UK: Setting Up A Designated Deposit Account

Last Updated: 13 February 2008
Article by Jeremy Glover

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:

"the Employer’s interest in the Retention is fiduciary as trustee for the Contractor and for any Nominated Subcontractor (but without obligation to invest..."

Clause 30.5.3 of the contract form stated that:

"The Employer shall… if the Contractor … so requests at the date of payment under each Interim Certificate place the Retention in a separate banking account (so designated as to identify the amount as the Retention held by the Employer on trust as provided in clause 30.5.1) and certify to the Architect with a copy to the Contractor that such amount has been so placed."

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Jeremy Glover
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Law Practice Management
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.