ISG’s devastating demise is a sharp reminder that contractors and subcontractors need to be paid and paid on time. Late payment is common whether the employer cannot, or will not, release the cash. So, asks Lucinda Robinson, what can a contractor do if it is not paid on time?
Contractors have a “whole battery of weapons” available to help them, said one employer (Hexagon) in a recent battle with its contractor (Providence) in the Court of Appeal,[1] listing interest, the right to suspend and adjudication as just three firearms a contractor could use to force the employer to pay. Another weapon in the contractor’s arsenal, in many contracts, is termination for repeated late payments. This is potentially a good tactical choice for a contractor frustrated at repeatedly being paid late, or looking to extricate itself from a difficult contract, and, as the Court of Appeal found in Providence v Hexagon, it is easier to use than might be expected. Termination is quite an extreme remedy, though, so it is worth assessing the firepower of all these weapons before detonating that bomb.
1. Interest
Contractors are entitled to interest for late payment. Usually, the contract will provide for this and set a contractual rate. For example, the standard proposed rate in JCT contracts is 5%, and in NEC contracts it is 3%.
If the contractual rate is not a “substantial remedy”, it will be void and the Late Payment of Commercial Debts (Interest) Act 1998 will imply a rate, currently 8% over the official dealing rate per annum.[2] The official dealing rate of the Bank of England on 13 September 2024 was 5%, meaning the applicable rate was then 13%. The alternative contractual rate does not have to be this high to be a “substantial remedy”. It must be enough to both deter and compensate for late payment and provide a fair and reasonable alternative to the statutory position.
So how low must the rate fall to be ousted by the Late Payment Act? In Yuanda v Gear[3] the judge considered that 5% over base was high enough, but 0.5% was not, and indicated that somewhere between 3% and 4% above base might be sufficient, particularly if negotiated, following which 3% above base was approved in Kennel Club v Micro-ID[4].
Then, in September 2024, 2% above base was rejected as too low in A&V Building v Hopkins.[5] The decision was influenced by the inequality of bargaining position, use of the contractor’s standard terms and application of the 2% above base cap only to what the subcontractor could recover leaving the contractor able to claim the higher statutory rate. Consequently, a rate less than 3% could be open to challenge. The right to interest is an important one and may come in useful (especially if interest accrues to a significant amount or in combination with other claims), but contractors will need to take the initiative and claim the interest owed, because it is unlikely an employer will pay of its own volition.
2. Statutory Right to Suspend
Another option for an unpaid contractor is to down tools and stop work temporarily. A right to suspend for non-payment is enshrined in the Housing Grants Construction and Regeneration Act 1996, s.112(1). The contractor must give seven days’ notice of its intention to suspend and the right to suspend ceases as soon as payment is made. Suspending contractors are entitled to an extension of time and their reasonable costs and expenses, so they do not shoot themselves in the foot when exercising this right.
It is not possible to contract out of this right, so standard form contracts write it in. For example, JCT DB 2016 clause 4.11.1 states:
“If the Employer fails to pay a sum payable to the Contractor in accordance with clause 4.9 (together with any VAT properly chargeable in respect of that payment) by the final date for payment and the failure continues for 7 days after the Contractor has given notice to the Employer of his intention to suspend the performance of his obligations under the Contract and the grounds for such suspension, the Contractor, without affecting his other rights and remedies, may suspend performance of any or all of his obligations until payment is made in full”.
Any such suspension is a Relevant Event entitling the contractor to an extension of time (clause 2.26.5) and is also compensated for in cash (clause 4.11.2).
NEC4 includes the right to suspend by referencing back to the HGCRA in Y2.5, where it states that the exercise of this right by the contractor is a compensation event. The contractor must follow the compensation event process to obtain its time and money.
Suspension can be used very effectively. Even a notice of intention can work as a shot across the bows making the actual suspension unnecessary. If the suspension is implemented, it undoubtedly puts pressure on an Employer seeking completion sooner rather than later and allows the contractor to put a brake on at least some of its costs. Logistically, however, suspension is not necessarily straightforward; there is a supply chain and orders to manage, and recovery of all costs, including overheads and profit, is unlikely. Furthermore, it still allows employers extended payment terms, because the employer can withhold payment until the first notice is issued and then for another six days before the suspension takes effect. That cycle could repeat indefinitely.
3. Claims
The claims artillery at a contractor’s disposal includes statutory demands, court claims and adjudication.
- Issuing a statutory demand is the first step towards a winding-up petition, so packs a punch. The threat of insolvency can prompt a quick payment and push the contractor up to the front of the queue for payment.
- Issuing a claim for payment of an invoice can also trigger payment, because it can be difficult to defend if there is no dispute over the amount due.
