Peter Stockill examines the key changes to the updated regulations on payment
Long payment periods and even later payments are a feature of the construction industry. The Housing Grants, Construction and Regeneration Act 1996 (HGCRA) leaves parties free to agree the period for payment and the prohibition of pay when certified clauses in the 2011 amendments to HGCRA has, in some cases, led to an elongation of payment periods. Can the updated late payment regulations assist?
The Late Payment of Commercial Debts (Interest) Act 1998 (“the Act”) applies to most construction contracts between businesses and with a public body. It implies a right to interest at a rewarding 8% above base, unless the contract provides a rate that is a “substantial remedy” (see Yuanda v WW Gear Construction [2010] EWHC 720 (TCC)). Where such a right is implied, the payee is also entitled to fixed costs of £40 to £100 per debt, according to its size, in addition to any rights to legal costs.
In these ways, the Act provides a deterrent to late payment. The amendments, made by the regulations for contracts entered into on or after 16 March 2013, seek to enhance that.
Payment periods
In contracts with public bodies, the maximum payment period is 30 days from the latest of: receiving the invoice; receiving the goods/services; or verification or acceptance of them where provided for by the contract or statute. (The time permitted for any acceptance or verification procedure is 30 days unless a longer period is agreed and not “grossly unfair”.) In other contracts, the parties are free to agree up to 60 days, or longer if they can show the period is not “grossly unfair”.
What is “grossly unfair” depends on all the circumstances, including:
(a) anything that is a gross deviation from good commercial practice and contrary to good faith and fair dealing;
(b) the nature of the goods or services in question; and
(c) whether the purchaser has any objective reason for requiring such a long period.
This is a new test and an early case on what is meant by “grossly unfair” is to be wished for. Arrangements under other contracts in the chain will surely be relevant and there is no doubt some justification for longer periods for the release of retention.
If a payment period is “grossly unfair”, it is reduced to 60 days. Note, however, the Act is concerned with interest, it does not shorten the period for other purposes, ie under HGCRA. It is possible to contract out of the new rules, but only if the contract provides a “substantial remedy” and in considering that the courts are bound to be influenced by the new constraints on payment periods.
Costs
There is now a right to recover reasonable debt recovery costs above the fixed sums. This may be excluded, but such exclusion is subject to the requirement of reasonable under s3 of the Unfair Contract Terms Act 1977, whether contained in standard terms or not.
The EU Directive from which the regulations derive refers to both internal costs and the cost of instructing lawyers or a debt collection agency. This begs the question: do they provide a basis for a recipient of statutory interest to recover legal costs in an adjudication?
The obvious counter argument is that such a term would fall foul of s108A of HGCRA, which prohibits “any contractual provision made between the parties to a construction contract which concerns the allocation as between those parties of (the parties’) costs relating to the adjudication of a dispute arising under the construction contract.”
This is another area in which an early test case would be welcome. In the meantime, where statutory interest is payable, paying parties might introduce provisions to exclude such a right. So do the regulations help? Potentially, but much will depend upon the approach taken by the courts and adjudicators to what is “grossly unfair”.
Peter Stockill MSc FCIArb is a partner in the construction team at law firm Berrymans Lace Mawer email: [email protected]
