Late payment of construction debts

A lot of ink has been spilled over late payment of debts, and I suspect that is due in part to the huge industry that has arisen around the pursuit of said debts. The issue is as follows. Bob agrees to pay Pete to provide a service, Pete provides that service and then Bob doesn't pay for it. The public sector can often be particularly difficult, as can very large organisations, taking 60+ days to pay as a matter of routine. Imagine if you paid your restaurant bill 60 days later; it just wouldn't happen.

Fortunately, the law is not that complicated when it comes to debt recovery. If the debt is over the insolvency limit, is undisputed and the threat of bankruptcy or liquidation is real, a statutory demand is often appropriate, and can often produce results quite swiftly.

In other cases, like when the debt is disputed on spurious grounds, the creditor can simply take the debtor through the county court. However, as well as that being a bit of a slow process (even a summary judgment application can take months), it's getting increasingly expensive with court fees going in the ever upwards direction. Also, if you're dealing with an individual they can just ask the court to allow them to pay the debt by a stupidly low amount every month, such that the debt is repaid after the ice caps have melted and the earth hit by a comet.

In either of those cases, the creditor is at least entitled to add some costs on to the debt, so that the debtor has to make a contribution towards the debt recovery process. That used to be between £40 and £100 per debt, plus interest at 8% plus base. However, that isn't really enough (though our debtcollector service did, and still does, very impressively limit debt recovery fees to those levels for low value debts). The legislation has been changed and you can now claim reasonable costs from the debtor as of right (under the new s5A(2A)), which means being able to recover what you spent on the debt recovery process, so long as that cost is reasonable. Which is great.

In the construction industry, there's a more subtle method of recovering what often in reality amount to debts, which is adjudication. Adjudication is only appropriate when the debt is disputed, so it's perfect for those debts which are not being paid because of spurious grounds (e.g. because the debtor has not been paid himself, or perhaps is claiming some kind of unspecified counterclaim). It's also worth saying that it's best, really, for relatively high value debts (about £50k or so +). The full nature of adjudication is beyond the scope of this article, but in brief one advantage is that it's quick and can be enforced swiftly in the Technology and Construction Court.

Anyway, one disadvantage of adjudication is that the legal fees of carrying out the adjudication cannot be recovered from the opponent, and can be considerable (think a few thousand pounds at least for the most basic of adjudications, with tens of thousands of pounds not being uncommon). This was done on purpose in legislation in 2009 to prevent adverse costs making adjudication impractical.

Fortunately, the academic world of construction law has come up with a solution, and credit goes to Rachel Gwilliam at Blake Morgan for her paper on this topic earlier this year to the Society for Construction Law. The point is as follows.

s108A of the Housing Grants, Construction and Regeneration Act 1996 (as amended by a 2009 amendment implemented in 2011) made contractual provisions ineffective which provide for the payment of costs inter partes. In other words, if the construction contract says that one party will pay the other's costs, or says that the adjudicator will have the power to order those costs to be paid, that bit of the contract will not work.

However, the Late Payment of Commercial Debts (Interest) Act 1998 (as amended by the Late Payment of Commercial Debts Regulations 2013 that came into force on 16 March 2013, which for the avoidance of any doubt were UK regulations not EU regulations, though they were implemented as a result of an EU directive – simples) says otherwise. It says that a supplier is entitled to between £40 and £100 plus any further reasonable costs, and that can only be contracted out of if the contract provides for a substantial remedy, and it might be argued that it's not a substantial enough remedy unless the contract provides for exactly what the Act provides for.

Ms Gwilliam's academic paper goes on to discuss the use of EU law to give the Late Payment legislation primacy. The argument goes as follows. The Law Payment legislation comes from an EU directive, and as any EU law lecturer now desperately seeking alternative post-Brexit employment will tell you, cases like van Duyn and Foster v British Gas tells us that an EU directive has vertical direct effect, and therefore it can be used against an emanation of the state (e.g. those pesky public sector bodies I referred to earlier). But not to private organisations.

Some other master academic will be able to cite case law that says that directives can be used as a matter of interpretation in cases like this, but I would have thought the more simple position would be that the late payment legislation came later than the construction legislation, and therefore the late payment legislation takes primacy.

What's a bit different about adjudication, though, as compared to first instance judge decisions is that they're almost impossible to challenge. Therefore it's worth arguing the point by way of adjudication, and the adjudicator may agree (indeed, it's also worth arguing the opposite if you're on the other side for the same reason – litigation is just like that sometimes). If that happens, it will be extremely difficult to appeal it.

That's actually exactly what happened in Lulu Construction Ltd v Mulalley & Co Ltd [2016] EWHC 1852 (TCC), the judgment for which was handed down in March 2016, but us mere mortals have only received a copy in August 2016. The adjudicator made a finding that he was entitled to award just under £50k of costs (I told you adjudication could be expensive) under the Late Payment legislation. On appeal, the adjudicator's decision was upheld by the Technology and Construction Court.

So there it is. Parties in the construction industry who are due to be paid have been given a weapon to use against pesky creditors who refuse to pay what's due. It's a bit of an uncertain weapon, but a weapon nonetheless, which will no doubt be used a great deal in the future. At least until the government catches up and changes the law.