09-12-2019
There are no effective legal rights in place to help small businesses (SMEs)
with late payments. This problem must be taken seriously and the law needs to
change.
If you search for articles on late payment relating to SMEs, you find publications
deal with complaints and statistics showing how the problem is rife but actually
offer no solution. All articles refer to optimistic future actions to be taken by
the government, such as undefined fines and sanctions that have never
materialised. The Chamber of Commerce says it plans to lobby parliament on this
problem in the New Year, but what is it going to ask for? Late payment always
becomes more acute when money gets tight, you see more bankruptcies and this
year it has been a particularly trying one, for example with the uncertainty of
Brexit.
The problem for all time, and especially in the construction industry,
is the imbalance of contract power. Larger firms often impose onerous terms on smaller
firms and play politics with SMEs on the promise of more work or exclusion if SMEs
do not comply. Excuses such as contra charges, delay damages or refusal to pay
due to demands for substantiation of the obvious are often used to avoid
payments of accounts. Getting through the dispute risk area is not
straightforward. However, the Construction Acts (HGCR Act 1996 and LDEDC Act
2009) have now been around for some time, forcing better payment behaviour and including
the right to adjudicate in the payment process. That legislation has kicked the non-paying bully boys in
the teeth, they complain about “smash and grab” and now often have to live with
paying out if they default. Although the Construction Acts are a major success
for the construction SMEs, in my experience many still do not know about the
power they have to get paid using that legislation. For example, obtaining
payment by default, i.e. you get paid what you ask for, if you the payee are
ignored. It is a perfect example that the government should take account of when
evaluating how legislation can even out the balance of power and help SMEs. It
is worth noting that the cost of recovering late payments is a considerable
barrier for SMEs, therefore by bearing these points of recovery costs and
effective legislation in mind when considering late payment, changes here would
be a very simple way the government could legislate to help SMEs survive and prosper.
Legislation designed to compensate the payee for late payment is already
in place (the Late Payment of
Commercial Debts (Interest) Act 1998, which was updated in 2013). It provides
for payment of simple interest at 8% over the base rate alongside reasonable
costs which are incurred in pursuit of payment. Great but? Such compensation
for late payment is only due if the contract does not have late payment terms
already agreed. In this way the larger firms abuse their power by putting a
clause in the contract which amends the 8% to 2% over base rate and inclusive
of any recovery costs. This type of clause is nearly always in the contract, indeed
even the JCT forms have it in, albeit at 5%. As a result, there is almost no
opportunity to recover costs of pursuing the debt, which might include
adjudication, making pursuit of payment very difficult commercially. Added to
this, the Courts have made matters worse for SMEs with Enviroflow Management
Ltd v Redhill Works (Nottingham) Ltd [2017] EWHC 2159 (TCC) by ruling that
adjudication costs cannot be recovered under the Late Payment Act rules,
despite the previous ruling in Lulu Construction Ltd v Mullalley & Co
Ltd [2016] EWHC 1852 (TCC), which ruled that adjudication costs could be
recovered. The Court effectively condemns SMEs with Enviroflow.
All the government needs to do to help SMEs take control and deal with
the larger bullying firms is to update the Late Payment Act legislation so that
all contracts mandatorily comply with its rules, as opposed to it stepping in
where the terms are absent. In essence, if you pay late, it will not matter whatever
the clause the contract provides for 2%, 5% or no costs at, the clause will not
comply with the legislation and be completely void. It means that in all cases
late payment will mean interest will be compulsory and payable at 8% above the
base rate and all reasonable costs will be recoverable, including debt
collection and adjudication costs. The legislation must also be empowered to
take precedence over all other legislation that restrict costs recovery, for
example the Construction Act in respect of adjudication costs.
It all sounds simple but this small and easy update to this legislation
can drastically change this enormous problem.
If a body, such as the Chamber of Commerce, is lobbying parliament on
the late payment of SMEs, in my view they need to do more than complain. If they
are demanding the imposition of fines or sanctions that cannot be policed and
impossible to implement, this is also useless.
The right to charge damages contractually through legislation under the Late
Payment Act will allow SMEs a commercial and fast means to recover the late
payment and be properly compensated with a legally binding order obtained in
adjudication with all those costs recovered. The legislation would allow SMEs
to effectively look after themselves without relying on any government
department. Win, win.
I do hope any lobbyists do not just complain; effective legislation on
the costs of recovery and rights to it will help SMEs, even just the spectre of
these rights would improve late payment. At present, as I said in the opening
statement, the current state of the law effectively does not help SMEs at all,
and it needs to change.
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