- Adjudication is another option; quicker than a claim in court and assuming the sum to be paid is not contested, it should be relatively straightforward.
All these assaults may push the employer to pay before any decision is reached, but none of them cures the late payment itself, certainly not quickly or easily. The employer will still have had longer to pay (so the contractor should ensure its claim also includes interest), and the contractor will have incurred the significant costs of its legal action. Nor do these options provide an exit route for a contractor continually messed around by a late paying employer.
4. Termination
Termination can be an attractive option for contractors looking to escape a project where the employer repeatedly pays late or there are concerns about the employer’s long-term solvency. Termination should never be undertaken lightly or without advice, because termination on illegitimate grounds or a failure to follow procedure could put the contractor in repudiatory breach, allowing the employer to terminate and claim damages. Nevertheless, termination can be an effective solution.
There is a common law right to terminate for a breach that is so serious it goes to the heart of the contract. Does late payment fall into this category? Payment is the entire point of a contract for a contractor, but late payment is different to no payment, and if the contractor is still paid and can claim interest, the purpose of the contract is still fulfilled. Consequently, it is unlikely that one late payment will justify a common law termination, but what if there is a repeated pattern of late payment?
In Dalkia v Celtech,[6] Dalkia tried to terminate when three consecutive instalments were missed. The court decided that paying a total of £350,000 late, out of £15 million to be paid over a 15-year contract, was not repudiatory but it was material (there is a distinction). The contract permitted immediate termination for a material breach, so Dalkia’s contractual termination was upheld.
JCT DB 2016 and NEC4 allow termination specifically for late payment, so materiality is not relevant. Under NEC4, there is no need for a warning before the assault is carried out. Clause 90.4 states:
“the Contractor may terminate if the Client has not paid an amount due under the contract within thirteen weeks of the date that the Contractor should have been paid.”
Whilst the clarity is useful, a cynic might say the employer can get away with paying every instalment almost 13 weeks late.
JCT DB 2016 tackles this differently. The contractor must first fire a warning shot by notifying its intention (“Notice 1”). Then, if the employer does not rectify the situation within seven days, the Contractor can terminate by notice (“Notice 2”). A quick-firing contractor can thereby put the employer under more immediate pressure and reduce any extended payment terms to just seven days.
In Providence v Hexagon, Providence (the contractor) was a sharp-shooter and issued Notice 1 immediately when the date for payment passed. Hexagon paid before Notice 1 expired, so Notice 2 was never issued. A few months later, Hexagon defaulted again. Providence lost patience. Instead of issuing another Notice 1 and re-setting the clock (as Hexagon said it should have done), Providence terminated in reliance on its original Notice 1 and clause 8.9.4, which said:
“If the Contractor for any reason does not give the further notice referred to in clause 8.9.3 [Notice 2], but (whether previously repeated or not):
.1 the Employer repeats a specified default …
then, upon or within 28 days after such repetition, the Contractor may by notice [‘Notice 3’] to the Employer terminate the Contractor’s employment under this Contract”.
Providence said this meant Notice 1 was still standing; Hexagon had repeated the specified default (late payment), so Providence could terminate. The Court agreed. Whilst the commercial positions of both parties were argued and considered, it was the interpretation of the language used in clause 8.9.4 that determined the case. The phrase “for any reason” was wide enough to include the employer paying up, so when the Hexagon failed to pay again, Providence terminated immediately.
Employers, beware! Contractors do not have to tolerate repeated late payments. Provided Notice 1 was issued, even if a subsequent late payment is small in amount, or the defaults are months apart, under clause 8.9.3 of JCT DB 2016, the contractor can walk away.
Final Word
Contractors do have an arsenal of weapons to use against employers paying late, but it will not always be realistic to engage them. When plotting their strategy and tactics, contractors should start by identifying the contractual and statutory ammunition at their disposal, then move on to consider the strength of force they want to unleash and the collateral damage it may cause in terms of cost, time and relationships. In the fiercest of battles, suspension and termination may win the war.
[1] Providence Building Services Ltd v Hexagon Housing Association Ltd [2024] EWCA Civ 962
[2] Late Payment of Commercial Debts (Rate of Interest) (no. 2) Order 1998
[3] Yuanda (UK) Co Ltd v VW Gear Construction Ltd [2010] EWHC 720 (TCC)
[4] The Kennel Club Ltd v Micro-ID Ltd [2019] EWHC 1639
[5] A & V Building Solution Ltd v J & B Hopkins Ltd [2024] EWHC 2295 (TCC)
[6] Dalkia Utilities Services Plc v Celtech International Ltd [2006] 1 Lloyd’s Rep. 599
