Transcript Late Payment Legislation

Commercial & Contractual
Awareness Training
Overview
• Getting the contract right – avoiding
problem payment provisions.
• Maximising payment.
• Recovering retention.
• Minimising insolvency risks.
Getting the Contract Right –
Avoiding Problem Payment
Provisions
Problem Payment Provisions
•
•
•
•
•
Disruption to cashflow.
Vague payment terms.
Conditions precedent to payment.
Set-off clauses.
Conclusive provisions.
Disruption to Cashflow
•
•
•
•
Look out for regular interim payments at
fortnightly or monthly intervals.
Lengthy payment terms can mean a long lead-in
period between starting work and getting paid –
consider an advance payment to overcome this
problem.
Interim payments linked to milestones rather than
monthly dates can disrupt cashflow.
Interim payments made on a percentage basis
(rather than against progress of the works to date)
can also have a negative impact on cashflow.
Vague Payment Terms
• Is it clear when you will be paid and how much
you will be paid?
• Is it clear how the payment process works e.g.
how do you apply for payment?
• If it is not clear how the payment process
works, disputes are more likely to arise.
• Don’t forget retention – is it clear how much
retention is being withheld and when retention
will be released? If you don’t understand when
your retention will be released, how can you
claim for it?
Conditions Precedent
• A condition precedent is a clause which
provides that one party is only entitled to its
contractual right if a specific condition is
fulfilled.
• Failure to comply with the condition carries the
sanction of losing that contractual right.
• A condition precedent has the effect of
excluding what might otherwise be a valid
claim or entitlement.
Conditions Precedent
• Conditions precedent to payment are
extremely common.
• Examples include:
•
•
•
No payment until a parent company
guarantee/performance bond is provided.
No payment if collateral warranties are not
provided.
No payment if key information like VAT
registration numbers and insurance certificates
are not provided.
• Also common are clauses allowing the payer to
deduct a specified sum for failure to comply
e.g. £10,000 per warranty.
Assessing Conditions Precedent
1. Check the contract for conditions precedent.
•
Note: the contract may not use the words
“condition precedent”. Phrases such as “provided
that”, “on condition that”, “subject always to” and
“if” can create a condition precedent.
2. Can you comply with the conditions?
3. What are the consequences if you fail to
comply?
4. Can you negotiate…
- to make the conditions less onerous?
- to have the clause deleted altogether?
Set-Off Clauses
• The right of set-off permits a debtor to reduce
the sum he owes to a creditor by deducting any
money which is owed to him by the creditor.
• The right of set-off arises automatically in law
when a claim and a cross-claim are so closely
connected that it would be unjust to enforce
one claim without taking the other into
account.
• This usually covers claims and cross-claims
arising under the same contract.
• However, relying on the implied legal right of
set-off can create uncertainties.
Set-Off Clauses
• Many contracts contain a clause giving an
express contractual right of set-off. The
benefit to the paying party is that:
• It provides certainty – you know you can
exercise the right of set-off because you are
not relying on an implied legal right.
• An express clause can allow:
• set-off between different contracts;
• set-off of sums that are not yet due; and
• set-off of estimates.
Set-Off Clauses
• From the payee’s perspective, set-off clauses
should be reviewed carefully.
• Cross-contract set-off can result in a loss of
control of cash flow on specific projects. Avoid
these if you do a lot of work for one payer
under different contracts or under a framework
agreement.
• Set-off of estimates is open to abuse.
• Payees should negotiate the terms of set-off
clauses so that they only allow the deduction of
reasonable and proven costs.
Maximising Payment
Maximising Payment
• Applying for payment properly.
• Good credit control.
• Charge interest.
• Understanding your rights under the Late
Payment legislation.
• Suspension for non-payment.
Applying for Payment
• Ensure payment applications are in on time and
in the correct format.
• Provide proper substantiation of costs claimed.
• Ensure instructions to carry out variations have
been given in writing.
• Get daywork sheets signed on the day the work
is carried out and submit them with
applications.
• Ensure VAT invoices are submitted promptly.
Good Credit Control
• A good credit control system cannot be
underestimated.
• Diarise due dates for payment and final
dates for payment.
• If the contract requires the payer to issue a
certificate or notice confirming the amount
due, chase this if it is not issued.
• Chase overdue payments persistently.
Charge Interest
• Check the contract for a rate of interest for
late payments.
