Late payment continues to be a scourge on the construction industry and evidence of its debilitating effects abounds both in the industry press and in court reports. A recent article published in Construction News highlighted the bleak statistic that one in four SMEs is at risk of collapse due to late payment (see this Construction News article) and a late payments survey carried out by Textura Europe and shared with Construction News ( click here) found that more than a third of main contractors, sub-contractors, clients and consultants are paid more than 60 days after issuing invoices.
It seems therefore that the payment requirements set out by the Housing Grants, Construction and Regeneration Act 1996 (as amended by Part 8 of the Local Democracy, Economic Development and Construction Act 2009) (the Construction Act) to improve cash flow have been of little help for some although the government's continued efforts to address payment issues are evidenced by various initiatives including:
- the Prompt Payment Code1 introduced to improve payment procedures and cash flow;
- the discussion paper published in February 2015 (" Late Payment: Challenging 'grossly unfair' terms and practices");
- the summary of responses to that paper published in June 2015;
- the launch by the Department for Business, Innovation and Skills (BIS) of a further consultation in October 2015 seeking views on how to change the statutory framework (the consultation closed on 27 November 2015); and
- the introduction of a duty on companies to publish reports on their payment practice and procedures under section 3 of the Small Business, Enterprise and Employment Act 2015. (This act came into force on 26 May 2015 but the reporting duty will apply from April 2016.)
Late payments often lead to litigation but what is surprising is that parties to construction contracts do not more often take advantage of the protection – and remedies – provided by the Construction Act, if only the parties would incorporate and implement the correct payment procedures in their construction contracts.
In a recent High Court case, for example, (Wilson and Sharp Investments Ltd v. Harbour View Developments Ltd [2015] EWCA Civ 1030), an unpaid contractor tried to recover payment on unpaid invoices by attempting to wind up the employer's business. This attempt failed in part because the employer had a genuine cross claim and the payment was disputed. However, the employer had not issued pay less notices and, in the absence of these notices, the contractor's notified sums would have been payable by the final date for payment in each case. It is therefore difficult to see why the contractor did not seek to obtain the full payment using the comparatively simpler statutory adjudication procedure and the enforcement procedures offered by the Technology and Construction Court (TCC).
Ignoring the adjudication procedure introduced by the Construction Act is especially surprising in the light of the TCC's strong support for adjudication as shown by the recent decision in RMP Construction Services Ltd v. Chalcroft Ltd [2015] EWHC 3737, in which Mr Justice Stuart-Smith said: "... the adjudication system was and is meant to provide quick and effective remedies to parties, equally accessible to those who are legally represented as to those who are not; and I bear in mind that the system now covers not only written contracts but also oral contracts which increases the likelihood that they may be mis-described" (paragraph 51 of the judgment).
The Wilson decision is also a reminder that parties to construction contracts should give serious consideration to payment procedures when drafting the contract and keep in mind that the Scheme for Construction Contracts (England and Wales) Regulations 1998 (SI 1998/649) will apply if the payment terms of the contract do not comply with the Construction Act. Once in place, the contract should then be a key reference point throughout the construction project to ensure that the agreed payment procedures are operated correctly and promptly, that payment notices are issued on time and that appropriate pay less notices are issued if there is a reason for non-payment.
Should payment not be forthcoming when due, the RMP decision gives ample reassurance that the courts will enforce an adjudication decision promptly. Those who have stuck to the payment procedures will be better equipped to recover money due by using the adjudication procedures if initial discussions prove fruitless. Equally, those employers who do not consider payment to be due will be able to withhold payment effectively – if they issues pay less notices correctly.
The complex contractual relationships in the construction industry, combined with the vagaries of our economy and fluctuating commercial fortunes, dictate that late payment will continue to be an issue. Creating and implementing reliable payment systems that comply with the provisions of the Construction Act can help to reduce the risks of being a late payment casualty.
Footnotes
1 The goals of the Prompt Payment Code and the timetable for action were set out in this BIS letter of 15 March 2015.
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