate structure to introduce.• As far as the issue as to who is to be the trustee is concerned, we recommend that thetrustee be the person who contracts for work and materials to be supplied or performed.Under these circumstances, the beneficiaries of the trust simply become thoseSubcontractors who undertake to provide labour and materials to the trustee (ie theHead Contractor).• We recognise that under this scenario the trustee will not be independent, therefore, anunderlying safety mechanism such as a mandatory external audit requirement wouldneed to be introduced to protect the interests of all parties to the contract.• We suggest that the trustee's powers, duties, responsibilities and obligations bepursuant to statute and common law and that the trust deed be encapsulated in astandard form building contract.
4. Trusts Page 26National Public Works Council IncImproving Security of Payment in the Building and Construction Industry• A difficult issue will arise where there are disputes between Head Contractors andSubcontractors as it is likely that a trustee will not want to make any payment untilabsolutely certain that the dispute has been resolved. This is due to the potentialliability imposed upon a trustee for improper appropriation of trust funds. Werecommend that a direction be made in a standard form building contract such that atrustee must refer disputes for alternative dispute resolution rather than having anunfettered discretion to settle disputes by whatever means the trustee considersdesirable. Clearly, it would be unconscionable for a Head Contractor in its capacity astrustee to settle its own dispute by unfettered discretion. We would envisage anindependent, but qualified and experienced panel of mediators/conciliators be availableto enable trustees to refer disputes at the earliest opportunity.• An independent trustee may, because of the duties, responsibilities and obligationsupon a trustee to act with the utmost of good faith towards beneficiaries, delay paymentto Subcontractors until absolutely certain that a payment to a particular Subcontractoris to be correctly made. A trustee that has privity of contract, although under the sameduties, responsibilities and obligations as an independent trustee, would, because of hisinvolvement in the contract, be in a position of greater knowledge and could use hiscommercial common sense when making payments.• If there are to be trusts along the lines of the Canadian approach (ie cascading trusts)with those trusts being administered by the parties privy to the building contract, itwould appear necessary that a proper education program be instituted so that theBuilding and Construction Industry becomes aware of the powers, duties,responsibilities and obligations of trustees. Such a program would take considerabletime to put into place with the benefits perhaps taking many years to come to fruition.It would be necessary to start the education program at the earliest opportunity, whichwe believe might occur as early as the apprenticeship stage.• However, this Consultancy does not recommend the use of trusts as a panacea forsecurity of payment although trusts can assist to improve payment in the Building andConstruction Industry. The complex, commercial and administrative burdens andobligations of trusts are likely to prevent their implementation on a wide spread basisthroughout the Building and Construction Industry. Also, the detailed legal issues andconsiderations involved with trust law and the onerous trustee obligations negate theworkability of trusts within the industry.
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Improving Security of Payment Building and Construction Industry

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