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Clifford Chance

Clifford Chance

Construction Insights

Credit crunch - is it time for Payment Charters with teeth?

We have been spending considerable time this year dealing with the fall-out from Carillion's liquidation - as well as meeting with board members of our clients and cross-industry contacts to discuss the issues it has exposed and potential ways forward.

This period has also seen the promotion of a private members Bill on retention deposit schemes (the 'Aldous' Bill) as well as consultation by BEIS on retention abuses across the industry.

However, it seems fair to say that the improper withholding of retention is only part of a much wider industry cash-flow issue. Delayed interim payments (whether or not driven by under-pricing and low-margin culture) have seen large numbers of Carillion subcontractors suffer hugely, whilst at the other end of the contractual chain, Employers and Lenders have been left out of pocket by mismatches between progress and payments and the belated discovery that performance security is inadequate to effect quick completion of projects with the same subcontractor team.

Contrary to some perceptions, lenders and developers/sponsors are not disinterested in cash-flow between contractors, subcontractors and suppliers. The withholding of monies in the contractual chain leads to unhappiness which leads to delay and disruption and ultimately losses all round - this is why most enlightened stakeholders seek a broadly cash-neutral position reflecting progress.

One idea we have been discussing with clients is a more muscular payment charter. Of course, charters themselves are not a new idea - for example, the Prompt Payment Code and Construction Supply Chain Payment Charter have been very worthwhile initiatives - but even when the use of a fair payment charter is insisted upon throughout the supply chain, they provide no additional remedy in the event of non-compliance.
Has the time therefore come for clients to (i) insist on the adoption of a fair payment charter and (ii) provide in their contracts that if the charter is not complied with (e.g. monies are withheld without the requisite notice), that they can pay affected subcontractors and specialists directly and further set off additional sums to cover its administrative costs in doing so?

There is a strong counter-argument that subcontractors and specialists are already adequately protected with non-payment remedies, including of course adjudication and winding up remedies – it is simply that many chose not to exercise such rights or are/feel pressurised into not doing so. That said, if clients required some form of project payment transparency they would be able to monitor payment flows on the project for themselves without subcontractors needing to take action.

Whilst this doesn’t deal with the crippling impact of low margins and depressed Government sponsored pipelines, we think its certainly an idea worth talking about. Let us know if you want to join that conversation.