Whether the Late Payment of Commercial Debts Act 1998 automatically applies if the parties agree English law and arbitration


The parties entered into a contract which provided for London arbitration and English law.  Following a dispute about an unpaid debt, a tribunal awarded interest on the principal amount of  12.75% under the Late Payment of Commercial Debts (Interest) Act 1998. Section 12(1) of that Act  provides that “This Act does not have effect in relation to a contract governed by a law of a part  of the United Kingdom by choice of the parties if (a) there is no significant connection between  the contract and that  part of the United Kingdom; and (b) but for that choice, the applicable law  would be a foreign law.” The issue in this case was whether the arbitrators had been correct to  find that the inclusion of a London arbitration clause was capable of amounting, in itself, to a “significant connection” between the contract and England. Popplewell J noted that the choice of English law alone is not sufficient to establish a “significant connection”. There are two possible explanations for  this: (1) there  must be something else which justifies the extension of a deterrent penal  provision rooted in domestic policy to an international transaction; and (2) subjecting parties to  a penal rate of interest on debts might be a discouragement to international parties who would  otherwise choose English law to govern their contracts. He suggested various factors which might  provide a “significant connection”:

  • The place of the performance of the obligations under the contract is in England
  • One or more of the parties is English
  • The parties are carrying on some relevant part of their business in England
  • The economic consequences of a delay in payment of debts may be felt in the UK

On the other hand, a London arbitration or English jurisdiction clause cannot be a relevant  connecting factor, since that “does not connect the substantive transaction itself to England.  Choice of law considerations must be ignored for the purposes of s.12(1)(a), because the section  will only be engaged in the first place where there has been a choice of English law. A London  arbitration clause, once shorn of its significance as ancillary to the choice of law, has no  relevance or significance to the substantive rights and obligations of the parties. Choice of forum  governs procedural rights and remedies, not the substantive obligations which would arise under an  implied term by virtue of the operation of the 1998 Act”.

On the facts of the case, he found no significant connection for the purposes of the Act.