For many businesses pursuing and recovering business debt is a priority. The Late Payment of Commercial Debts (Interest) Act 1998 should be of interest as it inserts an implied term for interest, together with a fixed sum charge and arguably costs, in business to business contracts for the supply of goods and services, where the contract is otherwise silent in this regard.
The interest/charges only arise on a debt created by virtue of an obligation under a contract to pay the whole or any part of the contract price, not damages.
The interest/charges don’t arise on each invoice, but on each debt. Therefore, each time part of the price falls due under the contract, another qualifying debt is created i.e. each instalment gives rise to a debt.
For the purposes of this act ‘business’ includes professions and public authorities. However contracts for employment, security, consumers, and international contracts are not covered by this act.
The Interest Rate
The rate is set twice a year by adding 8% to the Bank of England’s official bank rate, on 31st December and 30th June.
Accordingly, the current rate would be 8.25%.
Fixed sum charge
Businesses should also remember that once interest begins to run the creditor is entitled to a fixed sum in addition to interest on the debt. This fixed sum depends on the amount of debt:
Below £1,000 = £40
£1,000-10,000 = £70
£10,000+ = £100
Costs
For contracts made on or after 16 March 2013, if a fixed sum is payable, the creditor also has an implied contractual right to be paid the reasonable costs of recovering the debt, less the fixed sum.
This provision may be useful where seeking to recover costs where the relevant forum does not provide for costs, for example, the Small Claims Court or adjudication of construction contracts. However it is by no means guaranteed that a judge would grant costs in such circumstances.
Interestingly, there is no express power in the act to reduce the fixed sum or costs. It is therefore arguable that the court has no power to deprive a supplier of these benefits, even in a case which justifies total remission of interest. That was the conclusion reached by the County Court in Northern Ireland in Blue Autumn Ltd v Glenview Nursing Home [2013] NICty 2.
Interest cannot be charged on the fixed sum, interest or costs.
Conduct
Interest may be reduced to nil in the interests of justice, if justified by the supplier’s conduct.
Contracting out of the Act
Parties to commercial contracts can exclude the right to interest under the Late Payments Act, but only if the contract provides an alternative ‘substantial contractual remedy’ for late payments. Whether a remedy for late payment provides the necessary substantial remedy is assessed as at the time the contract was made.
The alternative remedy must be both sufficient to compensate the supplier, and deter late payment, and also be fair and reasonable to oust or vary the right to interest under the Act. The Court, in deciding whether the alternative remedy is fair should consider the benefit of commercial certainty, the parties’ relative bargaining strength, whether one party imposed the term on the other, and any inducement offered to the supplier to agree to the term.
Limitation
As with most breach of contract cases the deadline for issuing legal proceedings to claim interest under this act is 6 years.
Do you have to inform your customer that you will be claiming interest due to late payment, together with compensation and costs?
The short answer is no, however you may wish to put warnings to this effect on your invoices, statements or terms of business, in the hope of prompting early payment.
Your terms and conditions
As above, you can contract out of the Act if your contract provides for a suitable alternative remedy.You may wish to review your terms of business to ensure they are as favourable as the Late Payment legislation.
If you do change your terms of business, make sure your customers know. You should:-
- Advise your customers that your Terms and conditions have been revised, and when these revisions will come into effect;
- Provide your customers with a copy of the revised Terms. It is best to do so in writing so there is proof of same; and
- Ensure all documents in which your Terms and Conditions appear, are referred to, or are appended to, are updated;
N.B. Existing contracts will continue to be governed by the Terms and Conditions which applied at the time they were entered into.
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