As of 16 March 2013, late payment law has changed. All businesses and public sector organisations (whether buying or selling goods or services) will be affected.

It is important that all buyers or sellers of goods or services are aware of the changes. Although we expect little substantial impact from this change in law, it is a good trigger to review your buying and selling practices and ensure you are taking an appropriate approach.

Here, Wragge & Co's commercial law experts look at what the changes mean.

What does this mean for private sector procurement?

A maximum payment period in contracts of 60 days.

  • Buyer and seller can agree different payment days but only if that is not "grossly unfair".
  • This is a change in the law.

The default interest rate on late payment is 8% above the Bank of England reference base rate.

  • Buyer and seller can agree a lower rate as long as there is a "substantial remedy" for late payment.
  • No change to the law.

Compensation is also payable for late payment (as well as interest).

  • To the sum of £40 for debts less than £1,000, £70 for debts more than £1,000 but less than £10,000 and £100 for debts of £10,000 or more. Plus any additional reasonable costs the supplier incurs above these fixed levels.
  • The addition of reasonable costs is new.
  • The fixed sums are not new.

What does this mean for public sector procurement?

A maximum payment period in contracts of 30 days.

  • Buyer and seller cannot agree a longer period.
  • This is a new change in the law.

The default interest rate on late payment is 8% above the Bank of England reference base rate.

  • Buyer and seller can agree a lower rate as long as there is a "substantial remedy" for late payment.
  • No change to the law.

Compensation is also payable for late payment (as well as interest).

  • To the sum of £40 for debts less than £1,000, £70 for debts more than £1,000 but less than £10,000 and £100 for debts of £10,000 or more. Plus any additional reasonable costs the supplier incurs above these fixed levels.
  • The fixed sums are not new. The addition of reasonable costs is new.

I am a private sector buyer. My standard payment terms are 90 days. Can I do this?

Yes, but only if it is not "grossly unfair".

What does "grossly unfair" mean?

The new legislation does not give a clear definition of the words "grossly unfair". However, it explains that account should be taken of:

  • Whether there is a gross deviation from good commercial practice which is contrary to good faith and fair dealing.
  • The nature of the goods or services.
  • Whether the purchaser has any objective reason to deviate from the default position established by the law.

It is very unclear what this means! We will need to wait for a few court decisions to be sure. But, we expect that a court will be reluctant to intervene where:

  • Extended payment terms are normal in a particular sector or a particular type of goods or service supplied.
  • Both buyer and seller are substantial businesses.

We believe that a court is more likely to strike out extended payment terms:

  • Where the payment terms are unusually long.
  • In order to protect a small supplier against a large buyer.

The lack of certainty is not new. There has been very limited case law on key issues under old legislation (see below comment on "substantial remedy"). The lack of court decisions reflects that suppliers typically do not enforce their rights relating to late payment. We expect no change in that approach.

My standard purchasing terms state that late payment interest is at 2% above a clearing bank base rate. Do I need to change this?

No, stating interest to be 2-4% above a clearing bank base rate is normal commercial practice.

Where the interest rate is less than 8% above base then there is a risk that the lower interest rate might be unenforceable unless there is "a substantial remedy". It is unclear just what a substantial remedy is (see below). Most businesses take this risk, not least because suppliers rarely assert their rights.

I am a supplier to the private sector. I have agreed to 30 day payment terms and 4% above clearing bank base rate interest. The buyer is persistently late in paying me. Can I claim interest?

Yes. You can certainly claim interest at the rate you agreed in the contract (4% above clearing bank base). You might also be entitled to claim interest at 8% above base.

The law is unclear on whether you can claim the higher rate - it is likely to be difficult.

Many suppliers who are in a continuing trading relationship with a buyer are usually very reluctant to actually enforce their legal right and claim interest. This is particularly the case in the current economic environment where suppliers would often rather be paid something late then nothing at all!

If interest on late payment is less than 8% above base, then it is only enforceable where there is "a substantial remedy". What is a "substantial remedy"?

This is unclear.

A court decision commented that 0.5% above base was too low where it considered the buyer had had that rate imposed on it. However, it stated that a higher rate (say 3-5% above base) is acceptable so long as the parties have understood and agreed it.

Take a look at our more detailed summary on this topic.

As a buyer can I extend payment terms by requiring the invoice to be issued, say, 30 days after delivery?

Yes but it might be ineffective.

The trigger in the legislation is the date on which the supplier performs the obligations (e.g. delivers the goods).There is special provision for where there is a post delivery/performance acceptance or verification process. However the period must not be extended so that it is grossly unfair.

Best practice in standard terms of purchase

  • Be clear on the payment period, for example:

    "The Buyer shall pay the Charges within 60 days of the date of receipt of the invoice."

    OR

    "The Buyer shall pay within 30 days of the end of the month in which the Buyer has received the invoice."
  • If your payment terms are longer than 60 days then you are taking a risk that they might be unenforceable if a supplier can demonstrate that it is "grossly unfair". The size of that risk is currently uncertain.
  • Make sure you are specific on the level of interest you are willing to pay for late payment. If you are silent then 8% above Bank of England base rate will automatically be implied. If you state a level of interest below 8% above Bank of England base rate then you are at risk that it might be unenforceable but it is normal commercial practice in the UK to set interest at 2-4% above clearing bank base rate.
  • If the reason that you are paying late is because you dispute the invoice make sure that this is clear to the supplier. If there is a genuine dispute and the issue is made clear quickly and early in the process then a court is likely to be more sympathetic than if you simply refused to pay without explanation.

What about international contracts?

If a contract is subject to English law then the late payment obligations will apply unless:

  • If the contract had been silent on applicable law the applicable law would not be English law; and
  • There is no significant connection between the relevant contract and any country other then England.

Therefore if the contract is genuinely international (i.e. both parties are not based in England and the goods or services are not delivered in England) then it is possible for the legislation to not apply. For example English late payment law would not apply to a contract between someone based in California and a Japanese supplier relating to goods made in India and delivered in China.

If a contract is subject to a foreign law then the late payment legislation may still apply if:

  • If the contract had been silent on applicable law the applicable law would be English Law.
  • There is no significant connection between the contract and any country other than England.

Therefore, a contract between an English based buyer and English based supplier subject to California law would still be subject to the English law on late payment.

All member states of the European Union are required to introduce similar legislation by 16 March 2013. We are aware that many jurisdictions (including France) have already introduced it. Similar provisions will apply throughout the European Union.

The new legislation only applies to England, Wales and Northern Ireland. However it is anticipated that the Scottish Parliament will enact equivalent regulations for Scotland.

When does the new legislation come into force?

The new legislation comes into force on 16 March 2013. It will not apply to contracts created before the 16 March 2013.

What contracts does it apply to?

  • Contracts for the supply of goods (including by hire) and services.
  • A contract which creates a mortgage, pledge, charge or other security is not included.
  • The consumer credit agreement is not included.

The legal detail

The new regulations:

  • are the Late Payment of Commercial Debts Regulations 2013 (SI 2013/395).
  • vary the Late Payment of Commercial Debts (Interest) Act 1998.
  • are the UK implementation of the European Commission EU Directive Late Payment of Commercial Transactions (2011/7/EU).