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Taking an interest in late payments

Cash flow is king for all businesses and successfully managing it is one of the keys to keeping a company solvent

It is fair to say that very few in the construction industry are whiter than white when it comes to making payments on time.

Being even more presumptuous, it would be fair to say that every month one or more of your creditors will not get paid on time for various reasons.

It is a fact of life in all business, even wholesale banking, that cash flow is king and managing it is one of the keys to remaining solvent.

At one time or another you will be subject to a claim for interest arising from the late payment of a debt. Since 2002, all businesses, regardless of size, can claim statutory interest for late payment. Some do, some do not; but the risk is always there and should be managed.

Payment negotiations

Apart from paying on time, every time, the only other way to avoid statutory interest being applied to your contract payment terms is to have a clause in the contract giving a substantial remedy for late payment of a debt.

Doing so gives you some say in what terms the payment of interest is made. In your payment negotiations you may wish to vary the credit period to allow more time to pay or set a lower rate of interest.

But beware: there is still a possibility that the court may declare your agreed contractual terms void. If you agree to a 90-day payment period when the norm for the industry is 30, the Court may oust that term from your contract.

Judges do not want to see you going against the grain of the statute and will act to put the contract back in line with the norm or the statutory period.

If you set the interest rate at base plus one per cent, instead of the statutory base plus eight per cent or similar, the Court may also oust that term. Judges do not want to see an interest rate on late payment being set so low as not to be a deterrent.

Even if both parties agree and sign up to a clause stating that regardless of the changes to the payment and interest terms a substantial remedy still exists, the court may still act to void the clause.

The reasoning for this may be on the basis that if you have to go to the trouble of stating something is a substantial remedy, it is more than likely no such thing.

For the legislation to be effective there has to be a deterrent to paying late. Just like returning a library book late, you should pay up and don’t argue.

At least in commercial contracts (unlike with the librarian) you do have some scope to vary and agree your payment terms giving you the opportunity to avoid paying interest.

Your choices are either pay on time or tinker with the payment terms to make them more manageable for you, although you could just carry on as normal and balance the burden of late payment interest charges by recovering them in the same way from customers who pay you late.

Alex Mosson works for construction and engineering specialist SLS Solicitors

NSCC campaign for fair payments

The National Specialist Contractors Council has launched an appeal to tackle the issue of overdue payment for construction projects.

Its Fair Payment Campaign will benefit members, who at the moment are being paid in relation to events, not dates, according to chief executive Suzannah Nichol.

The initiative is addressing three key areas: how much should be paid and when; enforcing payment within 30 days; and striking out cash retentions in favour of more modern alternatives.

Construction minister Stephen Timms is backing the initiative, claiming the Government can make a difference. It will introduce its own scheme, a charter for public sector projects, in January 2008.

Construction News has created a complementary survey to uncover more about payment procedures for specialist contractors. To take part, go to: www.fairpaymentcampaign.co.uk.