Late Payment of SMEs in Construction

Late Payment of SMEs in Construction – Simple Legislation Solution


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.