When is prompt payment not prompt payment

When is prompt payment not prompt payment

Posted by Pete Loughlin in Prompt Payments 06 Nov 2013

There’s a particular moral standard that simply doesn’t stack up in my view. It’s the standard that claims that if it’s legal, it’s OK. If it’s within the rules, it’s fair.

We see it all the time. Employees who feel they are unfairly treated are told “If you don’t like it, you know were the door is”. Put up or shut up! The employer knows that the employee needs the job and if they do walk, there’s plenty of potential replacements. Whether or not the employee is right in their complaint, the employer is using or even abusing their power over their staff. It’s not fair.

Large corporations spend huge sums of money employing the best legal minds in the world to show how they can arrange their affairs so that they avoid paying tax. Perfectly legal practices that are quite blatantly unfair – unfair to those tax payers who, whether out of a sense of decency or simply because they can’t afford the best legal minds in the world, pay their fair share of tax.

I’m not referring to the grey areas – there are lots of them – situations that are open to interpretation and opinion. No, I’m referring to those cases where any reasonable person would agree that a course of action is clearly, without ambiguity, contrary to the spirit and intention of a set of rules, a contract or an agreement. The fact that there is no breach of rules does not make the situation fair – it simply makes it legal. Which is why I’m astonished at the response from Philip King recently on the OB10 blog to a question about prompt payment.Purchasing Insight logo

In a nutshell, Quentin Brook described a situation whereby a large business in the UK that has signed up to the Prompt Payment Code behaves in a way that could be seen as inconsistent with the spirit and intentions of the code.

The Prompt Payment Code (PPC) asks that private sector companies treat suppliers fairly and is supported by EU legislation on late payment that requires businesses to keep to 60 day payment terms. For public sector organizations it’s 30 day terms. The unnamed organization that attracts Quentins ire pays in 60 days starting from the beginning of the month following reciept of the invoice. To any normal person this means they pay in between 60 and 90 days – contrary to the spirit and intention of the EU legislation. Further, the customer requires the supplier to opt out of UK legistlation that would allow them to impose penalties for late payment. Quentin asks “Should a company who asks/forces it’s suppliers to “opt out” of the Late Payment Regulations, be allowed to continue as a signatory the Prompt Payment Code?”

Philip King is chief executive of the Institute of Credit Management (ICM) which manages the code on behalf of the Department for Business, Innovation and Skills. His response is extraordinary.”No supplier – big or small” he says “should sign a contract containing terms they are not happy to accept.”

Wrong answer Philip!

The prompt payment code is not law. Philip King has not been asked for legal opinion. He has been asked whether there is an inconsistency between agreeing to pay promptly and thereby gaining the kudos for being seen to do so at the same time as paying in up to 90 days and requiring suppliers to give up their legal rights. Of course there is an inconsistency! I cannot see the remotest ambiguity.  How can the manager of PPC support or imply support for this behavior?

The whole point about the prompt payment code is to redress the balance of power between financially strong buying organizations and their relatively weaker suppliers. It is not the law. It’s a code of conduct. It is in the same spirit of employment laws that protect the interest of individuals against potential abuses by their employers.

The increasingly popular tactic of extending payment terms to suppliers in order to maximize working capital and DPO has become commercially abusive behavior. Unchecked, this behavior threatens small business and the economy generally. That’s why it’s a good thing to encourage prompt payment. But when the guardians of the code themselves use the same bully boy language as the unscrupulous employers – “you know the rules – take it or leave it” (to paraphriase Mr King), they are no better than bullies themselves.

The prompt payment code is well intentioned but it should serve the interests of hard pressed suppliers – not justify the abuse of power that some large corporates indulge in. It is hopelessly naive to suggest that small supplier refuse to abide by their large customers’ terms and conditions. If they did so, they’d have no customers.

Managing the PPC  requires a level of empathy and knowledge of the real world that Philip King and the Institute of Credit Management is failing to exhibit.

Pete Loughlin can be found on twitter @peteloughlin

  • Thordur Erlingsson November 6, 2013 at 10:53 pm /

    Great post Pete, using the SMB´s as a bank is the worst kind of cash management.

  • philip king November 7, 2013 at 12:42 am /

    Peter

    The PPC does not support the use of clauses that “significantly reduce the interest and compensation payable and below that provided by the Late Payment Regulations”. If a signatory is imposing such clauses I would welcome the opportunity to address the issue with them but I can’t do so unless I know who they are.

    Challenging the status of a Code signatory is simple at http://ppc.promptpaymentcode.org.uk/ppc/challenge.a4d and if the terms are being imposed across the organisation’s supplier base then no individual supplier should be identifiable if they make an anonymous challenge or do so through a representative business body.

    My point about not signing a contract containing unacceptable terms is simply that, by doing so, you remove any opportunity for legal redress. Bad and exploitative behaviour by big business needs to be stamped out but acquiescing encourages it. Businesses wouldn’t sell products at a loss and they shouldn’t sell on payment terms that will cause them to lose money either.

  • Pete Loughlin November 7, 2013 at 4:16 am /

    Philip’s argument is well made but there’s one aspect that I have a fundamental problem with.