• Calculate the applicable interest and send
chaser letters setting out the interest that
has now accrued.
• Consider offering to waive your right to
interest in return for prompt payment of the
overdue sum.
Late Payment Legislation
• Late Payment of Commercial Debts (Interest)
Act 1998.
• Only applies where the contract does not
contain a “substantial remedy” for late
payment.
• Allows the payee to charge interest at 8%
above the Bank of England base rate on late
payments.
Late Payment Legislation
•
What is a “substantial remedy”?
• Previously the focus has purely been the
interest rate specified in the contract.
• JCT contracts contain an interest rate of 5%
above the base rate - this is widely regarded as
a substantial remedy.
• In the case of Yuanda (UK) Co v WW Gear
Construction (2010), the interest rate was 0.5%
above the base rate. The court held that this
was not a substantial remedy and replaced it
with the statutory rate of 8% over base.
Late Payment Legislation
• Where the Late Payment of Commercial Debts
(Interest) Act 1998 applies, payees have a right
to claim a fixed sum of compensation for late
payment in addition to statutory interest:
• £40 for debts of up to £999.99.
• £70 for debts from £1,000.00 to £9,999.99.
• £100 for debts above £10,000.00.
Late Payment Legislation
• The Late Payment of Commercial Debts
(Interest) Act 1998 was recently amended by
the Late Payment of Commercial Debts
Regulations 2013.
• Only applies to contracts entered into after 16
March 2013.
• Creates two new rights:
•
•
A right for payees to claim the “reasonable
costs” incurred in recovering the debt.
A right to claim statutory interest after 60 days.
Late Payment Legislation
Recovery of Reasonable Costs
• The right to claim the “reasonable costs” of
recovering a debt only arises when:
1. the Act applies i.e. when there is no
alternative “substantial remedy” for late
payment in the contract; AND
2. the fixed sum of £40, £70 or £100 (depending
on the value of the debt) does not cover the
payee’s reasonable costs of recovering the
debt.
Late Payment Legislation
•
•
•
Meaning of “reasonable costs” is not clear.
Probably only covers costs incurred prior to formal
proceedings, such as administrative costs and
possibly the cost of preliminary legal assistance such
as solicitors’ letters.
Unlikely to cover adjudication/legal costs:
•
•
•
•
The Construction Act prohibits the recovery of legal costs
from the other party in adjudication.
The detailed rules relating to legal costs could be
undermined if the Regulations allowed for automatic
recovery of costs.
Keep a record of costs incurred.
Doubtful that payees will voluntarily pay “reasonable
costs”.
Late Payment Legislation
Right to claim statutory interest after 60 days
• Under the Regulations, statutory interest will begin
to accrue 60 days (or 30 days if the payer is a public
authority) after whichever is the latest of:
•
•
•
•
the day the payee performs the obligations to which
payment relates;
the day the payee submits a claim for payment; or
the day the payer verifies or accepts goods or services
provided (where the contract includes a verification
or acceptance procedure).
The effect of the Regulations is to impose a limit on
how long a payment period can be before statutory
interest begins to accrue.
Late Payment Legislation
• Note: the Regulations say that statutory
interest will start to accrue after 60 days.
• They DO NOT say that payers have to pay
invoices within 60 days.
• Payers can have longer payment periods and
just risk being faced with a claim for interest on
any period in excess of 60 days.
Late Payment Legislation
• 2 important exceptions to the 60 day rule.
1. Only applies where statutory interest applies i.e.
not in cases where there is a contractual
“substantial remedy” for late payment.
2. Does not apply where the contracting parties have
“expressly agreed” a payment period longer than 60
days and that period is not “grossly unfair”.
• Not clear what is meant by “expressly agreed” –
do standard terms and conditions count?
• The Regulations state that any payment period
that is a “gross deviation from good commercial
practice and contrary to good faith and fair
dealing” may be grossly unfair.
Late Payment Legislation
• Will the view of what constitutes a “substantial
remedy” change in light of the Regulations?
• The Act and the Regulations offer a wide range
of remedies in addition to interest.
• Payees may be able to argue that an interest
rate alone does not constitute a “substantial
remedy” and that contracts must provide more
generous remedies in order to effectively
exclude the Act and the Regulations.
• No case law on this issue yet.
