The supply chain payment charter promises to end retention and lengthy payment schedules. But despite its subjective language it has a sting - you’re signing up to legal obligations

Tony Bingham

Sound the trumpet throughout the land - so said Jeremiah with his backing group Vince Cable MP and David Higgins, chairmen of HS2. “By 2025 retentions are no longer to be held”. I cannot, for the life of me, see the wisdom of yelling that headline in this Construction Industry Supply Chain Payment Charter, which proclaims the retention fund will die in 11 years’ time. Eleven years to go! Oh, come off it. That’s a turn-off. No, no, don’t turn off. Just come with me to look more closely and I’ll tell you a secret.

This Supply Chain Payment Charter sets out 11 Fair Payment Commitments. I will come to them in a moment. Note, first, that a charter is not normally binding, merely a set of ideas to aspire to. Careful. This charter has legal consequences. It sets a standard, a standard of “fairness”. And if your payment terms are not inside the standard don’t be surprised if they get booted out.

It doesn’t ban an agreement over 60 days unless it is regarded as ‘grossly unfair’. The question is, what is ‘grossly unfair’? All eyes will turn to that charter to fathom what is unfair

On the front page it says, “This Charter builds on and complements existing legislation and policy” (the lawyers’ ears will prick up) namely the HGCRA 1996 (as amended), the Late Payment of Commercial Debts Regulations 2013, and more besides. The secret is in that late payment regulation of last year. It is so important, yet hardly anyone has read it, let alone studied it. It says that folk in the public sector construction world must pay your bills in 30 days. It says that it is 60 days for non-public sector business to business. It doesn’t ban an agreement over 60 days unless it is regarded as “grossly unfair”. The question is, what is “grossly unfair”? All eyes will turn to that charter to fathom what is unfair. It says, you look at “all the circumstances” of the contract and in particular at: (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/payer has any objective reason to deviate from the result, which is provided for.

Now look at Vince Cable’s and David Higgins’ Construction Leadership Council and the supply chain charter it has endorsed. The charter says:

Fair payment commitments

We agree that on all new construction contracts from 1 January 2015 we will meet the fair payment commitments set out below.

  1. We will make correct full payment as and when due for all work properly carried out, or products supplied, in accordance with the contract. We will ensure any withholding of payment due to defects or non-delivery is proportionate, and clearly, specifically and demonstrably justified in line with the arrangements set out in the contract.
  2. We will not deliberately delay or unreasonably withhold payment.
  3. For all new contracts we will ensure that payments are made to our supply chain not more than 60 calendar days from the end of the calendar month in which the work is carried out or products are supplied. From June 2015 we will ensure that payments are made to our supply chain not more than 45 calendar days from the end of the calendar month. From January 2018 that will decrease to not more than 30 days.
  4. Public authorities are already required to pay within 30 calendar days. On central government contracts, payment will be made to Tier 1 within 14 days, Tier 2 within 19 days and Tier 3 within 23 days of the due date, which will be seven days after the common assessment or valuation date established by the client in the Tier 1 contract.
  5. We will either not withhold cash retention or will ensure that arrangements for retention with our supply chain are no more onerous than those implemented by the client in the Tier 1 contract. We aim to move to zero retentions by 2025.
  6. We will issue any “pay less” notices at the earliest opportunity and no later than seven days prior to the final date for payment.
  7. We will have processes in place so the effects of contract variations can be agreed promptly and fairly, and payments for such variations to be included in the payment immediately following completion of the varied works.
  8. We will make payments electronically unless agreed otherwise.
  9. We will use project bank accounts on central government contracts unless there are compelling reasons not to do so, and on other contracts where appropriate.
  10. Where supply chain finance schemes, to allow members of the supply chain to secure earlier payment, are offered, we will not impose fees or costs for receiving payment within the terms set out in the contract.
  11. We will adopt a transparent, honest, and collaborative approach when resolving disputes.

And if your terms are unfair, then the payment rules of the HGCRA apply plus 8.5% interest and a penalty payment. As to retention, well, if the employer says none, so must the main contractor and so on ad infinitum. Trumpets for Vince and David, I think.

Tony Bingham is a barrister and arbitrator at 3 Paper Buildings, Temple