Reg. 113 of the Public Contracts Regulations 2015 (PCR2015) establishes rules for the payment of undisputed invoices within 30 days. Reg.113 clearly aims to shorten the delay in payments down the supply chain and, somehow, comes to make up for the fact that reg.71 PCR2015 does not include some of the optional mechanisms in Art 71 of Directive 2014/24 to that effect, such as the possibility to create mechanisms of direct payment
to subcontractors.
On the whole, reg.113(2) PCR2015 tries to achieve the goal of ensuring prompt payments down the supply chain by establishing that contracting authorities shall ensure that every public contract which they award contains suitable provisions to require:
(a) that any payment due from the contracting authority to the contractor under the contract is to be made no later than the end of a period of 30 days from the date on which the relevant invoice is regarded as valid and undisputed;
(b) that any invoices for payment submitted by the contractor are considered and verified by the contracting authority in a timely fashion and that undue delay in doing so is not to be sufficient justification for failing to regard an invoice as valid and undisputed; and
(c) that any subcontract awarded by the contractor contains suitable provisions to impose, as between the parties to the subcontract (i)requirements to the same effect as those which sub-paragraphs (a) and (b) require to be imposed as between the parties to the public contract; and a requirement for the subcontractor to include in any subcontract which it in turn awards suitable provisions to impose, as between the parties to that subcontract, requirements to the same effect as those required by this sub-paragraph (c).
(b) that any invoices for payment submitted by the contractor are considered and verified by the contracting authority in a timely fashion and that undue delay in doing so is not to be sufficient justification for failing to regard an invoice as valid and undisputed; and
(c) that any subcontract awarded by the contractor contains suitable provisions to impose, as between the parties to the subcontract (i)requirements to the same effect as those which sub-paragraphs (a) and (b) require to be imposed as between the parties to the public contract; and a requirement for the subcontractor to include in any subcontract which it in turn awards suitable provisions to impose, as between the parties to that subcontract, requirements to the same effect as those required by this sub-paragraph (c).
Where no such provisions exist, reg.113(6) PCR2015 determines that very similar terms will be implied in the relevant contracts.
Hence, the three main obligations that derive from reg.113(2) and (6) are: a duty to verify invoices in a timely fashion, a duty to pay within 30 days all invoices regarded as valid and undisputed (which is inexcusable in case of undue delay in the verification process), and a duty to include (or have implicitly included) those terms in all contracts and subcontracts.
Reg.113(7) PCR2015 requires contracting authorities to publish on the internet each year how they have performed on this including the proportion of invoices paid on time to their first tier suppliers /prime contractors.
There are several issues regarding reg.113 that deserve detailed comments (Pedro has focused on the impact of this rules on highly-complex contracts here).
Reg.113(7) PCR2015 requires contracting authorities to publish on the internet each year how they have performed on this including the proportion of invoices paid on time to their first tier suppliers /prime contractors.
There are several issues regarding reg.113 that deserve detailed comments (Pedro has focused on the impact of this rules on highly-complex contracts here).
(1) Need to coordinate Reg.113 PCR2015 and Directive 2011/7 on late payments
Directive 2011/7/EU on combating late payment in commercial transactions imposes specific obligations to ensure prompt payment in commercial transactions, both when payments are due to the main contractor, and when they are due between undertakings (in the case of subcontracts) [see Department for Business, Innovation and Skills, A Users Guide to the recast Late Payment Directive (October 2014)].
Those obligations clearly apply in concurrence to the specific rules of reg.113, as implicitly acknowledged in its paragraph (3), whereby reg.113(2) is without prejudice to any contractual or statutory provision under which any payment is to be made earlier than the time required by that paragraph.
Under Art 4(3)(a)(i) Dir 2011/7, in commercial transactions where the debtor is a public authority, the period for payment cannot exceed 30 calendar days following the date of receipt by the debtor of the invoice or an equivalent request for payment. However, under Art 4(3)(a)(iv) Dir 2011/7, where a procedure of acceptance or verification, by which the conformity of the goods or services with the contract is to be ascertained, is provided for by statute or in the contract and if the debtor receives the invoice or the equivalent request for payment earlier or on the date on which such acceptance or verification takes place, the period for payment cannot exceed 30 calendar days after that date.
In any case, under Art 4(5) Dir 2011/7, for such acceptance or verification procedure to be valid for these purposes, its maximum duration must not exceed 30
calendar days from receipt of the goods or services, unless
otherwise expressly agreed in the contract and any tender documents and
provided it is not grossly unfair to the creditor (Art 7 Dir 2011/7).
In view of all this, there are two risks derived from an approach of strict compliance with reg.113(2)(a) and (b) PCR2015 that could leave contracting authorities exposed to pay statutory damages, without the necessity of a reminder, in the form of statutory interest for late payment--ie simple interest for late payment at a rate which is equal to the sum of the reference rate and at least eight percentage points.
