The government has published its response to last year’s late payments consultation, and it confirms sweeping changes are on the way, which will particularly impact construction, including a ban on retentions.
Major legislative changes
In what the government says will give the UK “the strongest legal framework on late payments in the G7” it has confirmed that it intends to introduce the following measures across the UK:
- Board-level scrutiny of payment practices, with boards of large UK businesses, which make a significant proportion of their payments late, being legally required to explain why payment performance is poor and how they will improve payment performance, with this being published on the GOV.UK website
- Maximum payment terms of 60 days between businesses, with very limited exemptions e.g. where both parties are large companies, the purchaser is the smaller party, or the goods or services are being exported or imported. In the case of construction contracts, government acknowledges “the importance of alignment of the existing and well-established legislation for parties to a construction contract with this policy for stricter maximum payment terms. This will be taken forward as part of the next steps“
- Deadline for disputing invoices, so if a business does not dispute an invoice within a set time they must pay compensation to their supplier. However government says “we want to ensure that any new dispute policy does not cut across existing ones and make it clear how a dispute window will work in detail. A separate measure, aligned with the existing payment notice mechanisms will be taken forward for construction contracts“
- Mandatory interest on late payments, with all commercial contracts containing a right to statutory interest at 8% above the Bank of England’s base rate. Parties won’t be allowed to agree an alternative remedy to this statutory interest. And if interest is not paid, small businesses can refer the matter to Small Business Commissioner (SBC) adjudication (see below).
- Additional reporting on statutory interest, with large companies being required to report on their interest payments. This includes how much interest they should have paid and how much they have actually paid. The SBC can use this information to spot persistently poor payment practices, potentially leading to investigations and fines.
- Prohibiting retention payments, banning the practice of deducting and withholding retention payments under construction contracts to prevent loss of money through insolvency and late or non-payment. However the government “will consult further with interested parties on the impact of this measure before taking a final decision on implementation.” It will be interesting to see how a ban on retentions might operate in practice and what alternative means developers and owners come up with to protect themselves against the risk of buildings defects.
More powers for the Small Business Commissioner
The SBC will be given new powers to:
- Investigate businesses suspected of poor payment practices, and breaching late payments legislation. This includes launching investigations and compelling companies to provide information
- Adjudicate to settle disputes between businesses, including allowing small businesses to refer payment disputes with larger businesses to SBC adjudication, and making adjudication awards. This begs the question how will this interact with existing construction adjudication processes? In its response government says “Specific construction payment and dispute resolution legislation has been in place for nearly 30 years through The Housing Grants, Construction and Regeneration Act 1996 – Part 2 Construction Contracts [in Northern Ireland the law is primarily contained in The Construction Contracts (Northern Ireland) Order 1997]. Respondents from the construction sector highlighted the importance of alignment of the existing and well-established legislation for parties to a construction contract with this policy for stricter maximum payment terms. This will be taken forward as part of the next steps”
- Impose fines, including for those who persistently pay late or breach payment legislation.
Timetable for change
The government says “these measures will require a combination of primary legislation (an act of Parliament) and secondary legislation to enact. We will legislate as soon as Parliamentary time allows“. Late payment law is a devolved matter in Northern Ireland so will require work with the NI Assembly and Executive “to ensure regulatory alignment” on the issue.
This article is for general information only and is not intended to be legal advice. Specific advice, tailored to your particular circumstances, should always be sought.
Please do not hesitate to contact Graham Pierce and the commercial property team on 028 90 434015 for any commercial property queries.
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