UK: Setting Up A Designated Deposit Account

The principle that retention is held on trust is a well established one. However the recent case of Bodill & Sons (Contractors) Limited v Harmail Singh Mattu [2007] EWHC 2950 which came before Mr Justice Akenhead answers certain questions about the manner in which those trust accounts should be set up. In particular, the case provides important guidance as to whether the bank account should expressly be designated a trust account so that the bank, and others, are aware of the status of the money being held in it.

By a contract dated 24 February 2006 in the JCT Standard Form of Building Contract, Private Edition with Contractor’s Designated Supplement, 1998 edition, Mr Mattu engaged Bodill to construct new apartments and convert two warehouses at Hinckley in Leicestershire. The contract sum was £3.79 million. By 12 October 2007, £3.97 million had been certified although retention was still being held.

Clause 30.5.1 of the contract form provided that:

Clause 30.5.3 of the contract form stated that:

In the last week of September 2007, Bodill asked Mr Mattu to set up the requisite separate bank account and pay the retention money into it. On 19 October 2007, Mr Mattu instructed his bank, the Royal Bank of Scotland, to set up a separate account and they did so within a few days. Mr Mattu instructed the bank to transfer the monies into the new account but due to an oversight on the part of the bank this did not happen.

Bodill’s solicitors wrote to Mr Mattu on 19 October 2007 threatening to seek an injunction to enforce clause 30.5.1 if, within 48 hours, confirmation was not given that the retention had been placed in a separate bank account. On the same day, RBS wrote to Bodill stating that they had been instructed to open a new account in the name of "Harmail Singh Mattu, trading as Urban Surburban re: Bodill retention monies" to hold a total of £123,207.93. RBS stated that the account had not yet been opened but would be opened within two to three working days.

Bodill did not receive any confirmation that the account had been set up and/or that it had the requisite money in it. Bodill therefore issued proceedings for an injunction on 9 November 2007. By the time the matter came to a hearing (30 November 2007), the account was open and the sum of £123,207.93 had been transferred by Mr Mattu into the account.

Two issues were raised at the hearing:

1. How long was reasonable for the account to be set up; and
2. Was the account sufficiently identified as a trust account as envisaged by the Contract.

The Judge answered these questions as follows:

1. A reasonable period for the setting up of the account and the transfer of monies is two to three weeks; and
2. It should be clear to the bank that the account is a trust account or that the sums in it are impressed with a trust. The account should have been designated a trust account.

The Judge held that given the fact that the retention monies were held on trust, it was necessary following the request in late September from Bodill, for Mr Mattu to set up the separate trust account. He accepted that neither the law of trust, nor the law of contract, required an instantaneous setting up of an account and/or transfer of money. It was necessary to take into account the commercial realities of the situation. However, in his view it was clear that a reasonable period for the setting up of the account and the transfer of the money would be two to three weeks.

The Judge accepted that whilst it could not readily be said that Mr Mattu was to any significant extent in breach of trust and/or contract for failing to set up the account promptly enough, it was also clear that Mr Mattu was at least nominally in breach of trust and/or contract in failing to pay (or to secure the payment of) the retention money into the account within that sort of period.

The Judge continued that the name of the account was not sufficiently clear. It could not be described as a designated trust account. At the time of the hearing it was referred to, as the RBS letter of 19 October said, as the "Harmail Singh Mattu, trading as Urban Suburban, re Bodill retention money account."

This did not, in the view of the Judge, make it "anywhere near clear enough" to the bank or anyone else that it was a trust account or that the sums in it were impressed with a trust. This amounted to a further, albeit, quite probably only a temporary, breach of trust and/or contract. The account should have been designated as a trust account.

There remained the question of what the appropriate relief was in light of Bodill’s application to the court. The money, approximately £123k, remained in the account. Mr Mattu indicated that he was prepared to give an undertaking to the court that he would promptly instruct the Royal Bank of Scotland to re-designate the account as a trust account with Bodill named also in the name of the account. Finally, and this to the Judge seemed to provide all the protection that Bodill could expect to have, Mr Mattu said that he was prepared to undertake to the court that he would give three clear working days’ notice (and the Judge said that this notice should be in writing) to Bodill of any intention to remove or use any monies in this trust account.

Consequently, the Judge did not consider that it was necessary to make any Order. If Mr Mattu breached these undertakings then it was open to Bodill to return to the Court.

Conclusion

The difficulty here arose, because whilst under the standard JCT contract wording, it is clear in the contract that regardless of the name of the account, the monies are impressed with a trust, it was not clear that a separate trust account was needed. Mr Justice Akenhead has held that such a separate account is required.

That account must also be sufficiently clearly identified and named. This is of great practical importance, as it should lessen the likelihood of banks mistakenly paying out monies which were supposedly held on trust by the bank, when an employer has become insolvent.

This article is based on an extract from a forthcoming issue of the Fenwick Elliott Dispatch, a monthly newsletter which summarises recent key developments relating to contentious and non-contentious construction law issues. To see the current issue please visit www.fenwickelliott.co.uk.

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