If an employer fails to pay a contractor by the construction contract’s final date for payment, it should expect to be on the receiving end of a costly claim for statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998.
Most would expect the statutory interest to start to run immediately after the final date for payment has passed. However, I recently came across an argument from an employer exposed to such a claim, contending that, under the Late Payment Act 1998, statutory interest didn’t start to accrue until a date much later than the final date for payment.
The construction contract
The terms of the construction contract in question allowed the contractor to make interim payment applications but failed to stipulate a contractual final date for payment. The contract simply said that the employer would “promptly settle” invoices received from the contractor.
As a consequence, under the statutory payment rules (section 110(1)(b) of the Construction Act 1996 and paragraph 8(2) of Part II of the 1998 Scheme for Construction Contracts) the final date for payment was 17 days after the date of the invoices (the invoices set the due date).
Unfortunately, there is a mismatch between the Construction Act 1996 and the Late Payment Act 1998. They do not work well together. This is a concern, given that both were designed to ensure prompt payment.
Under section 4(2) of the Late Payment Act 1998, interest starts to run on the day after the “relevant day” for the debt. Under the the construction contract in question, the contractor argued what most would expect: the “relevant day” was the final date for payment imposed by the Construction Act 1996 (in other words, day 17).
Somewhat surprisingly, the employer said the “relevant day” was not until day 30. It argued that, under section 4(3) of the Late Payment Act 1998, if the parties to the contract have agreed a date for payment, then that is the “relevant day” but, in all other cases, under section 4(5)(b), the “relevant day” is 30 days after the later of:
- performance of the obligation; or
- notification of the debt.
The employer asserted that the “final date for payment” under the Construction Act 1996 is not equivalent to the “date for payment” under section 4(3) of the Late Payment Act 1998. Unfortunately, the wording of the section seems to allow for this uncertainty:
“4(3) Where the supplier and the purchaser agree a date for payment of the debt (that is, the day on which the debt is to be created by the contract), that is the relevant day …”
The words in brackets are meant to clarify the position, but they are inconsistent with the terminology adopted by the Construction Act 1996 and so could confuse the position when you try and “combine” the effect of the two statutes.
When was the debt created?
I suggest that the debt was created when the works were carried out. Then, the debt became due for payment once an application (an invoice) was submitted. Finally, expiry of the 17 day credit period (you might even call it an administration period, to allow the payment to be processed) leads to the “final date for payment”. Surely this ought to be the “relevant day”, or the “date for payment”, triggering statutory interest?
However, the employer argued that, as the parties had not expressly agreed a “date for payment”, section 4(5) of the Late Payment Act 1998 applied:
“4(5) In any other case, the relevant day is the last day of the period of 30 days beginning with:
(a) the day on which the obligation of the supplier to which the debt relates is performed; or
(b) the day on which the purchaser has notice of the amount of the debt or (where that amount is unascertained) the sum which the supplier claims is the amount of the debt,
whichever is the later.”
Adopting the employer’s construction had the result that statutory interest did not run until a further 13 days after the final date for payment under the Construction Act 1996.
The construction contract’s final date for payment
The effect of section 110 of the Construction Act 1996 is to imply into a construction contract an agreed term providing for a final date for payment 17 days after the due date. As the parties had agreed a date for payment, albeit by means of an implied term, that date should trigger statutory interest.
In my view, the “final date for payment” under the Construction Act 1996 ought to be equivalent to “the agreed date for payment” under the Late Payment Act 1998. There should be no room for doubt about this and it’s a pity the forthcoming amendments to the Construction Act 1996 will not address this anomoly.