The Late Payment of Commercial Debts Regulations 2013 came into force on 16 March 2013. The Regulations amend the Late Payment of Debts (Interest) Act 1998 (“Act”) and implement changes required by the 2011 Late Payment Directive (“Directive”).
Under the Act as it currently stands, statutory interest accrues from the date that the parties agree is the payment date under the relevant contract. A payment date is implied if one is not agreed in the contract.
The Regulations make three key changes:
- they limit the parties’ freedom to agree an excessively long payment period by restricting the length of the payment period that applies if statutory interest accrues under the Act;
- they limit the length of time parties have to verify (or ‘accept’) goods or services for the purpose of establishing a payment date for those goods or services; and
- they permit recovery of a supplier’s costs of enforcing payment in excess of the fixed payments that suppliers are currently entitled to.
However, all of these changes are only relevant if statutory interest is accruing under the relevant contract (i.e. if there is not a substantial remedy) and only apply to contracts entered into after 16 March 2013.
Payment periods for the purposes of statutory interest
Different rules will apply depending on whether the customer is a public authority or a business.
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; and
- verification or acceptance of the goods or services (where provided for by statute or contract).
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. The parties may agree to extend the due date for payment beyond 60 days, but this will only be valid if the extension is not "grossly unfair" to the supplier. 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.
Verification and acceptance procedures
The Regulations limit the amount of time purchasers have to verify the conformity of goods or services (for the purposes of working out when statutory interest will start to run) to 30 days, unless a longer period which is not ‘grossly unfair’ is expressly agreed. The Directive suggests that a longer period may be appropriate for complex contracts.
Where there is a verification procedure, the Directive envisages that the payment date will be 60 days from delivery of the relevant goods or services (i.e. 30 days to verify plus a further 30 days to pay).
The concept of gross unfairness
When determining whether it is ‘grossly unfair’ for a business purchaser to agree a payment or verification extension with a supplier, all the circumstances of a case will be considered, including:
- gross deviations from good commercial practice;
- the nature of the goods or services supplied; and
- whether the purchaser has an objective reason for deviating from the statutory provisions.
This legislation will be of interest to those negotiating or seeking to enforce commercial contracts. The concept of ‘gross unfairness’ is new to English Law and it remains to be seen how the courts will interpret it.