Suspension for Non-Payment
• Your rights in terms of suspension for nonpayment will differ depending on whether the
contract was:
• entered into before 1 October 2011 (and is
therefore governed by the Housing Grants,
Construction & Regeneration Act 1996); or
• entered into on or after 1 October 2011 (and
is therefore governed by the Housing Grants,
Construction & Regeneration Act 1996, as
amended by the Local Democracy, Economic
Development & Construction Act 2009).
Suspension for Non-Payment
• Pre 1 October 2011:
• Must give at least 7 days’ notice of intention
to suspend performance, stating the ground
or grounds for suspension.
• Have to suspend performance of your
obligations under the contract in their
entirety.
• Entitled to an EOT for the period of
suspension.
Suspension for Non-Payment
• Post 1 October 2011:
•
•
•
•
Must give at least 7 days’ notice of intention to
suspend performance, stating the ground or
grounds for suspension.
Can suspend any or all of your obligations under
the contract.
Entitled to an EOT for the period of suspension
and for any period of de-mobilisation/remobilisation.
Entitled to recover “a reasonable amount in
respect of costs and expenses reasonably
incurred” as a result of the suspension.
Suspension for Non-Payment
• A word of warning – in order to suspend
performance:
•
•
•
•
The final date for payment must have passed.
The unpaid sum must be properly due.
Notice must have been given (check if the contract
specifies a longer notice period).
Notice must have been validly served in accordance
with the notice provisions of the contract.
• Get any of these steps wrong and you face being
in repudiatory breach of contract and liable to
pay damages to the payer.
Recovering Retention
Recovering Retention
• Your rights in terms of recovery of retention
will differ depending on whether the contract
was:
• entered into before 1 October 2011 (and is
therefore governed by the Housing Grants,
Construction & Regeneration Act 1996); or
• entered into on or after 1 October 2011 (and
is therefore governed by the Housing Grants,
Construction & Regeneration Act 1996, as
amended by the Local Democracy, Economic
Development & Construction Act 2009).
Pre-1 October 2011 Contracts
• Before 1 October 2011, the release of retention
was not regulated by the Construction Act.
• For Sub-Contractors, the release of the final
balance of retention was typically linked to the
issue of the certificate of making good defects (or
similar) under the Main Contract.
• As Sub-Contractors have no control over the
making good of defects in the work of the Main
Contractor or other Sub-Contractors, it was
common for Sub-Contractors to wait years after
practical completion to get paid the balance of
their retention.
Pre-1 October 2011 Contracts
•
Sub-Contractors who consider that the release of
retention is being delayed unfairly can try to rely
on the case of Pitchmastic v Birse (2000):
•
•
•
The release of Pitchmastic’s retention was
conditional on the issue of the Main Contract
Certificate of Making Good Defects.
No Certificate of Making Good Defects was ever
issued.
Since Pitchmastic’s works were free from defects,
they argued that they were entitled to receive the
balance of their retention.
Pre-1 October 2011 Contracts
•
•
The court said:
• The only way Pitchmastic could circumvent the
agreed terms of the sub-contract was if they could
show Birse had actively prevented the issue of the
Certificate of Making Good Defects.
• The test to be applied is whether the Main Contractor
is proceeding with reasonable diligence to make good
the defects.
• Pitchmastic did not provide sufficient evidence to
satisfy the test.
It is very difficult for Sub-Contractors to rely on this
case – how can you get evidence about what the Main
Contractor is doing?
Post-1 October 2011 Contracts
• Section 110(1)(1A) of the amended Construction
Act states:
“The requirement… to provide an adequate
mechanism for determining what payments
become due under the contract, or when, is not
satisfied where a construction contract makes
payment conditional on:
(a) the performance of obligations under another
contract, or
(b) a decision by any person as to whether
obligations under another contract have been
performed.”
Post-1 October 2011 Contracts
• Section 110(1)(1A) prohibits contractual
provisions which link the release of a SubContractor’s retention to the issue of the Main
Contract making good defects certificate.
• Sub-Contracts must contain their own
mechanism for release of retention.
Post-1 October 2011 Contracts
• Typically, a date for the release of each part of
the retention is specified.
• Under the JCT Standard and Design & Build SubContracts, the first half of retention is released at
practical completion and the remainder is
released on the “Retention Release Date”.
• However, Main Contractors tend to specify dates
which are far in the future to try to ensure they
have received their own retention before
releasing it to Sub-Contractors.
Avoiding Insolvency Risks
Avoiding Insolvency Risks
•
•
•
•
•
•
Preliminary checks.
Parent company guarantees.
