Law and its limits

In recent times there has been no shortage of legislation dealing with money issues. The Construction Act and the Late Payment of Commercial Debts Act each contain provisions expressly aimed at solving some of the problems associated with payments, long complained about in the industry. Subcontractors in particular have had bitter experience of insolvency as a result of delayed or withheld payment.

Such thorny issues as the right to stage payments, interest on late payments, restrictions on set-offs and the prohibition of pay-when-paid clauses have all been specifically addressed.

In the case of the contractor, if it does not get the money that is coming to it, it has been accorded the right to suspend works or to have its entitlement to payment quickly established by an adjudicator. But just how successful will this legislation be? Wrongly or rightly, some developers and contractors may take exception to being told how they should act. Consequently, they will be tempted to sidestep the bits of legislation they do not like. And by keeping within the letter of the law, but not necessarily the intent, this can be surprisingly easily achieved.

The apparently foolproof idea of staged payments can be got round by stating in the contract that the first-stage payment shall be on completion, and the second when any defects have been made good, say 12 months later.

The incorporation of extravagantly long periods for the honouring of payments would have the effect of blunting the effectiveness of interest penalties on late payment. Similarly, the prohibition on pay-when-paid clauses can be evaded by the contractor being allowed long periods for payment following his application to be paid.

Even the restrictions on set-offs can be muddied by creative redefinitions: for example, it can be claimed that the money is withheld as a result of an abatement, and so is not due at all.

What of the actions a contractor can take if it does not get its money? Are these remedies all they seem? When considering suspension of works, aggrieved contractors face a much-publicised conundrum: they must be sure that they are contractually entitled to payment. If they are not, then suspending the works may put them in breach of the contract, with possibly dire consequences.

Also, easy access to adjudication will not, in itself, overcome small contractors' reluctance to enforce their rights to payments, for fear of not being included on future tender lists.

Perhaps, however, rather than the employer's tinkerings or the shortcomings in the available remedies, it is market forces that will have the most bearing on whether or not the legislation is successful. Supply and demand rather than the words of the contract or rights under legislation may dictate the future.

It may be that the ever-optimistic contractor, to gain a competitive advantage, will reduce its tender to reflect the real or perceived improvement to its cash flow brought about by the legislation. In other words, in the market place, what the contractor may gain on the financial swings, it may lose on the financial roundabout.

This may sound as if I am cynical about the chances of legislation solving the problems caused by late payments and bad debts. On the contrary, I think that such legislation is long overdue – but, as has been said before, "you can't buck the market".

So, for that reason alone, we should not expect too much.

Keep an eye on those insolvency statistics of contractors and subcontractors; I hope you will be able to say that I was wrong.