What Can a Contractor Do if an Employer Refuses To Pay?
Late payments or refusals to pay are sadly part of life in the construction industry, as in many other business-to-business transactions.
A well-drafted construction contract should always make provision for overdue payment. It should clearly set out what will happen if payments are late or not made at all. A solid contract ensures that both the employer and contractor are on the same page regarding remuneration and other crucial details. It will also make it easier for you as the contractor to act if payments are late or withheld altogether.
Unpaid invoices can severely impact cash flow and can be a significant threat, if not terminal, for many businesses — not just sole traders and smaller concerns.
Payment for work you have satisfactorily completed is your legal right. You should not be frightened about getting tough with non-payers.
What Does UK Law Say About Non-payment?
UK law offers defined and formal protection to contractors should they find themselves the victim of an employer refusing to pay.
If the contract does not provide for late payment interest, the parties are subject to the Late Payment of Commercial Debts (Interest) Act 1998. The Late Payment of Commercial Debt Regulations 2013 allows a contractor to charge interest and statutory fixed costs on any invoice paid outside the payment terms agreed in the construction contract.
The interest chargeable on an outstanding payment is quantified at 8 per cent over the ‘official dealing rate’ found on the Bank of England website. You can also get a fixed level of compensation between £40 and £100 for each later invoice and sometimes even your reasonable costs to recover the unpaid amount. These charges are set out in the legislation.
In reality, your ability to recover substantive debt with ease may largely depend on the terms of the initial written agreement between the contractor and employer.
UK law supports the right of contractors to pursue unpaid invoices and sets minimum payment standards. It also expressly prevents some kinds of contract clauses designed to slow or frustrate payment, for example, a ‘pay when paid’ clause is not valid even if you agreed to it. Still, the speed and efficacy of chasing withheld payments — plus the ability to recover additional costs — is significantly improved if you have a well-drafted contract in place.
How To Collect Unpaid Invoices as a Contractor
Don’t Delay — Act Quickly
It’s human nature to let payment of an outstanding invoice slide somewhat if you think you will ultimately receive compensation. Few contractors wish to develop a reputation for being overly sharp or unreasonable. However, if an invoice is unpaid, it is always best to follow it up quickly.
Before chasing, make sure you have fully understood the payment terms and that you have fully complied with all the pre-conditions for payment. This could include sending the application in a certain form to a certain address as well as by email. Many contracts stipulate that an application must be received by a certain day to be valid. These formalities matter.
Issue a polite reminder after a few days. Being overly aggressive early on may result in loss of future business, and it’s not necessary to flex your muscles at this stage. Coming across as threatening can also damage your business reputation.
Sometimes a personal phone call can be more effective than a letter which is easily ignored. Extending a personal touch or even meeting face-to-face can often exert more leverage than an email or letter.
However, don’t hold off chasing an earlier payment application in writing for too long. Written reminders can provide a valuable audit trail if you need to take more decisive action later on.
Consider Whether You Wish To Suspend Performance for Non-payment
If the contract does not have a term allowing you to suspend work for non-payment then you have a statutory right under Section 112 of the Housing Grants Construction & Regeneration Act 1996 as amended. However, you must have a notified sum and you must serve the correct notice with the correct warning period.
If you suspend work unlawfully, even because you have missed a technicality, you may be liable for damages for breach of contract and/or termination.
If you are thinking of suspending work you should contact us to assess whether you have the right to suspend.
Engage a Construction Law Specialist Not a General Debt Collection Company
If reminders and letters continue to be ignored, then a contractor can engage a construction law specialist to recover the money or take legal action.
It is a mistake to use a debt collector that does not understand the special rights and obligations that arise in construction. This can lead to costly mistakes, wasted time and wasted money.
The late payment legislation permits ‘reasonable costs’ incurred as part of debt collection to be added to the balance owed, alongside the interest and statutory costs.
If you intend to take legal action or instruct a specialist Solicitor, use this as a warning to the employer. Sometimes this can spur them into issuing payment.
It is also sensible to put them on notice if you will be looking to recover any attendant costs and interest in addition to the unpaid invoice.
Can You Terminate the Contract Due to Non-payment?
In theory, a late payment could be treated as a breach of contract. But it is essential to seek legal advice before taking such drastic action as terminating the agreement.
Terminating the agreement without an expert assessment of the consequences could easily make the situation worse.
Some construction contracts set out clearly what constitutes a breach of contract and how to follow the termination procedure, while others do not.
When chasing payments, it is critically important to give prior notice of an intended termination by stating that prompt payment is essential to the contract, and continued late payments will be viewed as a breach. Any notice must take note of the procedures required by the contract.
If the correct procedures are followed, persistent late payment should provide you with the right to terminate the contract if you wish to do so.
It is always essential to take independent, professional advice to ensure that a contract termination does not prejudice your position and end up making it harder to recover the debt in the long run.
Always ensure that the payment terms are set out clearly in writing before you commence a contractual business arrangement. If they are not, the legislation will come to your aid, but you may need help to understand how it works.
The best form of protection against unpaid invoices is a contract that has been thoroughly and professionally drafted with your best interests in mind from the outset. Such a contract should include a timeframe for payment of invoices and penalties for late payments.
Helix Law can offer robust and professional advice which will protect your contractor business and ensure that your payment terms are watertight. Explicit contract provisions make it easier and quicker to recover unpaid money.
Helix Law is also available to act for those contractors who are already waiting on payment and may not have the benefit of a clear contract to rely on. We offer targeted and strategic advice to identify the best — and most cost-effective — solution for your unpaid invoice issues.