Industry could be caught out by EU-wide prompt payment rules, says expert

The Late Payment Directive (10-page / 783KB PDF) must be implemented by individual states as part of their national laws by 16 March 2013. Amongst other changes, the directive introduces time limits for payments and sets compensation in the event that payment is late.

Regulations implementing the directive's requirements in the UK were published at the end of last month. Following a period of consultation, the UK Government has decided against extending payment terms to the maximum permitted under the directive. It will also maintain the existing tiered approach to compensation, rather than introducing a flat minimum of €40 as provided for under the directive.

The National Specialist Contractors' Council (NSCC) welcomed the introduction of the new rules, which it said would "create a level playing field for UK businesses trading in other EU member states". However infrastructure law expert Chris Hallam of Pinsent Masons, the law firm behind Out-Law.com, said that the quick turnaround on the new UK regulations left businesses with little time to prepare for the changes.

"With the threat of a triple-dip recession looming, the new legislation will certainly be welcomed by the construction industry in general, and particularly by those who typically sit further down the supply chain," he said. "However, one suspects that the industry will be somewhat caught out by these new requirements given that the regulations only came into being a couple of weeks ago - yet will be in force next week, and without much of a fanfare."

"The payment provisions in contract terms and conditions will need to be reviewed to ensure that they meet the new regulations. This may not be a particularly easy task, given that construction contracts typically provide for payment on the basis of interim valuations or stage payments whereas the regulations are geared around matters such as the delivery of goods or services," he said.

The Late Payment Directive requires public authorities to pay their suppliers within 30 calendar days of receipt of an undisputed invoice, matching the UK Government's standard practice. Payment terms for business to business payments as fixed in the contract cannot exceed 60 days unless otherwise expressly agreed, provided that the terms are not "grossly unfair". Under the Directive, the 60-day limit also applies where a public authority is carrying out "economic activities of an industrial or commercial nature" by offering goods and services on the market. However, the UK has opted to keep the limit at 30 days for this type of contract.

Commercial law expert Ruth Andrew of Pinsent Masons pointed out that the concept of 'grossly unfair', which was copied from the directive into the UK regulations, was not one normally in use in the UK. It would be up to the courts to decide how to interpret the phrase in the event of a dispute, she said.

"These changes provide another useful tool for suppliers to ensure prompt payment in a tough economic climate, particularly the restrictions on agreeing extended periods during which no interest is payable," she said. "The regulations may help suppliers resist customers pushing for longer payment terms and provide leverage in negotiations. That said, it will be interesting to see whether businesses utilise and enforce the rights available to them, especially if there is a power imbalance in the relationship between customer and supplier."

The Government also announced this week that the number of large companies that have made a public commitment to paying their suppliers promptly has tripled since November 2012. An additional 94 companies listed on the FTSE 350 stock exchange have signed the Government-backed Prompt Payment Code (PPC) since Business Minister Michael Fallon urged them to do so at the end of last year. Three quarters of FTSE 100 companies, including Shell, Kingfisher and Diageo, have now signed the pledge.

"Late payment is a real issue for businesses around the country," Fallon said. "It is not fair and poor cash flow can prevent small firms growing and even push them into insolvency. We need to improve the payment culture and I welcome the response of big businesses in signing up to the common sense principles in the PPC. Signing up demonstrates a serious pledge to pay promptly, and reports of any companies found to be falsely committed to the value of fairness in the Code will be taken very seriously."