Prompt payment regulations: Is it time to revisit the past?

The saying that “cash is king” can be applied to many industries, but nowhere does it find greater application than in the construction industry.

13 Jul 2021 5 min read Dispute Resolution Alert Article

At a glance

  • Cash flow is crucial in the construction industry, and the South African construction sector is facing financial pressure and cash flow issues, exacerbated by the COVID-19 pandemic.
  • Jurisdictions like the UK and Australia have enacted legislation to regulate payment regimes in construction contracts, ensuring predictable and transparent payment practices and providing a quick adjudication procedure for payment disputes.
  • In South Africa, there was a proposal to introduce "Prompt Payment Regulations" similar to those in other jurisdictions, but the draft regulations were withdrawn due to concerns about constitutional validity. Revisiting and implementing these regulations could benefit smaller contractors, support job creation, and ensure fair and timely payment throughout projects. However, challenges may arise in state-funded infrastructure projects where payment obligations might be difficult to fulfill.

In the construction sector, cash flow and the flow of money down the project hierarchy, from an employer to contractors and then on to subcontractors, is vital to the success of any project. In the absence of adequate or effective cash flow, projects stall, contractors and subcontractors are placed under financial pressure and, ultimately, the timeous completion and overall satisfactory achievement of project milestones, including the contracting relationships, are negatively affected.

As has been the case for many years, the South Africa construction industry is under severe financial pressure, which has impacted the cash flow on projects. These cash flow issues have been exacerbated due the ongoing COVID-19 pandemic and have resulted in employers resorting to withholding payments that are due to contractors. There has also been a continued reliance on “pay when paid” provisions, which has left many subcontractors without any recourse when seeking payment for the work which they have performed.

This has brought the need to regulate contractual payment regimes in South African construction contracts back into the spotlight.

Alternative payment regimes

In jurisdictions such as the UK and Australia, legislation, such as the Housing Grants Construction and Regeneration Act 1996 and the NSW Building and Construction Industry Security of Payment Act 1999, were enacted to regulate payment regimes under construction contracts, with the ultimate goal of ensuring sustainable cash flow. While the mechanisms provided for in the aforementioned legislation differ slightly, they both have two main objectives:

  1. To establish payment practices that are predictable, transparent and regulated, thus ensuring that any party that contracts to carry out construction work or supply related goods or services on construction projects, promptly receives and recovers all payments which are due to it.
  2. In the event that there is a dispute relating to a payment, to provide for a quick, inexpensive and statutorily prescribed adjudication procedure to resolve such disputes.

Crucially, these legislations also provide for a prohibition on the “pay when paid” or conditional payment provisions which are common in the South African construction industry.

Prompt Payment Regulations

The concepts around regulated payments are not new in South Africa. In May 2015, the Minister of Public Works issued a notice of the ministry’s intention to amend the Construction Industry Development Regulations of 2004 (as amended) published under the Construction Industry Board Act 38 of 2000. This amendment proposed the enactment of “Prompt Payment Regulations” similar to those in the jurisdictions outlined above.

The Prompt Payment Regulations were viewed as a breath of fresh air and a revolutionary option for the industry as they ultimately sought to:

  • prohibit conditional or “pay when paid” clauses in contracts;
  • prohibit the withholding of payment and requiring regular progress payments within defined time frames;
  • introduce the right to suspend construction activities or performance for non-payment;
  • introduce the right to charge interest on late payments; and
  • introduce a mandatory statutory form of adjudication for resolving payment disputes.

Despite the Prompt Payment Regulations being regarded by many as a step in the right direction, in October 2017 in response to a question in the National Assembly, the minister confirmed that the draft Prompt Payment Regulations had been withdrawn, seemingly on the grounds that the they had “received the legal opinion from the Office of the Chief State Law Advisor which emphasised that the regulations were ultra vires and if challenged would not pass the constitutional validity threshold”.

Since the confirmation of the withdrawal of the draft Prompt Payment Regulations, it does not appear that any further steps have been taken towards amending such regulations to address the issues raised in the legal opinion. The draft regulations and the ground-breaking ideas which they represent have seemingly been indefinitely mothballed. 

Large infrastructure project opportunities

The past year has seen the South African Government pledge more to infrastructure projects and identify high priority road, rail and energy projects to be completed over the next 10 years. With the focus shifting towards these infrastructure projects to revive the South African economy, it could be argued that now is an opportune time to revisit the Prompt Payment Regulations.

The adoption of these regulations would ensure that smaller contractors, who rely on timeous payments to stay afloat, are presented with the best opportunity for survival. The survival of these smaller contractors is essential for job creation in South Africa and for economic growth.

Further, while many standard form construction contracts, such as the JBCC and NEC, provide for dispute resolution mechanisms, it is common practice in the industry to allow disputes to accumulate and to thereafter have a large, costly adjudication or arbitration at the end of a project. The imposition of a mandatory statutory form of adjudication for resolving payment disputes will allow for disputes to be dealt with as and when they arise, thus ensuring that contractors are compensated fairly and timeously throughout the life of a project. 

Despite the need for interventions to ensure that the payment practices in South Africa align with international best practice, the success of the regime proposed under the Prompt Payment Regulations is questionable, in particular on state-funded infrastructure projects where cash strapped state-owned entities, municipalities and departments may simply be unable to comply with their payment obligations. Accordingly, any regulations would need to have regard to the present-day realities and the various treasury and procurement regulations.

The Prompt Payment Regulations provide the best solution for the creation and preservation of a sustainable construction industry in South Africa. While the formulation and implementation of these regulations could be problematic, especially where the state is involved, the benefits which could be achieved through the enactment of such regulations far outweigh any potentially detrimental effects. The time is therefore right for the regulations to be revisited, failing which, South Africa could fall behind its counterparts around the world.

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