Project Bank Accounts and Third Party Rights: the limits of Clause Y(UK)1

A recent case in the TCC has considered the applicability of the Contract (Rights of Third Parties) Act 1999 to clause Y(UK)1 of the NEC4 contract suite, and has highlighted significant limitations in the protections offered by project bank accounts where they are not effected or operated properly.

Project Bank Accounts

Last year, it was reported that a number of subcontractors were unable to access funds that were supposed to have been protected by project bank accounts (“PBA”s) in the wake of ISG’s insolvency¹, due to alleged failures of the MoJ to properly fund the accounts, cutting across the primary purpose of a PBA to protect the supply chain from non-payment and insolvency.  

In the recent case of E & TL Jones (Civils) Ltd v Vale of Glamorgan Council [2026] EWHC 2054 (TCC), the claimant (“Jones”) was a groundworks subcontractor to ISG.  The project in question was supposed to be protected by a PBA. The PBA was never set up and Jones was left significantly out of pocket.  Jones sought to establish a claim against the local authority defendant (“Glamorgan”) on the basis that (i) the Contract (Rights of Third Parties) Act 1999 (“1999 Act”) gave it enforceable rights in the main contract against Glamorgan and (ii) that Glamorgan was in breach of its obligations under the main contract for making direct payments to ISG rather than paying sums into the PBA.

E & TL Jones (Civils) Ltd v Vale of Glamorgan Council

The main contract on this project was an NEC4 Engineering and Construction Contract, June 2017 Edition with January 2019 amendments, and critically it incorporated Option Y(UK)1, requiring the establishment of a PBA. 

The obligation under the main contract was upon ISG to establish the PBA, which didn’t happen, and then upon Glamorgan (under clause Y1.8) to make payment of the amount due under the contract into the PBA.

The PBA and the protections under it were to be governed by a “Trust Deed” (in a prescribed form) and were to benefit “Named Suppliers” who would either be party to the Trust Deed, or would later join into it by a “Joining Deed” (in a prescribed form).

The contract defined Named Suppliers as those who are identified as such in the contract, or other “Suppliers” who had signed the Joining Deed. 

Jones argued that (i) the 1999 Act endowed it with rights under clause Y(UK)1 of the contract (in particular clause Y1.8), (ii) that Glamorgan was in breach of its obligations under clause Y1.8 which required it to make payments only into the PBA, and (iii) as a result of that breach and by making payments directly to ISG, ISG was not motivated to establish the PBA, which meant that Jones’ money was not protected.  Jones maintained that had payments been withheld, ISG would have been compelled to establish the PBA and join Jones to the Trust Deed, ensuring protection of its sums due.

Could Jones establish rights under the 1999 Act?

The first point to note is that the Court held (and in fact the parties agreed) that clause Y1.8 does purport to confer a benefit on third parties (as required by section 1(1)(b) of the 1999 Act), being part of an “interlocking suite of provisions” the purpose of which “is to protect subcontractors against the insolvency of the Contractor”. 

However, section 1(3) of the 1999 Act requires the third party to be expressly identified, either by name, as a member of a class or as answering a specific description. 

Here the Court found that the relevant class of third party was Named Suppliers, and not broader than that – relying on terms of clause Y(UK)1 as a whole which were concerned with payments to the contractor and the Named Suppliers via the PBA.  Crucially, whilst Jones was a Supplier (as defined in the contract), it was never a Named Supplier, as none were identified in the contract (which simply listed the named suppliers as “TBC”), and it had not joined into the Trust Deed by signing the Joining Deed.

The Court rejected the argument that a mere Supplier could be a beneficiary based on the terms of clause Y(UK)1. Jones’ alternative argument, that the reason it did not become established as a Named Supplier was due to Glamorgan’s alleged breach of clause Y1.8 by making direct payments to ISG (on the grounds that ISG’s incentive to open the PBA was therefore eroded), and that Glamorgan shouldn’t be able to rely on its own breach, also failed with the judge saying that “to say that [Jones] can circumvent section 1 [of the 1999 Act] in reliance on a breach of the clause sought to be enforced under section 1 is tantamount to saying that [Jones] can enforce a contractual term [in a contract it is not party to] without satisfying the requirements of the 1999 Act”.

