Delayed Payments in Construction Contracts: Legal and Contractual Considerations

Delayed Payments in Construction Contracts: Legal and Contractual Considerations

Introduction

Delayed payments are a critical issue in construction contracts, affecting cash flow, project progress, and contractor stability. When payments are delayed, contractors may struggle with liquidity constraints, leading to delays in procurement, labor issues, and potential disputes. Understanding the causes of delayed payments and their legal and contractual implications is essential for all stakeholders involved in construction projects.

Delayed payments in construction contracts can arise due to various reasons, including:

Administrative inefficiencies: Delays in processing invoices and approvals.

Financial constraints: Employers facing liquidity issues or funding shortages.

Disputes over work quality or scope: Employers may withhold payments due to disagreements on deliverables.

Legal or regulatory obstacles: Government regulations or compliance requirements causing payment hold-ups.

Ways to Mitigate Delayed Payments

To avoid delayed payments, parties can implement:

Clear contract terms: Defining payment schedules and penalties for late payments.

Effective documentation: Ensuring all required approvals and supporting documents are in place.

Regular follow-ups: Communicating with relevant stakeholders to ensure timely processing.

Alternative financing arrangements: Utilizing bank guarantees or payment bonds for financial security.

Delayed payments in construction contracts are a common issue that can have significant legal and financial consequences. This article examines the obligations of the employer (client) and the entitlements of the contractor under various legal frameworks, including the Egyptian Civil Code, Law No. 182 of 2018 (Public Procurement Law), and the FIDIC Red Book 1999. Additionally, the implications of delayed payments, such as extension of time (EOT) and financial compensation, are analyzed.

Obligations of the Employer Regarding Payments

1. Under the Egyptian Civil Code

Article 147:

"????? ????? ??????????? ??? ???? ???? ??? ?????? ??? ?????? ???????? ?? ??????? ???? ?????? ???????. ??? ???? ??? ???? ????? ????????? ???? ?? ??? ?? ????? ??????? ????? ??? ?????? ?? ????? ???????? ????????? ??? ?? ???? ????????? ??? ?????? ?????? ???? ????? ?????? ?????? ??? ??????? ????? ??????? ???? ???????? ??? ????? ???????? ?? ??? ???????? ?????? ??? ???? ???????."

"The contract is the law of the parties. It cannot be revoked or amended except by mutual consent or for reasons prescribed by law. However, if extraordinary and unforeseen events occur that make the execution of the contractual obligation excessively onerous for the debtor, threatening them with severe loss, the judge may, considering the circumstances and balancing the interests of both parties, reduce the obligation to a reasonable level."

Article 163:

"?? ??? ??? ????? ????? ???? ?? ?????? ????????."

"Any fault that causes harm to others obliges the one who committed it to compensate."

Article 221:

"??? ?? ??? ??????? ???????? ?? ????? ?? ??? ?? ???????? ??????? ?? ???? ???????. ????? ??????? ?? ??? ?????? ?? ????? ??? ???? ?? ???? ???? ?? ???? ??? ????? ?????? ???? ?????? ????????? ?? ?????? ?? ?????? ??. ??????? ????? ????? ?????? ??? ?? ??? ?? ??????? ?????? ?? ?????? ???? ??? ?????."

"??? ???? ??? ??? ???????? ????? ?????? ??? ????? ?????? ???? ?? ????? ???? ?? ??? ?????? ??? ?????? ????? ???? ??? ???? ????? ???? ??? ???????."

"If the compensation is not determined in the contract or by law, the judge shall determine it. The compensation includes the loss suffered by the creditor and the gain missed, provided that this is a natural result of the non-fulfillment of the obligation or the delay in its fulfillment. The damage is considered a natural result if the creditor could not have avoided it by making a reasonable effort."

"However, if the obligation arises from a contract, the debtor who has not committed fraud or gross negligence is only liable for compensating the damage that could usually be foreseen at the time of contracting."

2. Under Law No. 182 of 2018 (Public Procurement Law)

Article 46:

"??? ???? ???????? ??? ?? ??? ?????? ???????? ???????? ???????? ?? ???????? ???????? ????? ????? ???????? ??? ???? ???????? ?? ????? ????? ??????? ????? ???????? ?? ???????? ??????? ?? ???? ??????? ????? ???? ???????? ?????? ?????? ?? ????? ??????? ??? ???????? ????? ????? ??????? ????? ??????? ??????? ??? ????? ??????? ??????? ?? ?????? ????? ???."

"In all cases, if the due payments to the contractor are not fulfilled within the specified deadlines, the administrative entity is obliged to pay the contractor an amount equivalent to the financing cost of the claimed amount or the approved statement for the delay period, according to the credit and discount rate announced by the Central Bank at the time of accounting, provided that official documents supporting the claimed amount are submitted. The responsible party shall be subject to investigation and bear the corresponding costs."

3. Under FIDIC Red Book 1999

Clause 14.7: The employer shall pay the contractor:

(a) The first installment of the advance payment within 42 days after issuing the Letter of Acceptance or within 21 days after receiving the required documents, whichever is later.

(b) The amount certified in each Interim Payment Certificate within 56 days after the Engineer receives the Statement and supporting documents.

(c) The amount certified in the Final Payment Certificate within 56 days after the Employer receives the Payment Certificate.

Payment shall be made into the contractor's nominated bank account in the designated country for the currency specified in the contract.

Clause 14.8: If the contractor does not receive payment as per Clause 14.7, they are entitled to financing charges compounded monthly on the unpaid amount during the delay period. The delay period starts from the due date specified in Clause 14.7, regardless of when an Interim Payment Certificate is issued.

Unless stated otherwise in the Particular Conditions, financing charges are calculated at an annual rate of three percentage points above the central bank's discount rate in the payment currency's country.

The contractor is entitled to this payment without formal notice or certification and without affecting other rights or remedies.

Clause 16.1: If payment is delayed beyond 42 days, the contractor has the right to issue a notice of suspension of works.

Clause 16.2: If the delay extends further, the contractor may terminate the contract and claim damages.

Entitlements of the Contractor in Case of Delayed Payments

Financial Compensation

The contractor is entitled to claim interest on late payments.

Compensation for financial losses due to increased costs or disruptions.

Under FIDIC Clause 14.8, financing charges are calculated based on the rate agreed in the contract.

Extension of Time (EOT)

If delayed payments affect the contractor’s ability to perform the works, an extension of time under FIDIC Clause 8.4 may be granted.

Prolongation costs may also be claimed if delays cause additional site expenses.

Right to Suspend or Terminate

Under FIDIC Clause 16.1, a contractor can suspend work after giving notice.

If the delay persists, the contractor may terminate the contract and claim outstanding amounts, damages, and demobilization costs.

Conclusion

Delayed payments in construction contracts can have severe consequences for both employers and contractors. Addressing payment issues proactively through proper contract management and dispute resolution mechanisms is crucial for the success of construction projects.