Peter Stockill on the law and the Supply Chain Payment Charter.
The Construction Supply Chain Payment Charter is the latest step in the government’s attempts to tackle late payment in the industry. It sets out fair payment commitments for contracts entered into from 1 January 2015, building upon previous initiatives.
The Charter will be implemented through voluntary sign up and monitoring through key performance indicators (KPIs). The details of the KPIs, monitoring arrangements and the consequences of failing to achieve them have yet to be agreed. This, and the number of those who sign up, is surely crucial if the initiative is to have any significant effect.
Pending confirmation of these matters, what is the legal context of the key commitments to reduce payment periods, unjustified withholds, and the use of cash retentions?
Payment periods
The Housing Grants, Construction and Regeneration Act 1996 (HGCRA) leaves parties free to agree payment periods. The Late Payment of Commercial Debts Regulations 2013 provides a maximum period of 30 days in contracts with public bodies. In other contracts, the parties are free to agree up to 60 days, or longer if not “grossly unfair”. The Charter’s ambition is to reduce payment periods to 60 days for all new contracts, decreasing to 45 days by June 2015 and 30 days by January 2018, with more ambitious targets for central government contracts.
Withholding payment
Charter signatories agree to make full payment in accordance with the contract and to ensure any withholding “due to defects or non-delivery is proportionate, and clearly, specifically and demonstrably justified in line with the arrangements set out in the contract”. It is not clear what this requires. Section 111(4) of HGCRA (as amended) requires that a pay less notice specify: “The sum that the payer considers to be due on the date the notice is served, and the basis on which that sum is calculated.”
What is required of the calculation referred to? Is it only necessary to (a) state the amount of a deduction within a larger calculation or (b) must a calculation or explanation of how the deduction has been arrived at be provided? When amending HGCRA, the government said it did not intend to impose more stringent requirements, which would suggest (a) is sufficient, but some support for (b) can be taken from the, now often cited, Scottish case of Maxi Construction Management v Morton Rolls [2001] Scot CS 199.
Supporters of the Charter will presumably hope that, when the opportunity arises, the courts interpret the statute in a way that requires more rather than less information.
Cash retentions
Signatories to the Charter undertake not to withhold cash retentions or to ensure the arrangements are no more onerous than in Tier 1 contracts, with the ambition of abolishing cash retentions by 2025. Instead, it anticipates that retention bonds will be provided and/or that commercial incentives provide adequate reason to rectify defects.
There is no legal prohibition on the use of cash retentions. Section 110(1A) of HGCRA (as amended) prohibits terms that link the release of retention to the performance of obligations under another contract, eg. the issue of certificates under the main contract, but that prohibition has not been a resounding success. Such clauses are still in use or in some cases are replaced with long retention periods.
Conclusion
To date, legislation has proven the more effective means of achieving the goals relating to payment contained in the Latham Report. The Charter goes further than the law, and it advocates other steps such as electronic payment and the use of project bank accounts. It may be that, for some of the Charter’s commitments, it will pave the way for further legal developments, particularly if the number of parties that sign up is low.
Peter Stockill is a partner in the construction team at law firm Berrymans Lace Mawer
