No PBA, No Protection: TCC Rejects Subcontractor’s Third-Party Claim Over Direct Payments

Project bank accounts (“PBAs”) can provide valuable protection to subcontractors, shielding them against the insolvency of the main contractor. But what happens if – even though the main contract and subcontract both provide for payment via a PBA – no PBA is established and the main contractor becomes insolvent, having failed to pass on a payment made by the employer to the main contractor?

This case, heard by HHJ Keyser KC, sitting in the TCC in Wales, arose out of the insolvency of ISG Construction Ltd, which entered administration in September 2024.

The claimant subcontractor sued the employer, a local council, for breach of the main contract, under which ISG had been the main contractor, carrying out works at a school. The subcontractor was not a party to that main contract, only to a groundworks subcontract with ISG. It therefore had to rely upon the Contracts (Rights of Third Parties) Act 1999, in order to bring its claim against the employer.

The alleged breach of the main contract was not that the council had failed to set up the PBA, because that was not its job; it was the main contractor’s responsibility. Rather, the subcontractor’s complaint was that the employer had, at the main contractor’s request, made multiple direct payments to the main contractor pending the establishment of the PBA.

The claimant subcontractor said these direct payments breached Clause Y1.8, a sub-clause of optional Clause Y(UK)1 in the NEC4 Engineering & Construction Contract, which is the NEC4 standard form PBA clause. It said that:

• As a matter of construction, Clause Y1.8prohibited the making of direct payments pending the setting up of the PBA; and
• As a matter of fact, if the employer had withheld payments altogether until it could pay into the PBA, then the main contractor would have been highly incentivised to, and would have, established the PBA.

On that basis, the subcontractor said, but for the employer’s breach in making the direct payments, the subcontractor would have become a party to the trust deed which governed the operation of the PBA (and hence a “Named Supplier”, in the terminology of Clause Y(UK)1. Consequently, the employer would – on the hypothetical “no breach” scenario, had paid all sums into the PBA, where they would have been held on trust for the subcontractor, on the insolvency of the main contractor.

The Court rejected the subcontractor’s claim on multiple bases. It held that, because the subcontractor never became privy to the trust deed, it lacked the status it would have needed to bring a third-party claim under the 1999 Act in relation to Clause Y1.8, even if the direct payments had breached that clause. It also held that Clause Y1.8 did not, in any case, prohibit the making of direct payments. On the contrary, another clause of the standard form NEC4 ECC wording, Clause 51.2, mandated payment pending the establishment of the PBA.

Jess Connors, instructed by Matthew Stevens and Alex Howells of Hugh James, represented the successful defendants. Watch this space for further news on a possible appeal by the unsuccessful claimant.