On 16 March 2013 the new Regulations came into force, introducing new rules relating to payment periods, and the dates from which statutory interest runs on commercial debts by amending the Late Payments of Commercial Debts (Interest) Act 1998 (Act).
The Regulations are designed to benefit SMEs by combating the problems caused by late or unpaid invoices which can include financial difficulties, loss of jobs and, in extreme cases, insolvency. By providing a more supplier-friendly approach to payment, their aim is to tackle the EU-wide culture of late payments in commercial transactions.
Application of the Regulations
The Regulations apply to all commercial contracts for the supply of goods and services entered into on or after 16 March 2013 (unless they are “excepted contracts”). Businesses may still contract out of application of the Act by way of an express term, however, where a contract is silent and there is no “substantial contract remedy” clause, the Regulations will apply.
Prior to 16 March 2013
A business has a statutory right to claim interest for the late payment of commercial debts. The statutory interest would generally start to run from the day after the agreed date for payment of the debt. If there was no such agreed date, statutory interest would generally start to run from the date that is 30 days after the supplier performed its obligation or the customer received its invoice (whichever is later).
In addition, a supplier could also claim compensation for the cost of recovering a debt, being a fixed charge of between £40 (for a debt less than £1,000) and £100 (for a debt between £1,000 and £10,000).
Changes under the new Regulations
If no time for payment is stated in a contract, statutory interest will start to run on outstanding payments from 30 days after the latest of:
- Receiving the supplier`s invoice
- Receiving the goods or services
- Verification or acceptance of the goods or services (where provided for by statute or contract).
Different rules will apply depending on whether the customer is a public authority or a business:
- In a business to business contract, the parties may agree a due date for payment of up to 60 days from the latest of the events listed above. If the parties agree to extend the due date for payment beyond 60 days, this will only be valid if the extension is not "grossly unfair" to the supplier (taking into account nature of the goods / services, whether long payment period is a gross deviation from good commercial practice, good faith and fair dealing, and whether the customer has objective reason for requiring the extension). Note that any payment period over 60 days must be “expressly agreed”
- In a contract where the customer is a public authority the parties may agree a due date for payment of up to 30 days from the latest of the events listed above and there is no right to agree an extension
Note that if statutory interest has been excluded by the provision of a “substantial contractual remedy” then statutory interest will not apply.
A remedy will not be substantial if it is insufficient to compensate the supplier for late payment or to deter late payment and it would not be fair or reasonable to allow the remedy to be relied on. What constitutes a “substantial” remedy for these purposes will be a question of fact. Government guidance on this issue states that to come to a decision a court will consider all the circumstances including the rate of interest, the length of the credit period, the bargaining position of each of the parties, any standard industry practice and whether the contractual terms will achieve the objectives of deterring late payment and recompensing the costs incurred by the supplier as a result of the late payment.
Costs of debt recovery:
The existing fixed sum rates of compensation are retained but a supplier may also claim as compensation any "reasonable" costs of recovering the debt that exceed the fixed sum. Any
attempt to exclude or limit this fixed cost or top up costs is subject to the test of reasonableness set out in the Unfair Contract Terms Act 1977.
Statutory rate of interest:
There is no change to the statutory rate of interest which remains at 8% over the Bank of England base rate.
Points to consider
- It is possible to contract out of these new rules by including an express term of the contract that provides for a substantial contractual remedy for late payment
- Businesses should review their payment terms and ensure that they include a maximum of 60 days payment term. A longer term may be permitted,, provided it is not “grossly unfair” to the supplier. Any statutory interest would not then run until expiry of the longer period. Where longer payment terms are required, consider including a term in which the parties acknowledge that the payment period is fair given their commercial needs
- Public authorities should ensure their payment terms are for a maximum of 30 days