Project bank accounts.
Termination for insolvency.
Pay when paid.
Retention of title clauses.
Avoiding the Risks of Insolvency
Preliminary Checks
• Before entering into a contract, it is essential to
identify the relevant parties in the payment chain.
• It is important that you think about insolvency both
up and down the contractual chain; insolvency of
the Employer may stop you from being paid, whilst
insolvency of your supplier may put you in delay.
• Due diligence:
• Credit checks/company searches.
• Have there been payment problems on past
contracts?
• Articles in the press.
Avoiding the Risks of Insolvency
Preliminary Checks
• Possible indicators of potential insolvency:
•
•
•
the Employer is a new/off the shelf/special
purpose company with few assets.
a parent company refuses to provide a parent
company guarantee and does not provide any
explanation for its refusal.
a Sub-Contractor who submits an abnormally low
tender.
• If due diligence reveals a potential insolvency risk,
there are a number of measures which could
minimise the risk of non-payment.
Avoiding the Risks of Insolvency
Parent Company Guarantee
• Typically provided by the payee (on the paying
party’s insistence) as a form of protection against
insolvency/breach of contract.
• Can be provided by the paying party as a form of
protection against non-payment, but a payee is
unlikely to have the bargaining power to insist on
this.
• In the event of a breach/insolvency, the parent
company steps in and fulfils the relevant
obligation (usually by making payment).
Avoiding the Risks of Insolvency
Parent Company Guarantee
• Only useful if the parent company has assets and
is not just a ‘holding company’.
• Provides protection against the risk that the
parent company will simply wind up the company
in default, leaving you with nothing.
• If a PCG is required from the payee, make it a
condition precedent to payment – this will ensure
the PCG is provided promptly.
Avoiding the Risks of Insolvency
Project Bank Account
• Employer makes payment into a single account and this
is apportioned between the Main Contractor and SubContractors.
• Everyone gets paid at the same time.
•
Often used on government projects but rare in the
private sector.
•
Specific contract amendments will be required to cater
for a project bank account.
•
Does not guard against risk of Employer insolvency.
Avoiding the Risks of Insolvency
Termination for insolvency
• Almost all contracts provide for termination upon
insolvency (usually automatically).
• If you are particularly concerned about the
potential insolvency of a supplier/Sub-Contractor,
you could include a provision allowing you to
terminate when you think insolvency is imminent.
• Ensure the contract allows you to withhold
payment following insolvency and gives you wide
power to set-off the costs you have incurred as a
result of the termination.
Avoiding the Risks of Insolvency
Pay When Paid
• Construction Act s113 – pay when paid clauses are
unenforceable except for insolvency situations.
• Essential to ensure your downstream contracts
contain a pay when paid clause to protect you against
the risk of upstream insolvency.
• Without an insolvency pay when paid clause:
• you won’t get paid if your Employer goes bust; but
• you will still have to pay your Sub-Contractors.
• Ensure the clause is well-drafted and provides you
with adequate cover.
Avoiding the Risk of Insolvency
Retention of Title Clauses
• Put simply, a ROT clause states that property in
goods or materials remain with the seller until
the buyer has paid for those goods or
materials.
• If the buyer does not pay, the seller may
repossess the goods and re-sell them.
• There must be an express ROT clause in the
contract; retention of title is not a general right
at common law.
Avoiding the Risk of Insolvency
Retention of Title Clauses
• ROT clauses have their limitations:
•
•
•
Where goods/materials cannot be identified as
belonging to the supplier, the clause will be
ineffective.
Where goods/materials are incorporated into
construction works, the clause will usually cease
to have any effect (although this can depend on
the degree to which the goods/materials can be
easily removed from the works.
Practically speaking, it is difficult to enter the
premises of the buyer or a third party to recover
the goods without risking being accused of
trespass.
Avoiding the Risk of Insolvency
Retention of Title Clauses
• A good ROT clause should include:
•
•
•
•
•
An obligation on the buyer to store the goods
separately or ensure they are identifiable as
belonging to the supplier.
An obligation on the buyer to act as fiduciary agent
and bailee in relation to the goods.
A right to enter into the premises of the buyer to
recover the goods, and a right to require the buyer
to “deliver up” the goods.
A provision allowing the buyer to sell the goods on
and hold the proceeds of sale on trust for the seller.
A list of insolvency events which bring the buyer’s
right to possession of the goods to an end.
Questions?