22
BUSINESS AND TRAINING
The benefits of an Escrow account
By
Uwe Putlitz
Probably the most serious problem for any contractor ( and consultant ) is cashflow , or the lack of it . The situation is neither new nor unique .
This is illustrated by the recent insolvency of some large principal contractors in South Africa while , in the United Kingdom , a 100-year-old contracting business in the UK , Carillion , closed in January 2018 , and 3 000 direct jobs were lost , and 75 000 jobs were affected in the supply chain with debts of GBP7-billion .
Build-UK and others are lobbying for legislation that would compel the investment of interim payments and / or retention money into an account or facility outside the employer ’ s or the contractor ’ s organisation to protect money due to contractors , subcontractors , and suppliers respectively in the event of liquidation or maladministration ( thereby eliminating ‘ cash ’ retention ) by no later than 2025 in terms of legislation still to be passed in the UK . The situation in South Africa is no better .
The various Standard-form Contracts ( SfC ) for building and / or engineering works and for the appointment of professional consultants , all include clauses describing the payment conditions – including the repayment of retention – in general terms and the requirements ( when due , how claimed , etc ) in the contract data .
The SfCs all describe procedures to follow where no , late or partial payment has been received , including : 1 . Notice to the employer to make payment in full before expiry of the notice period .
2 . Failing which the service provider may suspend the work or delivery of a service and be entitled to an extension of time and costs incurred during suspension .
3 . Withholding intellectual property before the product can be used , for example a compliance certificate for plumbing , electrical or mechanical installations or a certificate of ( practical ) completion for the work . 4 . Issuing a demand in terms of a payment guarantee , if provided . 5 . Issue a Notice of Termination of the contract .
Consequently , some countries require ‘ retention ’ to be held in a separate ‘ Project Bank Account ’ ( such as Australia and Canada ) or in a trust account ( such as New Zealand ) but not in the employer ’ s general bank account .
What is a project bank account ( PBA )?
• The concept of a PBA probably dates to the often-quoted Latham report ‘ Constructing the Team ’ published in June 1994 dealing with “ systemic failings in the UK construction industry ” also recommended the use of a “ project bank account ” applicable to public sector projects … to ensure regular payment to all tiers of service providers in the construction industry within defined time periods .
• The employer pays money into the PBA from where payments to contractors and suppliers are dispersed .
• Money in a PBA has ‘ trust ’ status that is not accessible to liquidators in the event of insolvency , permitting the payment of amounts due to all creditors at the same time rather than cascading through the supply chain .
• The PBA must be with an identified independent bank account for the lifespan of the project and be subject to normal bank charges shared pro rata by all beneficiaries .
• The PBA trustees are the employer and the principal contractor . The SfC should specify the authority of trustees and the beneficiaries ( including subcontractors and suppliers ) and how the interest of each beneficiary is determined in the event of insolvency .
• Subcontractors reportedly were not convinced that the Principal Contractor , as a trustee , fairly represented their best interests .
• Principal contractors ’ concerns were the ‘ loss of control ’ over payments to others , resulting in disputes of another kind , and that they could not finance their business from withheld payments .
• Another concern raised was , in the event of insolvency of the employer , that money in the PBA was excluded from the liquidation account giving preferential treatment to project creditors over other creditors . ( Reference : - Louise Hall , Society of Construction Law D222 September 2019 p 4 )
• As the system was not mandatory , it was not widely used in the UK .
Escrow account The concept of an escrow account is new to the South African market and is not dissimilar to the project bank account or , for example , a trust account operated by a legal practice .
• Escrow is a holding account created by a purchaser of a service ( the client or employer in the building construction industry ) and a supplier ( a consultant or a contractor or subcontractor in the building construction industry ) to hold money in trust until a specified service has been provided or completed , as agreed between the parties , when the escrow account is initiated at a financial institution or a bank .
www . plumbingafrica . co . za @ plumbingonline @ plumbingonline @ PlumbingAfricaOnline January 2022 Volume 27 I Number 11