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How to avoid becoming a late payment victim

The problem of late payment is common knowledge and in the extreme it can result in insolvency and liquidation.

The worst culprits are often from the largest and the most powerful client groups. All construction suppliers have statutory as well as contractual rights of timely payment.

Legal remedies

  • The Housing Grants, Construction and Regeneration Act 1996 (HGCRA) provides for payments to be made promptly. It does not stipulate payment periods but allows parties to agree the payment provisions and the contract to contain adequate mechanism for determining the same. In default, The Scheme for Construction Contracts applies to impose a payment period of 17 days from the due date to the final date for payment.
  • The Late Payment of Commercial Debts (Interest) Act 1998 provides for simple interest to be payable on outstanding debts at the penal rate of 8 per cent above the BoE base rate.
  • The Late Payment of Commercial Debts Regulations 2013 amended the act by imposing a limit on payment periods which could be varied by mutual agreement provided the variation is not grossly unfair to the supplier.

Additionally, it entitles the supplier to compensation for its reasonable costs of debt recovery.

Best practice remedies

These are at the discretion of the client and can only be leveraged for the benefit of the supply chain if and when offered by the client.

  • Project bank accounts are one such remedy, as discussed in my previous article (CN 26 Jun, p28).
  • The Construction Supply Chain Payment Charter was launched in April 2014 to build on the provisions set out in the HGCRA, Late Payment of Commercial Debts Regulations, Fair Payment Charter, Cabinet Office Procurement Information Notes 2/2010 and Prompt Payment Code.

Announced by the Construction Leadership Council, the charter sets out 11 fair payment commitments.

  • In November 2014 the government announced its intention to use the Small Business, Enterprise and Employment Bill to impose a duty on larger listed companies to report on payment practices and performance.

Practical remedies

The secret of avoiding late payment is dynamic internal risk assessment and credit management procedures. Contractors should never enter contractual arrangements without properly assessing risks.

It must be a prerequisite at the outset of every contract to establish a relationship between internal costs and valuation income to be maintained until the final account.

Any negative deviation should prompt protective action. If the cause is late payment or undervaluation then the contractor should employ pre-prepared standard procedures to promptly and amicably confront the client to redress the balance.

If these procedures are skilfully drafted, it will ensure the contractor does not become a victim of late payment - no client will enter delayed payment disputes in which there is a limited chance of success.

Produced by 4-5 Gray’s Inn Square in association with Construction News. Samuel Okoronkwo is a practicing barrister at 4-5 Gray’s Inn Square. He specialises in planning, construction and engineering law and can be found at samuelokoronkwo.com, or contact his clerk at soclerks@4-5.co.uk

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