The UK High Court has given a useful ruling on when statutory interest can be charged on debts arising under contracts expressed to be subject to English law but which otherwise have an international dimension.
In the UK, the Late Payment of Commercial Debts (Interest) Act 1998 (the “Act”) implies a term into contracts for the supply of goods or services that interest (currently 8% above the prevailing UK base rate) may be charged on debts which arise. This is known as ‘statutory interest’. The Act will apply by default but will be ousted if the parties include an express interest provision in the contract. S12(1) of the Act also limits its applicability as follows:
“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
- there is no significant connection between the contract and that part of the United Kingdom; and
- but for that choice, the applicable law would be a foreign law.”
In essence, S12 says that the Act will not apply to a contract which the parties have chosen to be governed by English law but which has ‘no significant connection’ with England and which would otherwise be governed by foreign law. This case considered what is needed to show that a contract has a significant connection with England.
In this case, a German company (C) hired a ship from a Greek company (D). The contract was expressed to be subject to English law and included a clause that disputes would be referred to arbitration in London. A dispute arose over unpaid hire charges. The dispute was referred to arbitration which awarded D US$180,000 in unpaid hire charges together with statutory interest on the award under the Act. C challenged whether the Act applied to the contract in light of S12(1). This point was referred to the High Court.
The High Court held that the Act did not apply to the contract. It said that the interest rate under the Act is a penal rate intended to deter late payment and protect the vulnerable financial position of commercial suppliers. This reflected domestic policy considerations which should not necessarily apply to contracts with an international dimension, even those expressed to be subject to English law. In order for the Act to apply to such an international contract, the contract must have a significant connection with England sufficient to justify the extension of a domestic penal provision to an international transaction. Alternatively, the contract must be subject to English law under default law/jurisdiction rules regardless of the express choice of the parties.
The court said that, for there to be a significant connection, there must be factors which connect the substantive transaction itself to England. This would include where the contract is to be performed in England, where one of the parties is English, where at least one of the parties is carrying on their business in England or where the economic consequence of a delay in payment may be felt in England or the wider UK. Merely specifying that arbitration would take place in London would not be enough. Neither would the fact that the contract was simply written in English.
In this case, the court held that the contract did not have a significant connection with England. In addition, under the default law/jurisdiction rules in the Rome Convention the contract would have been governed by the law of Greece (as the principal place of business of the shipowner). Accordingly, the Act did not apply to the contract.
The parties to an international contract may think it advantageous to provide that the contract be governed by English law perhaps in an attempt to pull the contract into the statutory interest regime in the Act. However, following this case, parties should be aware that merely providing that English law will apply will not be enough to bring the contract within the remit of the Act without there also being some significant connection between the contract and England. If there is any doubt on this, the parties should include an express clause in the contract entitling them to charge interest on debts. Failure to do so could mean that they lose the right to be able to charge interest on a debt, like D did in this case, resulting in the loss of a significant sum of money.