Legal questions: late payments
Late payments in construction
2 April 2015
Shy Jackson explains the issues around late payments in a construction project
I am a subcontractor on a large project and the main contractor is paying me later and later as the project progresses. The delay period is affecting my cash flow. What can I do?
Unfortunately, late payment of invoices continues to plague the construction industry. The primary remedy is to claim interest from the contractor on any late payment. Under English law, interest can be claimed under the subcontract, if it provides for this, or under the Late Payment of Commercial Debts (Interest) Act 1998 (as amended).
The first thing to do is to check whether your subcontract provides for interest to be claimed. If the contractual rate amounts to a 'substantial remedy', interest can be claimed at that rate on any overdue payment. Most standard form contracts stipulate the rate to be applied – for example, clause 4.10.6 of the 2011 JCT Standard Subcontract Conditions provides for interest at a rate of 5% above the Bank of England base rate. If there is such a contractual provision, you would be entitled to be paid interest and should claim this from the main contractor. Employers and main contractors sometimes reduce the rate of interest payable. It is then possible that the revised rate would not amount to a substantial remedy and the 1998 Act will apply. The test is (judged at the date the contract was made):
- whether the interest rate is sufficient to both compensate the subcontractor and to act as a deterrent to late payment
- whether it is fair and reasonable to oust the right to interest under the 1998 Act
- the benefits of commercial certainty
- the bargaining powers of the parties.
By way of an example, a rate of 0.5% above base rate (amended down from 5%) was not a substantial remedy in Yuanda (UK) Co Ltd v WW Gear Construction Ltd  EWHC 720 (TCC). However, a rate of 5%, although less than the statutory remedy, was held to be a substantial remedy in Walter Lilly & Company Ltd v Mackay  EWHC 1773.
Applying the Act
If the subcontract does not stipulate an interest rate or the interest rate is not considered to provide a substantial remedy then you may still have a right to claim interest under the 1998 Act. The Act seeks to deter late payment by imposing a statutory rate of interest, compensation and for contracts entered into on or after 16 March 2013, a right to recover the reasonable costs incurred in collecting the debt. The 1998 Act applies to all business-to-business contracts for the supply of goods or services, and will therefore apply to construction contracts.
The 1998 Act implies a simple fixed rate of interest (currently 8% above base rate) on any qualifying debt. This is deemed to be when there is an obligation under the subcontract to pay the whole or part of the contract price, and that payment is outstanding.
Where the subcontract provides a due date for the payment, interest will be calculated from the next day until payment is made. However, if the subcontract is silent on payment dates, interest will be calculated depending on when the contract was entered into:
- contracts made before 16 March 2013: 30 days after the later of delivery and invoice
- contracts made on or after 16 March 2013: 30 days after the later of the subcontractor achieving its contractual obligations, the subcontractor invoicing and the contractor accepting the works.
It is possible to agree to extend the payment date from 30 to 60 days (provided the contractor is not a public authority), and even longer if the extended payment period beyond 60 days is both 'expressly agreed' and not 'grossly unfair'. Consideration will be given to:
- the nature of the goods and services in question
- any objective reasons to extend the payment date
- whether an extension is likely to be a gross deviation from good commercial practice and contrary to good faith.
If interest is being claimed under the 1998 Act, you will also be able to claim a fixed sum as compensation. This will range from £40-£100 depending on the value of the outstanding qualifying debt. If your contract was made on or after 16 March 2013, and the costs you have incurred in recovering the late payment exceed the level of compensation, you may also be entitled to claim those excess costs provided that they are ‘reasonable’. It is yet to be determined what those reasonable costs will amount to, and to what extent they will cover the costs of court proceedings, arbitration or adjudication.
Shy Jackson is a Partner at Pinsent Masons LLP
This feature is taken from the RICS Construction journal (February/March 2015)