Late payers could face robust penalties

Late payments have been the scourge of small and medium size businesses (SMEs) for many years but despite the introduction of legislation to deal with the issue, it has not gone away. Unfortunately, businesses in the construction industry are particularly badly affected by late payments.

The government is making further moves to confront the problem and, in the latest development, a further consultation has just been announced.  This latest call for evidence follows the consultation launched in October 2018: Creating A Responsible Payment Culture: A Call For Evidence In Tackling Late Payment. The focus was on existing payment practices and statistics, with the government asking industry for evidence of their experiences on late payment and how the payment culture could be improved.

The new consultation (which is the government’s response to the earlier consultation) is asking for views on the merits of strengthening the ability of the Small Business Commissioner (who is to become responsible for the voluntary Prompt Payment Code) to compel the disclosure of information in relation to late payments; and whether the Commissioner should have powers of enforcement against large businesses who fail to comply with disclosure requests, and businesses with poor unfair payment practices.

Possible enforcement methods to hold businesses to account include court orders and fines, and the ability to impose undertakings in relation to payment plans with the risk of additional fines in the event of the undertaking/payment plan being breached.

There is also to be further research into supply chain finance and, for the first time, company boards will be held accountable for supply chain payment practices to increase transparency.

How will this impact construction?
Businesses in the building and construction industry can be encouraged that court orders and robust powers are being seriously considered in an effort to tackle the endemic late payment culture that puts many SMEs at risk of insolvency. The chief executive of the Federation of Master Builders, Brian Berry, recently commented that its members say three quarters of their payments are late. He says a “culture change in the construction industry” is needed.

If the proposals become law, the scourge of late payments in the industry could quickly begin to diminish.  However, a key problem is that the momentum for change is slow causing widespread concern for businesses in the construction industry and beyond. Despite the issue now having been considered by successive government, there is still little chance of any further legislation hitting the statute books any time soon.

What does this mean?
In the absence of changes in the law, businesses need to ensure they protect their interests effectively by negotiating robust but fair payment provisions.

It may be wise to include a late payment clause specifying the consequences of late payments in order to minimise the risk of late payments and the potentially devastating impact on a business, though such clauses must be drafted with care to make sure they are reasonable and valid.

How can we help?
We advise businesses in the construction industry, as well as across other industries, on their payment terms and their wider contractual rights and obligation. For strategic advice and representation, contact the expert commercial solicitors at Herrington Carmichael as early as possible. 

Please contact our commercial team.

Cesare McArdle
Partner, Commercial & Construction
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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