Putting paid to late payment

The Department for Business, Innovation and Skills’ discussion paper Building a Responsible Payment Culture, published last December, raised many issues regarding late payment, but perhaps none more important than the balance between legislative intervention and the freedom to contract. This issue has been implicit in all previous considerations on how to improve payment practice, and goes back to before Sir Michael Latham’s Trust and Money report in 1993.

There has been a long standing problem with payment in the construction industry, but interestingly, December’s report looked far beyond construction because getting paid is a problem across nearly all industries. Furthermore, it recognises that behaviour is an important part of the payment process: it is not sufficient to rely solely on contractual or legislative payment frameworks. However good the payment framework, it must be used within a responsible payment culture to work effectively.

Late payment may also be due to lack of liquidity, which may become beyond one’s control. Risk assessments frequently do not give proper consideration to matters of liquidity and solvency - problems will inevitably flow from shoestring financing. But payment problems that arise from poor cash flow, either because of inadequate working capital or the desire to exploit cash held in one’s accounts, should not occur where a responsible payment culture exists.

Anyone in the supply chain can be guilty of payment abuse by requiring a party that lacks economic strength to enter into onerous and extended payment terms

A responsible payment culture is dependent upon reliability which, among other things, is itself dependent on capability and understanding. If the parties are reliable, it means they can be trusted and that the purchaser (payer) will pay and the provider (payee) will perform the works. The payer must have not only the capability to pay but also understand what payments are due and when. The payee must have not only the capability to perform but understand what needs to be achieved before payment is due. Deficiencies in these areas are commonplace and need to be addressed if problems regarding payment are to be reduced.

Securing liability is easier said` than done; it needs to be achieved without causing undue complications or expensive additional layers of administration. There will always be residual risk to be managed: hence the existence of payment bonds, retention, pay less notices, project bank accounts and bonds for advance payment and for off site materials. Regrettably, these too may give rise to complications and consequential problems.

Payment for construction works is determined by the contract. So anyone in the supply chain can be guilty of payment abuse by requiring a party that lacks economic strength to enter into onerous and extended payment terms. Suppliers in weak economic positions often feel unable to resist such pressure and regrettably are often too keen to take on work regardless of risk.

A responsible payment culture is dependent upon reliability which, among other things, is itself dependent on capability and understanding

Ignoring the contract, withholding payment of sums due and differences as to whether work has been properly executed are all too frequent. Although remedies exist for those who experience wrongful withholding of payment there is reluctance, especially by those in a weak position, to use them. This is understandable because of concerns about relationships with those who may provide future work but, as with accepting onerous terms, the risk of dealing with such entities should not be ignored. If a remedy exists then one must be prepared to use it - and as adjudication is the principal means to secure a remedy it must be straightforward.

Some feel that in a marketplace of companies and organisations with unequal bargaining powers, it is appropriate to provide additional protection for the weak in much the same way as consumers secure protection under legislation. Unfortunately, giving protection to certain entities, while trying to maintain the concept of freedom to contract, is fraught with difficulties. However, where persistent poor payers can be identified (although this is not as easy as it sounds) they should be penalised.

Over recent years, legislation has improved some payment practices but it is debatable whether further legislative intervention in contractual payment is likely to yield much, if any, worthwhile return. It seems much more about building a responsible payment culture; something to be achieved through education as to the proper use of payment frameworks and as to what constitutes proper risk assessment.

Peter Hibberd is the chairman of the Joint Contracts Tribunal