By: Mark A. Rysberg
An express trust clause can be used in a construction contract to create a trust over payments received by a contractor or subcontractor. The effect of establishing a trust is that it creates property rights in construction project payments and obligates the contractor receiving such payments to fulfill the fiduciary duty of using the trust funds to pay the named beneficiaries. The following is an example of an express trust clause:
All payments made by Contractor to Subcontractor shall be held in trust for the benefit of the Contractor and those persons having contracted with Subcontractor to provide materials or labor to the project.
These clauses can act as a sword or shield depending on the situation. In scenarios involving non-payment downstream, an express trust clause can provide the named beneficiaries (owners, contractors, subcontractors, and suppliers) with additional claims that can be asserted against a trustee that has received payment but failed to in turn issue payment downstream. These clauses can also protect all of the parties from claims asserted by unrelated creditors and bankruptcy trustees that may attempt to take the funds.
In short, if you run across an express trust clause you need to have a clear understanding of what your obligations may be. To that end, having contracts reviewed before execution and discussing these issues with legal counsel is an important step in protecting yourself.
If you enjoyed this article, you might also like “Construction Contract Clauses, Part 3 – Site Investigation Clauses.”