No right of Subcontractor to recover unpaid sums not paid into a Project Bank Account. Is it time for the NEC Board to re-consider the drafting of Option Y(UK)1?

The Technology and Construction Court (TCC) dismissed the claim by ETL who are a sub-contractor, for damages against an employer VOG under section 1 of the Contracts (Rights of Third Parties) Act 1999. The claim related to sums that, on the ETL’s case, the employer as the Client under the contract should have paid under the project bank account provisions of the main contract (which was based on the NEC4 Engineering and Construction Contract pre-October 2020 amendment). The court held that only ‘Named Suppliers’ within the NEC4 project bank account regime could fall within the relevant class of third-party beneficiaries; here, the claimant was not a Named Supplier because that part of the Contract Data which would identify Named Suppliers simply stated “TBC”. A supplier could become a Named Supplier once the necessary formalities had been completed. The formalities were not completed and no Joining Deed executed.

The decision underscores the importance of complying with the formal mechanics of NEC4 project bank account arrangements and demonstrates the limits of third-party rights.

But does is also expose a flaw in the NEC4 Option Y(UK) 1 drafting both pre and post October 2020 when Y(UK) 1 was amended ?

The basic facts are these.

It is the policy of the Welsh Government that certain public procurement must include establishing a Project Bank account. This was such a procurement.

ISG had been appointed as the Contractor and the contract conditions included provisions for establishing the Project Bank Account.

There were some delays to the project and to establishing the project bank account.

Payments had been made by VOG directly to ISG while there was delay in setting up the project bank account. ISG’s solvency was also worsening. As ISG’s solvency and potential sale became more acute the Bank became unwilling to complete the process. A direct payment was made including £486,017.67 certified as due to ETL, under sub-contract payment application no.4. VOG paid the certified main contract sum directly to ISG on 5 September 2024. However, ISG entered administration on 20 September 2024 without paying ETL, and ETL expected no recovery in the administration.

The outcome of the case is that the intention of protecting the supply chain in insolvency was defeated. The court found it was the Bank who was responsible for that and that the ETL could have done more to protect itself by pressing for the operation of the procedures to execute a Joining Deed. VOG, a Council do not have to pay twice. 

If there was any doubt that the Client can make direct payment where the Project Bank has not been set up under the NEC drafting that has been laid to rest. The court held among other things that that the existence of the Project Bank Account is a condition precedent to making payment into it and therefore the Client was not in breach by making payment to the Contractor. The more recent Option Y(UK)1 (October 2020 amendment) includes express provision that the Client may make direct payment.

“Y1.7 Until the Project Bank Account is established, payment is made by the Client to the Contractor.”

This leaves the subcontractor exposed. As the spectre of insolvency arises it may prevent the Project Bank Account being established. If as in this case it is the Contractor who is given that responsibility, they may well not establish the Project Bank Account or be unable to as they juggle liabilities. 

This suggests that the clause is fundamentally flawed as it places no responsibility on the Client to establish the account (there is an option for the Client to establish it but that can be difficult). If the clause is to protect the supply chain, there should be some mechanism for them to protect their interests. 

This could be achieved by amending the new Option Y(UK) 1 clause to include new clauses.

The clause Y1.5 already includes drafting as to what must be included by the Contractor in its contracts with Named Suppliers. This should include drafting to the effect that the Named Supplier may suspend the performance of the works if the Project Bank Account is not established.

Suggested 

In section Named Suppliers 

The Contractor includes in the contract with the Named Supplier a right to suspend performance. 

If it is an NEC contract this could be an amendment to the Y(UK) 1 drafting for the relevant contract 

“If the Project Bank account is not established within time required by clause Y1.2 the Named Supplier may notify the Contractor. If the Project Bank account is not established within two weeks of that notice the Named Supplier may suspend the performance of the contract.”

There should be a new heading 

“ Suspension”

The Contractor includes in the contract with the Named Supplier a right to compensation and an extension of the time for performance if the Named Supplier exercises its right to suspend pursuant to clause XXX.

If it is an NEC contract then yUK(1) could be amended

“If the Named Supplier exercises its right to suspend performance under y1.** it is a compensation event.”

The existing NEC drafting  provides a remedy if important clauses are not stepped down into subcontracts. See clause 26 subcontracting. “ The Project Manager does not appoint a proposed subcontractor until the Project Manager has accepted etc”. Such acceptance requires that the Contractor has included specific drafting in the subcontract relating to mutual trust and co-operation. See 26.3 last bullet point.

The same approach could be taken in relation to the “Named Suppliers” clause 1.6. by adding a new clause  

“A reason for not accepting a Named Supplier or a submission for adding a Supplier to the Named Suppliers is that the contract with the Named Suppliers or Supplier does not contain the right to suspend and right to compensation and additional time for performance if the Named Supplier has given notice and suspends under y1.**”

The advantage of the NEC Board make the amendments is that the family of contracts can be amended consistently and it will have more commercial impact than leaving it to the supply chain to negotiate this on a piecemeal basis.

As we know Parties do not always do what the contract suggests. If the Client and the Contractor fail to do what is required, the drafting must address the interests of the supply chain, or the provisions are of little value.