Securing payment on time is crucial to survival in the construction industry. We answer 10 frequently asked questions about securing payment.
1. What can I do if the final date for payment passes and payment has not been made?
The Housing Grants, Construction & Regeneration Act 1996 (as amended) (the “Construction Act”) provides that payment must be made by the final date for payment, provided that a “pay less notice” has not been issued by the paying party in accordance with the terms of the contract.
The first step in the event of late payment is to immediately remind your employer that the payment is outstanding. It is appropriate for this initial reminder to be quite informal (e.g. by email). If this informal reminder is ineffective, then you should send a more formal letter of demand for payment.
If corresponding with your employer yourself does not yield results, the next step is usually to instruct a chartered quantity surveyor (“cqs”). A cqs can send further letters of demand, which may be more convincing and effective than a letter you have written yourself, or, if this is still not successful, the cqs can advise on whether some form of legal action (such as adjudication or litigation) is required. However, it is often viewed as inappropriate or risky to commence formal action whilst a project is on-going, due to the negative effect this can have on the parties’ working relationship.
Another effective option is to suspend performance of your works. Section 112 of the Construction Act gives a payee the right to suspend performance of its obligations under the contract in the event of non-payment. If complete suspension of performance sounds too extreme, it is possible to suspend performance of certain obligations and continue fulfilling others. However, in all cases the right of suspension cannot be exercised without giving at least 7 days’ notice of intention to suspend performance.
Anyone considering exercising the right of suspension must first check the contract to determine (a) how much notice must be given and (b) how notices should be served. It is also essential to be sure you are validly entitled to payment. Any error in suspending performance could put you in repudiatory breach of contract, allowing your employer to terminate your contract and claim damages.
2. Can I claim interest on late payments?
Under the Late Payment of Commercial Debts (Interest) Act 1998, you are entitled to charge interest on any late payments at the rate of 8% above the base rate. Please note however that many contracts will vary the rate of interest which is applicable to late payments, so you should always check the contract to find out the rate of interest which is applicable.
3. What happens if the payment terms in my contract don’t comply with the Construction Act?
If the payment terms in the contract do not comply with the Construction Act, the Scheme for Construction Contracts (the “Scheme”) will apply.
The extent to which the Scheme applies depends on the extent to which the contract does not comply with the Construction Act. The Scheme stipulates due dates and final dates for payment (if these are not specified in the contract) and sets out the dates by which the paying party must issue a ‘payment notice’ and/or a ‘pay less notice’. It may be necessary to refer to the Scheme when establishing that payment is late, but typically legal advice is required to determine whether or not the Scheme applies (and to what extent).
4. What can I do to improve my chances of getting paid what I apply for?
You should comply exactly with the requirements of your contract. Ensure your applications are in the correct format, provide the appropriate level of detail and are accompanied by the necessary supporting evidence (e.g. signed timesheets).
5. What can I do if payment is withheld because a party up the line has become insolvent?
The Construction Act permits clauses in contracts, which allow payment to be withheld in cases when a party up the contractual chain has become insolvent. Unfortunately, if there is a “pay when paid” clause in your contract which allows your employer to withhold payment when an upstream party is insolvent, there is nothing you can do (although see question 10 below). It is therefore essential to ensure you also have a “pay when paid” clause in your downstream contracts to ensure that you are not left in the financially crippling position of having to make payments to others when you will not be receiving any yourself.
6. Do I have a right to be paid for goods and materials on site?
There is no general right to payment for goods and materials simply because they have been delivered to site. Your right to payment for goods and materials is governed by the contract. Many contracts will permit payment for on-site materials and goods provided that certain conditions are satisfied (for example, if they are stored correctly and are not on site prematurely).
7. Is there a legal limit on how long payment periods can be?
No, the Construction Act states that the contracting parties are free to choose the due dates and the final date for payment. In practice, the length of payment periods will be governed by commercial negotiating positions. The tendency in the current climate seems to be towards ever increasing payment periods, particularly for sub-contractors.
8. Can my employer withhold payment on the grounds that I have failed to satisfy a condition precedent?
Yes, provided your employer has issued a ‘payment notice’ or a ‘pay less notice’ confirming that payment is being withheld. Conditions precedent are legally binding and payment can be withheld for failure to fulfil a condition if the contract states that payment is conditional on fulfilling that condition. It is essential to check for conditions precedent at the outset and put procedures in place to ensure they are complied with.
9. Am I entitled to recover the administrative and legal expenses I incur chasing late payments?
The Late Payment of Commercial Debts (Interest) Act 1998 states that you are entitled to claim a fixed sum to represent compensation for the late payment. The fixed sums are:
- £40 where the unpaid sum is less than £1,000;
- £70 where the unpaid sum is more than £1,000 but less than £10,000; or
- £100 where the unpaid sum is more than £10,000.
Other than this fixed sum, the administrative and/or legal costs you incur in sending letters of demand are generally unrecoverable.
If you do commence legal or arbitration proceedings, the successful party will usually recover most of its costs from the unsuccessful party. However, there is almost always an element of unrecoverable cost.
The costs of adjudication are not recoverable, even if your claim is successful. For this reason, the unpaid sum would have to be significant to justify incurring the expense of instructing a chartered quantity surveyor to handle the adjudication on your behalf.
10. How do I recover payment if my employer becomes insolvent?
It is extremely difficult to try and recover payment in cases where your employer is insolvent. You will rank as an unsecured creditor, meaning that all secured creditors (e.g. lenders) take priority over you. Unsecured creditors rarely get any payment when the insolvent company’s assets are distributed. Notwithstanding this, you should always lodge a proof of debt with the administrator or liquidator just in case a dividend does become available for distribution to unsecured creditors. This typically involves filling in a form (which you can obtain from the administrator or liquidator) with details of the sum you are owed.
If you have provided a collateral warranty to a third party, they may have the right to step in to the contract in place of your employer. However, this is entirely at the third party’s discretion and it is not necessarily the case that the third party will assume responsibility for unpaid sums even if they do exercise step in rights.
This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require further advice on any of the issues raised in this article, please do not hesitate to contact Ian Cruse at Cruse MS Ltd