Late payment penalties

For many businesses getting timely payment from customers is key to trading successfully. Delays in receiving payment can have a huge impact on small businesses in particular. The Late Payment of Commercial Debts (Interest) Act 1998 can be a useful way to incentivise your business customers to make prompt payments. It can also potentially be used when debts are not "standard" business to business debts. The interest and late payment penalty levied can be used to mitigate some of the inevitable burdens of late payment.

What is it?

The Late Payment of Commercial Debts (Interest) Act 1998 adds an implied term to business to business contacts giving the supplier a right to claim interest on overdue monies, where the contract is silent on interest.

Who does it apply to?

When making the contact for the supply of goods and/or services the parties must be acting in the course of business. The Act does not apply to consumer contracts or to one off type transactions. There needs to be evidence that the transaction was within a structured and stable commercial activity, although it does not have to be the party's main commercial activity. An example can be that the party was acting under their trading name and that an invoice was issued. Money must be exchanged in consideration for the goods or services for the Act to apply.

If the business to business debt is not "standard", the court will look closely at what was agreed in considering if the Act applies. The recent case of Edge Tools & Equipment Limited v Greatstar Europe Limited and G2 Products Limited [2018] EWHC 170 (QB) clarified that a qualifying debt had to be for the provision of goods or services not something of the nature of a licensing agreement.

A common misconception is that interest can be claimed instead of or on top of the agreed contractual rate. It is important to note that this Act will not apply if you already have a remedy which is substantial in the event of late payment in your contract.

How much?

The interest rate that can be applied under the Act is 8% above the Bank of England's official Bank Base Rate. The current rate is 0.5%.

Once you are entitled to add interest under the Act the creditor is also entitled to a fixed sum in addition to the interest. This sum is dependent on the amount due and ranges from £40 to £100 per invoice. As mentioned above, if you already have a provision for interest in your contract the Act will probably not apply and therefore Ashfords Asset Recovery can advise you on this as you may not be able to claim a fixed sum.

However, your contractual "substantial remedy" must not be too substantial. On 24 February 2018, the Late Payment of Commercial Debts (Amendment) Regulations 2018 comes into force. The purpose of the amendment is to allow representative bodies, on behalf of businesses, to challenge grossly unfair contractual terms relating to payment periods and the right to interest or compensation, therefore, it is important to ensure your terms of business do not contain a remedy which could be challenged as so excessively substantial that it amounts to a grossly unfair contractual term. If your terms need reviewing our Commercial Team can assist you with this.

How do I claim it?

When a payment is overdue you can claim interest from that date (providing you do not have a provision in the contact that states otherwise). When you decide that action needs to be taken the first step is to send a letter before action setting out how much you are owed from the debtor. This is where you should include late payment penalties and interest.

Comment: This Act was designed to encourage prompt payment by businesses. When used correctly it can be a useful incentive to get business customers to pay. Before claiming late payment penalties and interest it is important to ensure that that the Act applies to your contract.