| Date | 4 September 2002 |
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| Judgment | Late Payment of Commercial Debts Regulations 2002 |
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| The Issue | Review of statutory provisions for the payment of interest on late payments. |
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| Implication |
From 7 August 2002, all businesses will be able to rely upon the statutory provisions for the payment of interest in the event of late payment. |
printThe Late Payment of Commercial Debts (Interest) Act 1998 came into force in November 1998 and has now been revised in August 2002. It often comes as a surprise to commercial people that when a debt is paid late to them, they may have only a limited means of recovering interest from the late payer. Prior to this Act, interest would only be recoverable in three circumstances: (1) where the contract between the parties provided for the payment of interest in the event of late payment; (2) where a judge or arbitrator exercised his statutory discretion to allow interest upon the substantive amount of his award, or (3) where it could be shown that special circumstances existed between the parties at the time of making their contract, such that interest could properly be treated as a foreseeable part of the damages to be claimed. The Late Payment of Commercial Debts Act changes all that. Initially it was intended that the Act would be phased in, at the outset applying only to debts owed to small businesses (defined in the Act as companies, partnerships and sole traders with 50 or fewer full time employees). It was anticipated that the provisions of the Act would be extended to all businesses within a period of approximately 4 years. On 7 August 2002, to meet the requirements of a European Directive, the final phase of the Act came into effect by the provisions of the Late Payment of Commercial Debt Regulations 2002. Accordingly, from 7 August 2002, businesses of any size will be able to rely upon the Act to claim interest on late payments arising under contracts made after 7 August 2002. The Act applies to contracts for the supply of goods or services where the purchaser and the supplier are each acting in the course of a business. Accordingly, in the broadest sense, the Act will apply to construction and engineering contracts. It also includes professionals and the activities of any government department or local or public authority. Consequently, public as well as private sector contracts are caught by the Act. The Act will not apply to certain excepted contracts, which include consumer credit agreements, and contracts intended to provide security (such as mortgages, pledges or charges). Where the parties have agreed a final date for payment of the debt (and such an agreement is a requirement of any construction contract), statutory interest will start to run the day after the agreed date. On all other contracts, the default period for payment is 30 days under the Act. Statutory interest will normally run until the day of payment. The rate at which statutory interest may be claimed is variable, and has been set at the official dealing rate of the Bank of England plus 8%. A contract term which purports to vary or exclude the right to statutory interest will be void, unless there is a "substantial contractual remedy" for late payment of the debt. The obvious intention of this provision is to prevent purchasers from using commercial bargaining power to avoid or limit the effects of the Act by standard terms of business or other contractual terms. Although the phrase "substantial contractual remedy" for late payment of a debt has yet to be judicially interpreted, it is inevitable that alternative remedies will be judged, at least in part, by comparison to the statutory rights provided by the Act. The Act does contemplate at least some scope for variation of the statutory interest rate, in that where a contractual remedy for late payment of a debt has been agreed by the parties, it will be regarded as a substantial remedy unless it is insufficient for the purpose of compensating the supplier for late payment or for deferring late payment, or it would not be fair or reasonable to allow the remedy to oust or vary the supplier's statutory rights. The new regulations provide that "representative bodies" may challenge any purchaser's standard terms of contract where these purport to vary the statutory rights. It may be expected therefore, that such a challenge might be successful where the contractual remedy provides for payment of less than, for example, 3% over base rate. In determining whether such a rate was fair and reasonable, the court would however take into account the relative bargaining positions of the parties and whether the term in question has been imposed by one party unilaterally. The court will also be interested to determine whether the supplier has received an inducement to agree to any reduction to the statutory rights for interest. The Act does not provide for any particular procedural mechanism by which statutory interest is to be obtained. Accordingly, a person wishing to recover interest under the Act will be required to make a claim in the normal manner and then to initiate adjudication or other legal proceedings in the usual way. Of course, it is always better to keep on top of payment entitlements than to allow the magnitude of late payments to grow, later relying on what might be regarded by the payee as attractive statutory interest provisions. Similarly, construction firms would be well advised to ensure that their standard terms of contract expressly deal with this subject. That way, those who administer construction contracts will be better placed to know where they stand.
CJ-0234
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