Clause 14.8 - What happens if the Payments are Delayed - Navigating Knowledge Across Domains (2024)

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Overview

Clause 14.8 addresses the consequences faced by the Employer if they fail to make timely payments to the Contractor as per the terms outlined in Sub-Clause 14.7 [“Payment”]. This clause is crucial in safeguarding the Contractor’s financial interests.

Key Features

1. Entitlement to Financing Charges: The Contractor is entitled to receive financing charges on the amount unpaid during the period of delay. This entitlement kicks in automatically if the payment is delayed beyond the specified date.
2. Calculation of Charges: The financing charges are compounded monthly. The rate used for calculation is typically set at three percentage points above the discount rate of the central bank in the country of the currency of payment. This rate is significant as it reflects a reasonable compensation for the delay while being tied to a recognized financial benchmark.
3. No Formalities Required: The Contractor does not need to provide formal notice or certification to claim these charges. This aspect simplifies the process and acknowledges the Contractor’s right to timely payments.
4. Non-Prejudicial Right: The entitlement to these charges is in addition to any other rights or remedies the Contractor may have. It means that claiming these charges does not waive the Contractor’s right to pursue other legal remedies for breach of contract.

Purpose and Implications of Clause 14.8

• Objective: To compensate the Contractor for the financial impact of delayed payments by the Employer.
• Entitlement: The Contractor is entitled to financing charges on unpaid amounts if payments are delayed beyond the specified dates in Sub-Clause 14.7.
• Calculation of Charges: The financing charges are compounded monthly and are calculated based on a specified interest rate, typically three percentage points above the central bank’s discount rate of the payment currency’s country.
• Automatic Entitlement: The Contractor is entitled to these charges without the need for formal notice, certification, or prejudice to other rights or remedies.
• Protects Cash Flow: This clause is designed to protect the Contractor’s cash flow, which can be critically impacted by delayed payments.
• Incentivizes Timely Payment: By imposing a financial penalty on delayed payments, it incentivizes the Employer to adhere to the payment schedule.
• Balances Contractual Power: It provides a balance in the contractual relationship, ensuring the Contractor is not unduly disadvantaged by the Employer’s delayed payments.

Main Points to Keep in Mind

• Timeliness of Payment: Be vigilant about the payment schedule as per Sub-Clause 14.7 to avoid additional charges.
• Calculation of Charges: Ensure the correct calculation of financing charges based on the agreed rate above the central bank’s discount rate.
• Documentation: Maintain clear records of payment dates and amounts due to support any claim for financing charges.
• Awareness of Rights: Understand that the entitlement to financing charges is automatic and does not require formal procedures.

Expert Opinion:

• Fair Practice: Experts often view this clause as a fair practice in contract management, ensuring that the Contractor is compensated for the financial impact of delayed payments.
• Risk Management: It’s also seen as a risk management tool, providing a clear, predefined method of compensation for payment delays.

Practical Application

• Record-Keeping: Contractors should maintain meticulous records of payment schedules and delays to support any claim for financing charges.
• Awareness: Both parties should be aware of the implications of this clause to manage their financial and contractual responsibilities effectively.

Interaction of Clause 14.8 Delayed Payment with Other Clauses

1. Sub-Clause 14.7 [Payment]:
   • Direct Link: Clause 14.8 is inherently linked to Sub-Clause 14.7. The entitlement to financing charges under 14.8 is triggered by a delay in payments stipulated under 14.7.
   • Shared Objective: Both clauses work in tandem to ensure the financial obligations are met timely. While 14.7 outlines the payment schedule, 14.8 provides a remedy for non-compliance.
2. Clause 16 [Suspension and Termination]:
   • Potential Escalation: Continuous or significant delays in payment might lead the Contractor to consider actions under Clause 16, such as suspension or termination of the contract.
   • Interdependent Consequences: The use of Clause 14.8 could be a precursor to invoking Clause 16, highlighting the severity of payment delays and their potential to disrupt the contractual relationship.
3. Clause 20 [Claims, Disputes and Arbitration]:
   • Resolution Avenue: Disputes arising from delayed payments or the calculation of financing charges under Clause 14.8 may be addressed under Clause 20.
   • Complementary Mechanisms: While Clause 14.8 provides a financial remedy, Clause 20 offers a procedural path for resolving disagreements that may arise from its application.
4. Sub-Clause 14.6 [Issue of Interim Payment Certificates]:
   • Timing and Certification: Delays in issuing Interim Payment Certificates under 14.6 can directly impact the payment timeline, potentially triggering Clause 14.8.
   • Interlinked Processes: The efficiency and accuracy in the issuance of Interim Payment Certificates are crucial to avoid the activation of financing charges under Clause 14.8.
5. Clause 4.2 [Performance Security]:
   • Conditional Payments: The receipt and approval of Performance Security under Clause 4.2 can influence the payment timeline, indirectly affecting Clause 14.8.
   • Sequential Dependency: The Contractor’s financial protection under Clause 14.8 is partly contingent on the Employer’s actions under Clause 4.2.