    “Businesses wouldn’t sell products at a loss and they shouldn’t sell on payment terms that will cause them to lose money either”

    Businesses do sell at a loss. In some circumstances they have no choice. Industries in many counties are heavily subsidised by governments in order to protect them from more competitive overseas markets. Without this protection, local economies, jobs and the livelihoods are vulnerable. It is this sort of support and protection that small business needs.

    Theoretically, small businesses could refuse to acquiesce – like the school kid could give the big bully a punch on the chin and refuse to hand over his lunch money. Yeah, right!

    The reality is that small business needs support and big business needs encouragement. This problem won’t fix itself and the Institute of Credit Management in the UK and similar bodies elsewhere have a responsibility to step in, help rather than blame the victims and level the supply chain playing field.

  • philip king November 7, 2013 at 12:35 pm /

    Absolutely – that’s why we need challenges to be raised against Prompt Payment Code signatories so that we can step in as you suggest.

  • Quentin Brook November 7, 2013 at 3:23 pm /

    Philip,

    What I am trying to do, is get the PCC to state their policy on this publicly, so that it can be applied to all.

    I don’t want to rectify the situation with just my client. I want the PCC to state, very clearly and publicly that “if you want to be a PCC signatory, then you have to accept and comply with the UKs Late Payment Regulations in full”.

    To date, you haven’t done that. Why does the PCC need challenges to be raised?

    Why can’t the PCC just decide that it’s the right thing to do, and then announce the new condition for PCC membership, publicly, and write to all your PCC members informing them of the new policy?

  • Quentin Brook November 7, 2013 at 4:41 pm /

    As just posted on the OB10 blog site:

    Use of these terms is rife amongst PPC signatories. I took a look at three names I recognised from the signatories list, and googled the company name + “substantial remedy” + late payment.

    I found, quickly, T&C examples for all three companies that contracted out of the Late Payment Regulations:

    Santander
    http://www.aboutsantander.co.uk/media/1050/standard_terms_and_conditions.pdf

    Sheffield City Council
    http://www.sheffield.gov.uk/dms/scc/management/corporate-communications/documents/transport/streets-ahead/Streets-Ahead-Contract/Streets Ahead Contract.doc

    National Grid
    http://www.nationalgrid.com/NR/rdonlyres/DD1F7BA7-583A-42E5-8F6F-72A639725AB8/55282/SCCs1007IBclean.pdf

    This took me just five minutes. Examples are not hard to find. Will you act upon these as a start?

    Quentin – See more at: http://www.ob10.com/OB10Blog/post/2013/08/14/Late-payment-still-grabbing-the-headlines.aspx#sthash.fwyJhQn4.dpuf

  • philip king November 7, 2013 at 11:56 pm /

    Quentin

    The ICM hosts and administers the Prompt Payment Code for BIS and has no remit to announce a new condition or make any changes to the BIS wording. David Cameron announced that the consultation on late payment would include the question: “How it can strengthen its existing government-backed Prompt Payment Code”. I’m sure you’ll take the opportunity to submit this suggestion as part of the consultation process.

    Thanks for the three examples and yes, I will talk to the organisations concerned. I notice that, in two of the cases, the documents you’ve found are dated well before the organisations became signatories of the PPC but they nevertheless raise valid questions which I’m happy to ask.

  • Quentin Brook November 8, 2013 at 10:53 am /

    OK, thanks Philip. I feel we have at least reached some clarification.

    Currently, the PPC does not require its signatories to either:
    a) pay within reasonable periods
    Or
    b) not force their suppliers to contract out of the UKs Late Payment Regulations.

    The only thing it appears to do, is encourage its signatories to pay “on time”, rather than “promptly”, so it’s name is misleading.

    At the beginning of this conversation, on the OB10 blog, you asked about the payment performance of our client. I could not answer that question at that time, because despite the fact that we have been delivering services to them for 3 months, we have yet to receive a penny. The first invoice was due this Monday just gone, and I can now confirm that we did not get paid on time. We had to chase it. Business as usual for small suppliers.

    Thanks for your input over the last few weeks. I hope to receive some reply from Michael Fallon on this subject, an email which I copied you in on.

    Regards

    Quentin

  • Quentin Brook November 22, 2013 at 2:09 pm /

    Philip,

    How did you get on with those three signatories? Did they agree to change their behaviour or did they tell you (quite justifiably from their perspective) that they wouldn’t because the PPC doesn’t actually require them to?

    And how did your meeting go with Mathew Hancock on the 18th November? He has, so far, provided no reply to any emails I’ve sent him – that’s no reply at all. Nothing.

    Meanwhile, we got an order from a division of Invensys today (a PPC signatory). Their Standard Terms of Purchase? 120 days! and the infamous late payment opt out clause is there, providing just 2% above EURIBOR interest if they pay late. The contract even says that time is not of the essence in relation to payment! You really couldn’t make it up. Everyone’s at it – not least, PPC signatories!

    I wait for an answer Matt Hancock, but doubt I’ll get a clear one. I expect he’ll dance around the issue somewhat, and in five years time, we’ll all still be moaning about how late payment is such a problem, and how the PPC should be given some teeth.

    I would be interested to know if you raised this specific issue with him, and what he said.

    Thanks

    Quentin

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