8 February 2016
Late Payments: Legislation and Codes of Practice
This guidance note is part of the ACE guidance series [link] and supported by the ACE Legal
and Commercial Group.
The payment culture in the construction industry continues to be a key issue for ACE
members, particularly the problem of getting paid on time and in a reasonable time. The
commitment by member businesses of substantial human resources to the pursuit of late
payments combined with the impact on cash-flow of unreasonably long payment periods
presents an enormous challenge to the growth of member firms.
In recent years there have been a number of legislative initiatives and codes of practice,
seeking to address the issue. The position in relation to contracts with public authorities has
been significantly strengthened from the supplier’s perspective, but much less so for
business to business contracts.
This note brings together the most relevant of those initiatives and identifies where more can
and should be done.
Legislation
1. Public Contracts Regulations 2015 – The Regulations came into force in February
2015, and off a significant development on payment in the context of public sector
contracts. Regulation 113 requires that contracts (with some exceptions)1 entered
into by contracting authorities contain provisions requiring the authority to pay all
validated and undisputed invoices within 30 days of the date of validation. Validation
must be carried out in a timely manner. These new requirements are supported by a
requirement on public authorities to report their payment practices, similar to the
requirements which have been imposed on large undertakings under the Small
Business, Enterprise and Employment Act 2015.
Additionally, any contract granted by a contracting authority with a lead contractor
must contain provisions requiring any sub contracts entered into by the lead
contractor to contain equivalent payment provisions to those required in the lead
contract.
1
Excluded contracts: Contracts for procurement of health care services for purpose of NHS and
Contracts awarded by a contracting authority which is a maintained school or Academy. Utilities
contracts an concessions are dealt with separately.
The Association is registered as a company in England with the number 132142, it is limited by guarantee and has its registered office at the above address
Where there is a failure to include such payment provisions in the lead contract, then
those provisions (including the stipulations as to provisions to be included in subcontracts) will be implied terms in the lead contract. We look forward to seeing the
extent to which this requirement is adhered to and enforced and how the courts
approach the requirements for provisions in sub contracts. It is not immediately clear
how a sub-contractor will enforce its entitlement to be paid in 30 days, if the contract
does not state it expressly; the sub-contractor may not have a contractual
relationship with the contracting authority pursuant to which it may seek a remedy.
For more information on the Regulations please see BLM LLP’s more detailed note
and ACE’s note on the relevance for SMEs.
2. Late Payments Act - Directive 2011/7eu (“Late Payments Directive”) as
implemented in English law by the Late Payments of Commercial Debts (Interest) Act
1998 (including changes made by 2013 Regulations) ( “Late Payments Act”). The
Late Payments Act contains some potentially useful protections for suppliers, but with
some shortcomings as described below. The main focus of the Late Payments Act is
on the right, in the absence of another agreed and ‘substantial’ contractual remedy
for late payments’, to claim statutory interest (8% over base) and fixed small levels of
compensation for the costs of recovering the debt.
How it works - The Late Payments Act imposes interest payment terms in
commercial contracts with:
a. Other businesses – if nothing else stated in the contract statutory interest
runs from the latest of 30 days after latest of (a) receiving the supplier’s
invoice; (b) receiving the goods or services; and (c) verification of the goods
or services (where provided for by statute or contract). The parties to the
contract can agree to extend to 60 days, or a longer period where not “grossly
unfair” to the supplier.
Additionally, the supplier may claim fixed recovery costs and other reasonable
costs (subject to a reasonableness test under the Unfair Contract Terms Act
1977 (“UCTA 1977”)).
b. Public authorities – The position for contracts with public authorities is in
alignment payment period requirements in the Public Contract Regulations
2015 (see section 1). Statutory interest runs from latest of 30 days after latest
of (a) receiving supplier’s invoice; (b) receiving the goods or services; and (c)
verification of the goods or services (where provided for by statute or
contract).
Additionally, the supplier may claim fixed recovery costs and other reasonable
costs (subject to a reasonableness test under UCTA 1977).
c. The Act limits any period that may be included in a contract for the
acceptance or verification of goods to 30 days from the date on which the
supplier’s obligation is performed. The parties to a contract may agree a
longer period for verification/acceptance in the contract provided such period
is not grossly unfair to the supplier.
d. What is “Grossly unfair” under the Act (s. 7A)?
i. Anything that is a gross deviation from good commercial practice and
contrary to good faith and fair dealing;
ii. The nature of the goods and services in question; and
iii. Whether the purchaser has any objective reason to deviate from the
result which is provided for by subsection 3B (i.e. 60 days maximum
period for statutory interest to arise) or 5C (i.e. 30 days maximum
period for acceptance/verification procedure).
Problems with the Late Payments Act –
a. A shortcoming of the Late Payments Act is that s.8(2) allows parties to
contract out of the provisions in the Act in cases where the contract provides
for another ‘substantial remedy’ for late payments. Much of the judicial
debate has related to whether alternative levels of interest being imposed are
‘substantial remedies’.
There may be an argument that an excessive credit period in itself represents
a lack of a substantial remedy and should therefore be considered void.
However, the Act is slightly ambiguous on this point, and a better argument
may be that the Act is only intended to impose a statutory interest regime.
b. In terms of overall late payments issue, the major problem with the Act is that,
by our interpretation, it does not expressly limit the length of time between the
payment becoming due and the final date for payment, or put another way
there is no limit on the payment periods that parties can agree to, although
there may be argument that a payment period does not meet the test of
reasonableness under UCTA 1977, as to which see para (f) below.
This can mean that statutory interest could become due, but the principle debt
does not become due until the later agreed longer credit period has expired.