Varied Phrasings and Shared Effects

• “A Cascade of Financial Implications”: Delays in payments (14.7) can trigger a cascade of financial implications, leading to financing charges (14.8), potential contract suspension or termination (16), and dispute resolution processes (20).
• “Interconnected Financial Safeguards”: Clause 14.8 acts as a financial safeguard, interlinked with the payment certification process (14.6) and the provision of Performance Security (4.2), ensuring a holistic approach to financial management in the contract.
• “A Balancing Act in Contractual Compliance”: The interaction between Clause 14.8 and other clauses represents a balancing act, ensuring compliance and providing remedies for non-compliance within the contractual framework.

Key Aspects to Keep in Mind when Employing Clause 14.8 Delayed Payment:

1. Trigger for Financing Charges:
   • Financing charges are activated when the Contractor does not receive payment in accordance with [Sub-Clause 14.7 Payment].
2. Delay Period Commencement:
   • The delay period for financing charges starts from the specified payment date in [Sub-Clause 14.7 Payment], irrespective of the issuance date of any Interim Payment Certificate.
3. Calculation of Financing Charges:
   • Unless otherwise stated in the Particular Conditions, financing charges are calculated at an annual rate of three percentage points above the discount rate of the central bank in the country of the currency of payment.
4. Currency for Financing Charges:
   • Financing charges shall be paid in the currency specified for payment unless otherwise stated in the Particular Conditions.
5. Entitlement without Formal Notice:
   • The Contractor is entitled to financing charges without the need for formal notice or certification.
6. Non-Prejudice to Other Rights:
   • The entitlement to financing charges does not prejudice any other rights or remedies available to the Contractor.
7. Interaction with Other Clauses:
   • Consider the interplay with [Sub-Clause 14.7 Payment], [Sub-Clause 14.6 Issue of Interim Payment Certificates], [Sub-Clause 14.4 Schedule of Payments], [Clause 16.1 Contractor’s Entitlement to Suspend Work], and [Clause 16.2 Termination by Contractor]. These clauses collectively influence the application and consequences of [Clause 14.8].
8. Global Applicability:
   • While not specifying a particular country, the reference to the central bank’s discount rate allows for global applicability, accommodating various currencies and economic contexts.
9. Flexibility in Notice Requirements:
   • While the clause doesn’t require formal notice for entitlement, be aware that [Particular Conditions] may prescribe specific notice requirements.
10. Protection during Suspension and Termination:
    • The entitlement to financing charges remains intact even if the Contractor decides to suspend work under [Clause 16.1] or terminates the contract under [Clause 16.2].
11. Consideration of Project-Specific Particular Conditions:
    • [Particular Conditions] may introduce modifications to the standard provisions of [Clause 14.8], so ensure a thorough understanding of any project-specific conditions.
12. Continuous Monitoring of Payment Schedule:
    • If a Schedule of Payments is in place, ensure continuous monitoring and potential adjustments to align with actual progress through [Sub-Clause 3.5 Determinations].

Sequence of Interactions related to Clause 14.8 Delayed Payment

1. Commencement of Work:
   • The project begins, and the Contractor initiates the work as per the contract’s commencement provisions.
2. Payment Schedule in [CLAUSE 14.4]:
   • If applicable, the contract includes a Schedule of Payments, specifying the instalments in which the Contract Price will be paid.
3. Application for Interim Payment Certificates ([Sub-Clause 14.3]):
   • The Contractor submits applications for Interim Payment Certificates based on the estimated contract values specified in the Schedule of Payments.
4. Payment Certification ([Sub-Clause 14.6]):
   • The Engineer certifies the Interim Payment Certificates, confirming the amount due to the Contractor for the specified period.
5. Payment Default ([Sub-Clause 14.7]):
   • If the Contractor does not receive payment in accordance with [Sub-Clause 14.7 Payment], the provisions of [CLAUSE 14.8 Delayed Payment] are triggered.
6. Entitlement to Financing Charges ([CLAUSE 14.8]):
   • Due to delayed payment, the Contractor becomes entitled to financing charges, compounded monthly on the unpaid amount during the delay period.
7. Financing Charges Calculation:
   • Financing charges are calculated at the annual rate of three percentage points above the discount rate of the central bank in the country of the currency of payment unless specified otherwise in the Particular Conditions.
8. Currency of Payment:
   • Financing charges are paid in the currency specified for payment unless modified by the Particular Conditions.
9. Notice and Certification Exemption:
   • The Contractor is entitled to financing charges without the need for formal notice or certification, preserving simplicity and efficiency.
10. Interaction with Suspension ([Clause 16.1]):
    • If the Engineer fails to certify or the Employer fails to comply with payment provisions, the Contractor may, after providing notice, suspend work without prejudicing entitlements to financing charges under [CLAUSE 14.8].
11. Termination ([Clause 16.2]):
    • In case of non-issuance of relevant Payment Certificates or non-receipt of due amounts under an Interim Payment Certificate within specified timelines, the Contractor may terminate the contract without compromising entitlements to financing charges.

