Some finishing touches

Last June Alex Salmond, Scotland’s first minister, announced in the Scottish parliament that a payment clause would be introduced into all Scottish government contracts. This would require payments to be discharged within 30 days throughout the supply chain. In his typically robust style, Salmond said: “The effect of late payment on small businesses, particularly in the current economic climate, is completely unacceptable and must be stopped.”

The change was made last October, and other public bodies have been requested to follow suit. The clause requires tier one suppliers to include the following provision in all their subcontracts: “Payment to be made to the subcontractor within 30 days of receipt of a valid invoice, as defined by the subcontract requirements.” It continues: “Where the purchaser has made payment to the tier one supplier and the subcontractor’s invoice includes services in relation to which payment has been made by the purchaser, then the invoice shall be treated as valid and payment shall be made to the subcontractor without deduction.”

The tier one supplier must also ensure that its subcontractor has such a provision in any sub-subcontract, and so on along the supply chain. The Scottish Procurement Directorate is charged with the implementation of this measure which, in principle, should be welcomed throughout the Scottish industry. However, in relation to the purchase of construction services, it may need some serious tweaking to ensure that it will make a difference.

The drafting is rather convoluted, but there appears to be two strands to the clause. The first relates to the timing of payments. The second seeks to place a restriction on the payer’s ability to withhold money.

With regard to the first issue, at what point will the payee in the supply chain be able to submit a valid invoice? Such a submission could be made dependent on compliance with a number of conditions aimed solely at prolonging the payment process.

It is inevitable that the payee will need to make an application for payment with a wodge of supporting documentation. This is always a fertile ground for delaying tactics

It is inevitable that the payee will need to make an application for payment with a wodge of supporting documentation. This is always a fertile ground for delaying tactics – is the documentation sufficiently supportive of the application? The payer is likely to give itself time – perhaps a couple of weeks or more – to assess the application and accompanying documentation before it includes it in its own upstream submission. It may insist in the subcontract that the due date for payment be linked to some event under the main contract such as the issue of a certificate or, alternatively, stipulate that the due date be some weeks after receipt of the application.

I now come to the second issue: withholding. Following the due date in the subcontract, the payer will want to exercise any rights of withholding it has before allowing the payee to submit an invoice. So, by the time we get to submission of an invoice a long period may have elapsed since the application. Once the payer has received payment in respect of the payee’s work it cannot withhold payment downstream. But it would have been helpful if the clause had placed an obligation on the payer to disclose that such payment had been received. Otherwise the payee will be in the dark about this.

The failure of any tier one contractor (or those in lower tiers) to include the clause in subcontracts will, of course, be a breach of contract. What sanctions, therefore, are available to the public authority where this happens? It can sue for damages, but these are likely to be nominal unless loss arising from the breach can be demonstrated. In this context it would be difficult for the authority to demonstrate actual loss. It is suggested that the Scottish government issue a standard clause that gives the authority (and also procurers downstream) the power to make direct payments to subcontractors where the 30-day payment clause is absent in the subcontracts.

In making these points I do not wish to detract from this laudable effort of the Scottish government to curb payment abuse. All I’m suggesting is that the clause should be revisited to ensure that it is effective for construction. And the Scottish procurement directorate will need to monitor implementation. A simpler approach would be to put in place project bank accounts for public sector projects in Scotland. The main standard construction contracts now have provisions for project bank accounts. The problems I’ve highlighted would, then – for the most part – be resolved.