The first risk is that contracting authorities may incur in liability for late payment under Art 4(3)(a)(1) Dir 2011/7 if they do not pay invoices within 30 days from their date because they engage in non-contractual acceptance or verification processes. In my view, the scant provisions in reg.113(2)(b) and 113(6)(b) are insufficient to meet the requirement for such procedures to be considered statutory for the purposes of Art 4(3)(a)(iv) Dir 2011/7. Hence, unless they include a regulation (even if by reference) of those verification and acceptance procedures in the public contract, they are bound to pay within 30 days from invoice date.
The second risk is that, as a combined effect of Art 4(3)(a)(iv) and Art 4(5) Dir 2011/7, and unless
otherwise expressly agreed in the contract and any tender documents and
provided it is not grossly unfair to the creditor (Art 7 Dir 2011/7), the combined length of those verification and acceptance procedures and payment cannot exceed 60 days. Consequently, contracting authorities cannot in any case pay later than 60 days after receipt of the goods or services, regardless of any autonomous interpretation of the requirements in reg.113(2)(b).
Consequently, as interpreted in compliance with Dir 2011/7, reg.113 PCR2015 imposes payment dates that are potentially stricter than a simple reading of the provision could indicate. In fact, reg.113 does not create any obligation to pay any quicker than contracting authorities had to do under EU law in any case.
The situation is different when it comes to payment obligations between contractors and sub-contractors, or further down the supply chain. In that regard, it is worth stressing that under Art 3(5) Dir 2011/7, contracts regarding commercial transactions between undertakings cannot specify payment periods beyond 60 days, unless otherwise expressly agreed in the contract and provided it is not
grossly unfair to the creditor (Art 7 Dir 2011/7). In that regard, the virtuality of reg.113(2) and (6) PCR2015 is to enforce that limit and, probably, reduce it where the contracting authority pays in a shorter period.
(2) Formal exceptions for NHS and schools' and academies' procurement
A second point that deserves comments concerns reg.113(1) PCR2015, which excludes contracts for the procurement of health care services for the purposes of the NHS within the meaning and scope of the National Health Service (Procurement, Patient Choice and Competition) (No. 2) Regulations 2013; and contracts awarded by a contracting authority which is a maintained school or an Academy, from compliance with the requirements of the regulation.
In my view, and given the discussion above, this exclusion is perfectly useless, at least in relation to the NHS. Given that all contracting authorities [Art 2(2) Dir 2011/7] need to pay within the 30 calendar day limits set by Art 4(3) Dir 2011/7, the exclusion of reg.113(1) has no practical effect. Under Art 4(4) Dir 2011/7, the UK could have decided to apply for longer payment periods for health services and other commercial activities carried out by public entities. However, the Government decided not to do so [see Department for Business, Innovation and Skills, Directive 2011/7/EU on Combating Late Payment in Commercial Transactions. Government Response to Consultation (February 2013)]. Similar reasons apply to the exclusion for schools and academies.
Thus, it is unclear why reg.113(1) PCR2015 aims to create such an exclusion and, in my view, it is in any case ineffectual.
(3) Statutory Guidance Issued under Reg.113 --Standard Term Not Useful At All
Reg.113(4) PCR2015 establishes that contracting authorities shall have regard to any guidance issued by the Minister for the Cabinet Office; and reg.113(5) PCR2015 further determines that such guidance may, in particular, recommend model provisions, including provisions defining the circumstances in which an invoice is to be regarded as being, or as having become, valid and undisputed including, for example: (a) provisions deeming an invoice to have become valid and undisputed if not considered and verified in a timely manner; and (b) addressing what is to be considered, for that purpose, to be a timely manner in various circumstances.
Such guidance has now been published and is available here. However, it simply provides a standard term on prompt payment that contracting authorities can include in their contracts. The standard terms simply provides the following (and a clause on sub-contracts):
1. Where the Contractor submits an invoice to the Authority [in accordance with paragraph [•]], the Authority will consider and verify that invoice in a timely fashion.
2. The Authority shall pay the Contractor any sums due under such an invoice no later than a period of 30 days from the date on which the Authority has determined that the invoice is valid and undisputed.
3. Where the Authority fails to comply with paragraph 1 and there is an undue delay in considering and verifying the invoice, the invoice shall be regarded as valid and undisputed for the purposes of paragraph (2) after a reasonable time has passed.
In my view, such a clause does not regulate the procedure for verification and acceptance to an acceptable standard in terms of Art 4(5) Dir 2011/7. In particular, the first paragraph is insufficient to consider that it sets out a "procedure of acceptance or verification by which the conformity of the goods or services with the contract is to be ascertained". Thus, contracting authorities will be well-advised to pay all their invoices within 30 days from their date in order to meet the requirements under Art 4(3) Dir 2011/7. Otherwise, they will have to start paying statutory damages in the form of statutory interest for late payment very soon and very often.