Further findings

Although that finding therefore dealt with Jones’ rights to enforce the main contract under the 1999 Act, the Court helpfully went further to consider other arguments, including (i) whether Glamorgan could rebut the presumption of enforceability under section 1(2) of the 1999 Act had Jones in fact been a Named Supplier and (ii) whether Glamorgan had in fact breached clause Y1.8 of the main contract by making direct payments to ISG (and that it ought to have instead withheld payment).

On (i) above, the statutory presumption of enforceability can only be rebutted if “on a proper construction … it appears that the parties did not intend the term to be enforceable by a third party”. On this point, Glamorgan’s argument was that the parties didn’t intend the term to be enforceable because the main contract expressly contemplated a chain of contracts including the subcontract with Jones and the Trust Deed, under both of which Jones would have had enforceable rights. The Court disagreed however and found that the existence of direct rights under the Trust Deed was insufficient to demonstrate a positive intention that the relevant main contract clauses should not be enforceable by third parties (despite in the Judge’s opinion third-party reliance on clause Y1.8 being practically unimportant to a Named Supplier as it would necessarily also be a party to the Trust Deed). 

On (ii) above, whether Glamorgan was actually in breach of clause Y1.8 of the contract, the Court found that it wasn’t.  

The key part of Clause Y 1.8 reads as follows:

“Within the time set out in the banking arrangements to allow the project bank to make payment to the Contractor [ISG] and Named Suppliers in accordance with the contract,

• The Client [Glamorgan] makes payment to the Project Bank Account of the amount which is due to be paid under the contract”

It was held that Jones’ case did not rely on the clause in a positive way (that Glamorgan ought to have made payment into the PBA), but in a negative way (that Glamorgan ought not have made payment elsewhere) – whereas the obligation in clause Y1.8 was a positive one, which was impossible to perform because the PBA had not been established (referred to by the Judge as a condition precedent to performance of the obligation to pay into it) and as such the making of direct payments was not a breach.   

Where there were no Named Suppliers and no third party rights existed, it was open to Glamorgan and ISG to make and accept direct payments as they wished, and there was no justification to import a negative obligation into clause Y1.8 to prevent this.

The Judge went further to opine that beyond direct payments being permissible in the circumstances, they were potentially mandatory in order for Glamorgan to be able to satisfy the relevant payment machinery in core clause 51 of the NEC4 main contract.  Jones’ argument that clause Y1.12 relieved Glamorgan from having to make payment under core clause 51 in the face of ISG’s failure to establish the PBA was also dismissed by the Judge as a matter of construction of that clause. 

It is worth adding that the NEC4 ECC that was the subject of proceedings was subject to some further amendments (in 2020) by NEC which, amongst other things, explicitly permit direct payments (under clause Y1.8) where no PBA is yet in place, meaning the arguments made by Jones in this case would have been even less likely to succeed if those updated terms were adopted.

Lastly, whilst the Judge didn’t explore defences under the 1999 Act in any great depth in light of all of the foregoing findings, he did express a view that as ISG had applied for and accepted direct payments, it had waived any breach of clause Y1.8 and would not have been able to assert a cause of action in breach of contract – and as such Glamorgan would have been entitled to rely on this as a defence to Jones’ claim pursuant to section 3(2) of the 1999 Act (which provides that a party can rely on any defence which would have been available had the promisee under the contract brought the claim directly).        

Practical significance

The primary lesson here is, once again, that for PBAs to provide the protection that they were born to do, they need to be established and managed correctly.  Whether, and how, parties can find space in their procurement programme and commencement and delivery requirements to accommodate this, to ensure that works don’t start until PBAs are in place, and don’t proceed until the subcontractors and suppliers are joined into the trust, will be a commercial challenge that needs to be solved in each case.

For employers, the decision offers reassurance that (at least under terms that are substantially the same as those that applied in this case) administrative failure in opening and operating a PBA will not automatically expose them to claims from unpaid subcontractors where there is contractor insolvency.  For subcontractors, however, it underlines the significant importance of ensuring that PBA arrangements and joining documentation are actually implemented.

Beyond that, the case gives us a good analysis of the application of the 1999 Act in practice and a rare interpretation of an option clause in an NEC contract.  Had the parties to the main contract identified Jones as a Named Supplier at the outset, and established the PBA as required, the outcome could have been very different and Jones might have seen a substantial recovery.

¹MoJ owes us £20m after contractor ISG's collapse, say suppliers - BBC News