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construction contract and commercial consultants

The end of long payment periods?

Long payment periods are quite popular in the construction industry; payment periods up to 90 days are not unusual.

Whilst the Housing Grants, Construction and Regeneration Act 1996 and its recent amendment by way of the Local Democracy, Economic Development and Construction Act 2009 (the Construction Act) helps in terms of ascertaining when a debt is due under a construction contract (click here for more information), it does not assist in reducing payment periods which is a matter left for the parties to agree.

However, that may change with the introduction of the Late Payment of Commercial Debts Regulations 2013 as an amendment to the Late Payment of Commercial Debts (Interest) Act 1998 and effects contracts entered into after 16 March 2013.

As a reminder, the 1998 Act provides that a party to a contract is entitled to charge interest to the other party in the event that a payment is made later than the ‘relevant day’. The ‘relevant day’ is the day the parties agree, by way of the contract, a date for payment of the debt.

This will be the final date for payment as defined by the Construction Act.

In the event that a contract fails to make ‘substantial’ provision for interest, the 1998 Act prescribes that the party owed the money can charge interest at 8% above the base rate of the Bank of England, plus charge fixed costs of £40 to £100 per debt, depending on its size, in addition to any rights to legal costs.

The 2013 amendment changes the definition of a ‘relevant day’ i.e. the day from which interest is chargeable, from the day the contract states the sum is payable to:

For contracts with public bodies, a maximum of 30 days from the latest of:

  • receiving the invoice;
  • receiving the goods/services; or
  • verification or acceptance of the goods/services where provided by the contract or statute (the time permitted for the verification procedure is 30 days or an agreed longer period unless that period is grossly unfair).

For all other contracts it is a maximum of 60 days, however the parties can agree a longer period providing such period is not grossly unfair.

What is ‘grossly unfair’ will depend on the circumstances including:

  • anything that is a gross deviation from good commercial practice and contrary to good faith and fair dealing,
  • the nature of the goods or services in question, and
  • whether the purchaser has any objective reason to deviate from the statutory periods.

If a contractual payment period is longer than the above (and fails the grossly unfair test in the case of non-public body contracts) the relevant day is reduced to 30 days and 60 days respectively. Note this does not reduce the payment period in the contract but merely changes the date from which statutory interest is charged.

In addition to the above, a party can also recover its reasonable debt recovery costs if they are greater than the fixed sums in the 1998 Act. This can be excluded by contract terms but such exclusion will be subject to the reasonableness test in the Unfair Contract Terms Act 1977.

All of the above can be contracted out of if the contract provides a ‘substantial remedy’ for late payment. There is no definition for that and the courts, when considering what is a substantial remedy, will no doubt take into account the new payment period constraints in the 2013 Regulations when considering a definition.

Will the new Regulations be of assistance? Much will depend on the court’s interpretation of ‘grossly unfair’ and we wait the first cases on that point with interest.

For further information, please contact us.

Written by Steven Evans who is a construction contract and commercial expert.

This article is for general information purposes only and should not be relied upon in any specific situation without appropriate legal advice. If you require that advice or wish to discuss any of the issues raised in this article, please contact us.