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Payment scams revealed

LAW REPORT - There are many payment scams hidden in contracts, waiting to catch out unsuspecting subcontractors. So it helps to know what to look out for.Here Rudi Klein lists his top 10 popular payment abuses

WHEN you are faced with a vast swathe of contractual documentation my advice is always to go straight to the payment provisions. If you are deeply unhappy about the arrangements for payment, what is the point in wasting valuable time ploughing through the rest of the pile?

It is amazing what horrors can lurk within a contract's payment provisions.

While I can't list them all, here are my top 10 most popular payment abuses. You should be able to spot these fairly easily.

Keep you eyes peeled, though, because there are plenty more scams out there.

1 Long payment periods According to credit reference agency Experian, the largest firms in the construction industry take longer to pay than the average in other British industries. It seems the normal 30-60 days payment period is now moving towards 60-90 days. Even if you are sufficiently cash-rich to be content with just pricing for long payment periods, you should consider the insolvency risks.

Lengthy payment periods will mean that, in the event of the insolvency of your payer, you could be at risk for vast sums of money.

2 Lengthy periods for discharge of payment In construction we are saddled with this daft concept of a 'period of grace'between the due date for payment and the final date for payment.During this period the payer is required by the Construction Act to pay up, subject to the issue (if any) of an effective notice of withholding payment under the Act.The period for discharge of payment in the Scheme for Construction Contracts is 17 days. One rarely sees 17 days inserted into contracts.More often this 'period of grace' is over 30 days and sometimes as long as 65 days. These ridiculously lengthy periods need to be resisted.

3 Pay when certified This is the bugbear of most subcontractors. There are two elements to pay-when-certified provisions:

timing and entitlement.Thus the due date for payment under the subcontract may be dependent on the timing of the issue of a certificate under the main contract. Alternatively, or in addition, entitlement to payment may be dependent on the certificate including a sum in respect of the particular trade. Pay-when-certified clauses are unlikely to comply with the requirement in section 110 of the Construction Act that there be an adequate mechanism for payment. If, for example, the pay-when-certified arrangement involves linking the subcontract due dates for payment to the date of issue of certificates, the provisions in the Scheme for Construction Contracts will apply.These provide for 35-day payment cycles from the date of the contract.

4 Cross-contract set-off Ten years ago, Sir Michael Latham recommended that this should be abolished. It arises where the payer claims the right to deduct by way of set-off monies under contracts other than the extant contract.

This could cause problems if the set-off is referred to adjudication. If a set-off dispute under contract A (which has arisen under a clause allowing cross-contract set-off ) has been referred to an adjudicator, such adjudicator will not be able to deal with a challenge to the set-off if it relates to a matter that is connected with contract B.

5 Wide set-off clauses Watch out for clauses that allow the payer to set-off in respect of likely, anticipated or possible losses rather than actual losses.

6 Main contractor's discount Sir Michael also recommended the abolition of main contractor's discounts, and as a result of discounts were dropped from JCT standard forms.What exactly is the status of these discounts? Are they trade discounts or prompt-payment discounts? If it is the latter, the likelihood is that the discount will be deducted in any event - irrespective of whether payment was made promptly.

7 Removal of the right of suspension for non-payment I was astonished to come across this clause:

'The contractor and the subcontractor agree that the provisions of section 112 of the Housing Grants, Construction and Regeneration Act 1996 are hereby excluded.'

Section 112 of the Construction Act provides a statutory right to suspend one's contract for non-payment. Here is someone trying to ignore an Act of Parliament.Well, it simply will not work. Even if you have agreed to this clause you can still exercise your statutory right.

8 Reductions in the statutory rate of interest for late payment The Late Payment of Commercial Debts (Interest) Act 1998 provides the payer with an entitlement to 5 per cent above base rate as interest for late payment. This is frequently reduced to 1,2,3 or 4 per cent, often excluding the base rate percentage. Parliament has deemed that 5 per cent above base is the rate of interest and so it should be.

9 No warranty bond, no money This is popular.As a prerequisite to any payment you must have provided any required warranties, bonds or guarantees. If these have been foisted on you after work has begun you may not wish to sign them.

Don't sign.You are still entitled to be paid for the work you have done.

10 Clause 40.2 of Alfred McAlpine's Special Project Standard terms of subcontract It states: 'The subcontractor hereby confirms that the subcontract sum or the tender sum as the case may be makes full and proper allowance for the fact that payments and monies due to the subcontractor under the terms of this subcontract may in fact be delayed.'

We can only gasp at the effrontery.How long will payments be delayed? Ten days, 100 days, 1,000 days? How long is a piece of string? Perhaps McAlpine should be informed that the progress of one's work will be linked to the timeliness of McAlpine's payments. So much for a new non-adversarial culture. Don't touch this one with a bargepole.