The law intervenes

According to Katie Saunders (pictured), projects and construction partner at law firm Trowers & Hamlins LLP, you can be sure of one thing whenever preparing a contract for any construction activity: both parties will want to make sure that the payment provisions suit them.
“Late payment can be a huge problem for contractors and consultants,” she explains, “particularly in the current economic climate where cash flow is being squeezed from every angle.”
The ongoing fallout from these kinds of disputes caused the EU, which is naturally concerned about companies failing as a result of their clients not paying, to issue a directive to combat late payment in 2011.
To be fair, the UK government had hardly been caught napping on the issue. Late payment legislation for the UK was enacted in 1998 in the Late Payment of Commercial Debts (Interest) Act. But the new directive has required amendments to this legislation and the new rules came into force in the UK on 16 March this year.
Under the old regime most companies will have been familiar with a statutory rate of interest being imposed on late payment unless the rate in the contract was a "substantial remedy". But, says Saunders, the problem was agreeing what constitutes a ‘substantial remedy’. “In practice, 0.5% over base rate was found by the courts not to be substantial,” she says, “but there is a case where it was considered that a rate as low as 3-4% over base might be a substantial remedy."
The amended legislation, she says, actually does little to change this position for entities which are not “contracting authorities” for the purposed of the public procurement regulations. “Commercial enterprises are still free to agree the rate of interest payable in the event of late payment, provided it complies with the substantial remedy requirement,” she says. The amended legislation also suggests that contracting authorities are still free to agree their own contractual interest rate, but this is contrary to the requirements of the 2011 EU Directive.
In respect of payment periods, under the new regime, interest on late payment will start accruing for contracting authorities after 30 days and for non-contracting authorities after 60 days from the later of three trigger dates. Here too, says Saunders, there is an issue: the 2011 EU directive proposed that contracting authorities would not be able to contract out of the shorter 30-day payment period, but this requirement has not been translated into UK legislation very well. Commercial enterprises can agree a payment period of longer than 60 days provided that it is not “grossly unfair” to the supplier.
It can be argued that the new regime does constitute a further erosion of parties’ rights to enter into a contract on their own terms if they choose.
“In the construction industry, where a well-planned and strictly implemented payment scheme can make the difference between solvency or otherwise, these changes are likely to be seen as generally positive by most contractors and consultants,” says Saunders.
But the new act does still leave open different options for contracting authorities. “Taking a conservative view and following the directive would be safer for them,” she says, “and would see the authority acting in the way that the EU appears to have desired. However, the temptation for many will be to follow the wording of the act until it is brought into line with the directive, either through legislation or case law.”
That in turn means that suppliers to public authorities, including construction companies, will have to be more bullish when negotiating payment terms, and should really be unwilling to accept any less than the statutory position.
If, that is, they can be prepared to put up a fight. Some contractors may still be worried about the impact any such dispute may have on their relationship with the main client or contractor. That’s why Ash Mahmood, a partner at Leeds-based law firm the Needle Partnership, is more circumspect about the effect of the new rules. He welcomes the stronger powers the legislation gives to remove grossly unfair practices. “But the rights are not compulsory,” he says. “It is up to the supplier to decide whether or not they exercise them.”

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