When is prompt payment not prompt payment

When is prompt payment not prompt payment

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