This sequence illustrates the dynamic interactions among [CLAUSE 14.8 Delayed Payment], payment-related clauses ([Sub-Clause 14.3], [Sub-Clause 14.6], [Sub-Clause 14.7], [Clause 16.1], and [Clause 16.2]), and the overall payment process within the FIDIC contract framework.

Flowchart

Detailed Explanation:

1. Start: Payment Due Date (As per Clause 14.7): The process begins on the payment due date specified under Clause 14.7.
2. Trigger Clause 14.8: If the Contractor does not receive the payment on the due date, Clause 14.8 is triggered.
3. Calculate Financing Charges: The Contractor is entitled to calculate financing charges on the unpaid amount.
4. Charges Based on Central Bank Rate + 3%: The financing charges are calculated at an annual rate of three percentage points above the discount rate of the central bank in the country of the currency of payment.
5. Contractor Entitled to Charges Without Formal Notice: The Contractor is entitled to these charges without the need for formal notice or certification.
6. Payment of Charges in Currency of Delayed Payment: The financing charges are to be paid in the same currency as the delayed payment.
7. End: Contractor Receives Financing Charges: The process concludes when the Contractor receives the financing charges.

Detailed Explanation:

1. Contractor Submits Statement and Supporting Documents: The Contractor submits a detailed statement and supporting documents to the Engineer as per the contract requirements.
2. Engineer Issues Interim Payment Certificate: The Engineer, upon reviewing the documents, issues an Interim Payment Certificate to the Employer, indicating the amount due to the Contractor.
3. Employer’s Scheduled Payment Date: The Employer is scheduled to make the payment to the Contractor as per the terms outlined in the contract.
4. Non-receipt of Payment Triggers Clause 14.8: If the Contractor does not receive the payment on the scheduled date, Clause 14.8 is triggered, entitling the Contractor to financing charges.
5. Calculating Financing Charges: The Contractor approaches the Central Bank to calculate the financing charges based on the prevailing rates.
6. Central Bank Provides Rate for Calculation: The Central Bank provides the rate, which is typically the discount rate of the central bank plus a specified percentage.
7. Contractor Claims Financing Charges: The Contractor claims these financing charges from the Employer.
8. Employer Pays Financing Charges: The Employer is obligated to pay these financing charges to the Contractor.
9. Raising Dispute (if unresolved): If there is a disagreement or the issue remains unresolved, the Contractor may raise the dispute to the Dispute Adjudication Board.
10. Dispute Adjudication Board Provides Decision: The Dispute Adjudication Board reviews the case and provides a decision, resolving the dispute.

Checklists:

Checklist 1: Proficient Execution and Deployment of Clause 14.8

Checklist 2: Applying and Overseeing Clause 14.8

Checklist 3: Monitoring Execution of Clause 14.8

Some Real-World Instances and Case Studies concerning Clause 14.8 Delayed Payment:

Construction Industry: In the construction industry, delayed payment has become a norm and is one of the biggest challenges for contractors. The FIDIC Red Book – 1999 Sub-Clause 14.8 [Delayed Payment] deals with the consequence of the delayed payment. If the Contractor does not receive payment in accordance with Sub-Clause 14.7 [Payment], the Contractor shall be entitled to receive financing charges compounded monthly on the amount unpaid during the period of delay. In case of default from the Employer, contract provisions entitle the Contractor to additional finance charges without being required to give any formal notice or certification. In addition to the above provision, the contract also empowers the contractor to suspend or reduce the rate of work in case of delayed payments. If the contractor believes that the situation warrants extreme measures, then the contractor will be entitled to terminate the contract.

Legal Cases: There have been several legal cases where the delayed payment clause has been invoked. For instance, in a case in the Indian legal system, an amount of Rs. 4,55,140/- was paid over to the contractor only on 21 May, 2002 and on this ground awarded interest for the period of delayed payment. Clause 16(2) of the General Conditions was invoked, which is similar to Clause 14.8, and it was argued that such a clause prohibits payment of interest.

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Causes of Delayed Payment:

Here are some of the reasons for delayed payment in construction industry:

• Employer may not have the necessary funding arrangements
• Employers delay the payment for their own financial advantages
• Complex process and procedure for payment review, certification, and release of money
• Lack of proper process implementation
• Unrealistic Cash flows
• Disagreement on the valuation of works at site.

In some cases, contractor also contribute to this situation by not providing adequate supporting documents, making incorrect valuation, or maybe not following the procedures.