S.14 Late Payments Act and UCTA 1977 (“UCTA 1977”)– Under UCTA 1977 a court
may set aside an ‘unreasonable’ term in a business to business contract where the
contract was entered into on one of the party’s standard terms, and subject to other
factors such as bargaining strength. This may be of general use where a consultant
is prepared to go to court. An interesting but largely untested point arises in S. 14
Late Payments Act, which states that the ‘reasonableness’ test contained in the
relevant provisions of UCTA 1977 will be applicable to any clause that postpones the
date on which a debt to which the Act applies would otherwise become due. Notably,
the test applies whether or not the contract was on the purchaser’s standard terms.
S.14 may therefore be useful to consultants, but each case is likely to be considered
on its own merits. It may be counter-argued that s.14 is really linked in to the
availability of statutory interest rather than to the length of credit periods, a general
limitation of the Late Payments Act.
Has the Late Payments Directive been fully implemented by the Late Payments Act?
If not, what relevance? - At least one, and arguably two articles from the Late
Payments Directive have not been implemented yet in UK law.
a. Art 7(4) requires the member state to make provision for a
representative body to be able to take action according to the national
law before courts or administrative bodies on the grounds that
contractual terms or practices are grossly unfair within the meaning of
para 1 of Art 7(1) of the Directive (see para d above), so that they can
apply appropriate means to prevent their continued use. The
Department for Business Innovation and Skills recently rang a
consultation on the implementation of this measure, in which ACE
submitted responses. Given the wide remit to look at payment
‘practices’ we think this provision could be helpful to the construction
industry, although it will depend on exactly how the remedy is
implemented in UK law. More on this to follow.
b. Art 3(5) of the Directive requires the member state to ensure that the
period for payment fixed in the contract does not exceed 60 calendar
days, unless other expressly agreed in the contract and provided such
other agreed period is not grossly unfair to the creditor/supplier. As
mentioned above, there is in our view no provision in the Late
Payments Act that specifically limits payment credit periods in its own
right. Rather, the Act is framed by reference to time limits before
statutory interest will arise. The counter-argument is that Art 3(5) was
only intended to relate to the period before which statutory interest will
arise. In our view, the wider interpretation, namely that the limitation
of payment periods, is worth pursuing, bearing in mind the language of
the Article and provisions in the preamble to the Directive.
3. Small Business, Enterprise and Employment Act 2015 This legislation will among
other things increase transparency on how larger undertakings pay their suppliers by
requiring them to publish information about their payment practices. Following a BIS
consultation it appears that the requirement will be half-yearly and will require certain
standard prescribed information in a prescribed format. This can only be helpful,
particularly combined with other codes of practice and legal protections.
4.
“Construction Act” (Full title: Housing Grants, Construction & Regeneration Act 1996
(as amended)) – A full summary is beyond the scope of this note, but the
Construction Act contains certain mechanism that may be helpful in the context of
getting paid on time, and limiting a client’s ability to withhold part of a payment or to
make a payment conditional on a payment received by a client under a separate
contract, for more information go here. However, it is worth mentioning that the Act
can also itself be source of difficulty in many cases given the strict procedural
requirements relating to triggering payments. Please go here for more information on
good practice. In terms of late payment remedies and protection please also note:
a. Suspension – s. 112 an unpaid party to a construction contract may give a
minimum of 7 days’ notice to suspend performance of its obligations if he
remains unpaid after the final date for payment has arisen. An automatic
extension of time will arise and a right to a reasonable amount for costs and
expenses. However, if used incorrectly this can be costly. Always take
advice before taking this approach;
b. Adjudication – right to apply for adjudication in the event of a breach of
contract.
Codes of practice and secret shopper schemes
There have been many codes of practice put forward in the construction industry over
the years, but currently the most important ones to note are:
1. Prompt Payment Code [ link ]– This is a voluntary code run by BIS and the Institute
of Credit Management, encouraging best practice among members. It has a number
of construction and engineering firms in its membership. Following a BIS
consultation, to which ACE submitted responses, the Code is to be strengthened to
require insert detail on maximum payment lengths to be adhered to by all signatories.
One of our members has had a result by raising a complaint under the Code. Go
here to find out more.
ACE encourages contractors, clients and consultants to sign up to the Code.
2. Construction Industry Supply Chain Charter [link ] – Launched by the Construction
Leadership Council. Sets out 11 fair payment commitments, notably a commitment
to reduce payment periods to 30 days from January 2018 (albeit achieved in stages),
not withholding cash retentions or only where proportionate, use of project bank
accounts, no fees for supply chain finance schemes.
In our view the Charter is stated in refreshingly clear terms, does present a few
issues:
a. There are presently only 9 signatories, although some are substantial
undertaking in the construction industry;
b. It is not clear how new signatories be brought on board?
c. No KPIs or monitoring of the achievement of the aims;
d. Penalties for failure to implement need to be clarified, and bear in mind the
impact will probably only be reputational, as it is only a code of practice;
ACE would like to see clarity on these points from BIS in due course.
3. Cabinet Office Mystery Shopper Scheme – This is a facility operated by Cabinet
Office by which people or business can anonymously report issues arising in relation
to public sector procurement. This could be used to report issues arising on
payment terms. Go her to find out more
Disclaimer - Please be aware that ACE presents this guidance to assist ACE
members with managing their business risks. It is not intended as and is no
substitute for specific independent legal advice. ACE recommends that
independent legal advice is taken in any individual case and before pursuing a
course of action. We assist our members with risk management through our
Business Helpline Service and where appropriate we can refer members to one
of our Legal Affiliates who will provide approximately 15 minutes of free legal
advice.
ACE Legal and Compliance Team
Updated April 2015