Improving Security of Payment Building and Construction Industry

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4. Trusts Page 33National Public Works Council IncImproving Security of Payment in the Building and Construction Industryof preferential payments and the recovery thereof by a Liquidator of the trust would notarise.4.5.6 How are Trust Disputes to be Resolved?Trust disputes can be resolved by agreement, by alternative dispute resolution(arbitration, conciliation and mediation) and by Court order. Resolution of disputesthrough the Courts is generally slow and extremely expensive. A direction in acontract, trust deed or otherwise might direct that disputes are to be resolved by firstattempting alternative dispute resolution prior to Court intervention. Such a directionshould lead to a quicker, less costly and perhaps more equitable resolution to thedispute, rather than from a Court intervention. This is in accordance with the principlethat there can only be one winner and one loser in a Court determination, whereas therecan be a "win/win" position through alternative dispute resolution.4.6 For Whom Should the Trustee Hold the Trust FundsIf there were cascading trusts set up in the construction process, trust monies should only beheld in trust for those parties upon which there is privity of contract. This is the notion of theso called "privity of trust" approach. This approach has been adopted in some provinces inCanada.The privity of trust approach is a simple one. Each trustee knows specifically who thebeneficiaries are, which should lead to an orderly flow of funds down the contractual chain.The obligation of the trustee would be fulfilled when the trustee has paid the party to whomhe has contracted. That party, in turn, would then have trust obligations of payment to theparty with whom he contracted, and so on.Provided beneficiaries were properly defined, the trustee ought not have difficulty indeciding to whom to distribute the trust funds.
4. Trusts Page 34National Public Works Council IncImproving Security of Payment in the Building and Construction Industry4.7 Problems, Difficulties and Legal Ramifications of TrustsThere are numerous problems, difficulties and legal ramifications from the use of trusts. Setout below are the main issues, outside the questions raised in the Brief (discussed at Section4.8) from the use of trusts.Most of the following discussion in Section 4.7 is based on the premise that the HeadContractor is the trustee. The ramifications for the trust scheme may be different where thetrustee is not the Head Contractor, but some third party.4.7.1 Trust AccountsThere are three possible trust structures available. These have been consideredpreviously, and can be described as single trusts, multiple trusts or cascading trusts.Irrespective of the structure adopted, trusts may be deemed (ie implied at law) orformal (ie expressed in formal terms such that their content is evident in trustdocumentation which in turn binds the parties).As indicated, one potential difficulty arising from the use of trusts occurs when trustfunds become mixed, either with monies from other trust funds held by the trustee, orwith the trustees own money, or both.It has been previously stated in this Consultancy that the likelihood of mixing of fundsis much less likely to occur in the case of cascading trusts.4.7.2 Monies Mixed in Trustee's AccountIf monies are mingled with the trustee's general account, they become unidentifiable.This means that tracing, in the case of an action brought for breach of trust, may not bepossible. There are three points to note where retention monies have been required tobe held on trust by Head Contractors:(i)(ii)(iii)As a result of the Head Contractor's fiduciary relationship with theSubcontractor, a Head Contractor was under a duty to set the monies aside in aseparate account. (Wates Construction (London) Ltd v Frantham PropertyLimited (Unreported) referred to in F Fitzpatrick Retention of Funds inBuilding Contracts [1991] New LJ 1007)The above proposition means that in the case of a solvent Head Contractor, aninjunction is available to the Subcontractor to secure funds, and an order canbe made setting aside as a separate trust fund a sum equal to that part of thesum owing as retention monies under the project. (Re Arthur Sanders Limited(1981) 17 BLR 125, 136)In the case of an insolvent Head Contractor who has not maintained separateaccounts, no injunction will be ordered to constitute the funds as in (ii) above.However, beneficiaries are also entitled, in certain circumstances, to trace
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