The scourge of outstanding invoices paid far too late is common for most small to medium businesses. Late payments costs the UK economy £11 billion every year and drives up to 38 companies out of business every day. Following the public consultation on poor payment practices, the government has introduced The Commercial Payments Bill, which is now progressing through Parliament, to tackle the problem. There are many terms in the Bill but here we explain the main terms, which are as follows:
- 60 day maximum payment terms to be imposed, with strictly controlled and limited exemptions.
- Interest on late payments to be mandated at 8% above the Bank of England’s base rate.
- Suppliers will be given the right to a fixed sum in cases where the purchaser raises a late dispute or a dispute without sufficient information.
- Prohibiting, under the terms of a construction contract, the withholding of retention payments.
The proposed Act will work together with new measures and stronger powers for the Small Business Commissioner (SBC) and new reporting requirements for large businesses. There is already an obligation to report on their payment practices as well as their policies and performance. The Small Business Commissioner will, in future, be able to:
- Where a large business is suspected of persistently breaching payment legislation and indulging in poor payments practices. The SBC will be able to take enforcement action with the power to make impose financial penalties and make directions.
- Also, adjudicate in contractual payment disputes, outside the court procedures, making binding interim decisions.
- Larger businesses that breach their statutory reporting requirements on payments practices can have enforcement action taken against them.
The SBC will also support the terms and details of the Fair Payment Code which are as follows:
The Award Tiers and the Criteria that supports them
Gold Award
At least 95% of all invoices to be paid within 30 days
Silver Award
At least 95% of all invoices to be paid within 60 days
Bronze Award
95% of invoices to be paid within 60 days
Other Terms
Awards last for two years before a business must reapply. All awardees must agree to be clear, fair, and collaborative with their suppliers. There is no cost for applying the code. The SBC can also investigate larger businesses that are believed to be persistently engaging in poor payment options.
Whilst the Commercial Payments Bill will have an impact on the issue of late payments businesses must develop a range of strategies to ensure that they receive payment for the work carried out. Establishing strategies to reduce the risk of non-payment before the contract begins is a wise practice. Thoroughly vetting the main contractor before the contract starts to establish as far as possible whether the firm has a reputation of slow or non-payment. Of course there can always be disputes arising from any contract and that does not necessarily demonstrate overall poor practices.
Vetting
Check Companies House filings and research the history of the firm establishing:
- Any Judgments or insolvencies.
- Credit reports may show a history of disputes
- Who owns the company and whether it is part of a larger group.
- Whether the company is financially sound
Make sure the contract is sufficiently robust and covers all aspects that could affect payment, such as:
- How variations are authorised
- When interim invoices can be submitted
- Due dates for payments
- Procedure for notices disputing payment
- Interest on late payment
- Suspension of work for late payment
- Dispute resolution
- Retention
- Set off rights
- Who is responsible for defective work
Pay when paid provisions are often considered ineffective, the contract should include a proper defined payment mechanism. Payment disputes frequently arise due no clear payment system. The contract should establish the procedures for all types of variation. If all attempts to obtain payment are unsuccessful the only alternative is legal action. Giambrone and Partners’ lawyers have successfully obtained payment for our clients from defaulting main contractors, often by pointing out the consequences and costs of legal action.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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