Ruth Carins examines the legislative framework which facilitates the recovery of interest and compensation when money due under construction contracts (and other contracts) is paid late.

The Late Payment of Commercial Debts (Interest) Act 1998 is a useful piece of legislation which adds an implied term into qualifying contracts, giving a statutory right to claim interest and compensation arising from the late payment of commercial debts.

On 16 March 2013, the Late Payment of Commercial Debts Regulations 2013 came into force, amending and extending the scope of the Act.

Qualifying contracts

The Act applies to business-to-business contracts made after 7 August 2002 for the supply of goods and/or services for monetary consideration. The following types of contract are expressly excluded for the purposes of the Act:

  • a consumer credit agreement; or
  • a contract intended to operate by way of mortgage, pledge, charge or other security.

Of course, if the contract is not a business-to-business contract for the supply of goods and/or services, the Act will not apply.

It is possible for the contracting parties to opt out of the Act in the contract and agree a contractual remedy for the late payment of a commercial debt. However, this remedy must be suitably ‘substantial’ in order for the Act to not apply. Where the contract is silent in this regard, the Act will apply.

Before 16 March 2013

Provided the Act applied, a business would have had a statutory right to claim interest at the rate of 8% over the Bank of England base rate for the late payment of commercial debts.

Such statutory interest was to be calculated from the day after the agreed date for payment of the debt. If there was noagreed date, statutory interest would start to run after 30 days from the later of either:

  • the date that the supplier performed its obligation; or
  • the date the customer received the invoice.

On top of this claim for statutory interest, a supplier could also claim compensation for the cost of recovering a debt in the form of a fixed sum as follows:

  • £40 for a debt less than £1000;
  • £70 for a debt between £1000 and £10,000; and
  • £100 for a debt of £10,000 or more.

Since 16 March 2013

The reasoning behind the introduction of the Regulations was to encourage prompt payment of invoices, with the particular intention of assisting the cash flow of smaller suppliers. The Regulations seek to achieve this by making a number of changes to the Act:

Payment periods

First, the Regulations have amended the period and dates from which statutory interest will start to run. The Regulations have created a differentiation in the time periods for calculation of statutory interest between a public authority as customer and other businesses as customer.

Public authorities

Where a public authority is the customer, statutory interest will start to run on outstanding payments after 30 days from the later of:

  • receipt of the supplier’s invoice;
  • receipt of the goods or services; or
  • verification and acceptance of the goods or services.

Other businesses

For other businesses, where a payment period has not been agreed in the contract, statutory interest will start to run on outstanding payments after 30 days from the later of:

  • receipt of the supplier’s invoice;
  • receipt of the goods or services; or
  • verification and acceptance of the goods or services.

As was the position before the Regulations, where the payment period is specified in the contract, statutory interest will start to run from that date.

However, the Regulations have introduced an amendment whereby if that agreed payment period is longer than 60 days after any of the events listed previously, statutory interest will begin to run from the date 60 days after the latest of the events above, in spite of the express contractual term. The only way to circumvent this would be to prove that the longer payment period as agreed between the parties is not grossly unfair to the supplier.

The definition of the term ‘grossly unfair’ in the Regulations is very broad:

‘In determining… whether something is grossly unfair, all circumstances of the case shall be considered; and for that purpose, the circumstances of the case include, in particular:

  • anything that is a gross deviation from good commercial practice and contrary to good faith and fair dealing;
  • the nature of the goods or services in question; and
  • whether the purchaser has any objective reason to deviate…’.

Compensation for costs of recovering a debt

The fixed sum compensation amounts stated above have been retained by the Regulations.

However, the Regulations have introduced a further ‘level’ of compensation. A supplier may now claim as compensation any further reasonable costs which are incurred in recovering the debt which are not met by the fixed sum. Any attempt to exclude or limit the level of the top-up compensation will be subject to the reasonableness test set out in the Unfair Contract Terms Act 1977.

Interest Rate

This remains at 8% over the base rate as per the Act.

Points to note

  • If the contract expressly provides a substantial contractual remedy for late payment, the Act and Regulations will not apply.
  • The Regulations only apply to contracts made on or after 16 March 2013. The Regulations do not apply retrospectively.
  • It would be advisable for businesses to review their payment terms to check that they do not exceed the maximum 60 day period (30 days for public authorities).
  • If a party does claim for the debt through litigation, it is worth noting that in order to claim interest, rule 16.4(2) of the CPR requires that a claimant must state in the particulars of claim whether he is doing so:
  1. under the terms of a contract;
  2. under an enactment (and, if so, which); or
  3. on some other basis (and, if so, what that basis is).

Therefore, the claimant will need to expressly plead in their particulars of claim their claim for interest under the Act and the Regulations, if they believe they are so entitled.