Skip to content

Proposed Reforms for Payment Provisions under HGCRA

The Housing Grants, Construction and Regeneration Act 1996 (‘HGCRA’)[1], modifies the common law [2] principle that entitled the contractor to payment once substantial completion has been achieved. A party to a construction contract which is more than 45 days is entitled to payment by instalments, stage payments or other periodic payments for any work under the contract [3] 

However, The HGCRA does not impose a minimum period of time after which a payment needs to be made. The parties are free to agree on the amounts of the payments and the intervals or the circumstances in which they become due [4]

Hence, the main contractor would be able to impose a long period of time before payment becomes due and payable, and consequently put pressure on smaller subcontractor’s cash flow.  The legality of this approach has been confirmed by the Technology and Construction Court which held that an adequate stage payment did not have to ensure instalment payments across the whole period of construction[5].

An analysis of Carillion’s balance sheets after its collapse, in January 2018, revealed such behaviours. Carillion was not an exception, as the tier one contractors have been found by the Department of Business, Innovation and Skills to be net receivers of trade credit from their subcontractors. In fact, the majority of contractors are Small and Medium Enterprises companies. They often act as subcontractors and are awarded contracts[6] based on the competitive tendering process. They often have little leverage on changing the length of payment cycles.

A possible reform would be to impose statutory maximum periods upon which payment becomes due and payable. An example of such statutory maximum periods can be found in The Public Contracts Regulations 2015 that imposes a duty to pay within 30 days of a sum becoming due on public sector contracts. To be effective, the proposed reform needs to have a set of regulations that imposes transparency on the payment terms for the parties to a construction contract, as well as penalties on the parties defaulting to issue timely payments. Such measures could resemble the one brought by the Reporting on Payment Practices and Performance Regulations 2017[7]

Whilst such reform requires additional cost and intervention in a contractual framework that is already regulated, it ensures frequent payments throughout the project’s supply chain and mitigates the risk of losing the money held by the contractors if they become insolvent before it is paid. Ultimately, it ensures that the client or main contractor will not use the subcontractor as creditor and that payments will be due frequently. 

 

[1]Part II as amended by the Local Democracy, Economic Development and Construction Act 2009 (‘LDEDC’)
[2]Appleby v Myers (1867) L.R. 2 C.P. 651; Hoenig v Isaacs [1952] 2 All E.R. 176; Bolton v Mahadeva [1972] 1 W.L.R 1009
[3]Housing Grants, Construction and Regeneration Act 1996 s.109(1)
[4]Housing Grants, Construction and Regeneration Act 1996 s.109(2)
[5]Grove Developments Ltd v Balfour Beatty Regional Construction ltd [2016] EWHC 168 (TCC)

[6]Public Contracts Regulations 2015 Regulation 113(2)
[7]The Reporting on Payment Practices and Performance Regulations 2017
 

Author:

Construction Solicitor

Hamza Sekkar

Partner & Director of Legal Engineering

 If you have any queries, please contact me on h.sekkar@sterlingstamp.com

Read the Previous Article treating: The payments’ provisions under UK legislative framework

Interested in Public Private Partnerships Check our article about: Public-Private Partnerships