The case of Yuanda (UK) Co Ltd v WW Gear Construction Limited ([2010] EWHC 720 (TCC) 13 April 2010) provides a stark reminder that companies need to take into account the Commercial Debts (Interest) Act 1998 when setting interest rates for late payment. It also provides a summary of familiar law on standard terms contracts and exclusion clauses.

Gear, a construction company, purchased certain goods and services from Yuanda on the terms of its standard purchase documents, which were based on the Joint Contracts Tribunal (JCT) trade contract. Yuanda complained that the clauses providing for a low rate of interest on late payments should be invalidated as unreasonable under the Unfair Contract Terms Act (1977) (UCTA) and the Late Payment of Commercial Debts (Interest) Act 1998.

In respect of UCTA, the High Court had to decide whether: (1) the contract documents constituted Gear’s “written standard terms of business”; and, if so, (2) whether the exclusion clauses were unreasonable. The judge concluded that Yuanda plainly did not deal on Gear’s written standard terms of business because Yuanda had negotiated some material alterations of the “standard terms” put forward by Gear. As such, Yuanda’s claim under UCTA failed. Even if standard terms had been used, UCTA would not have assisted Yuanda because the contract was an international supply contract and as such exempt from UCTA reasonableness (by virtue of section 26).

In respect of the Late Payment of Commercial Debts (Interest) Act, however, the clause would be invalidated because it did not constitute a “substantial remedy” for late payment. Under the 1998 Act, any term which purports to exclude the right to statutory interest in relation to a qualifying debt will be void “unless there is a substantial remedy for late payment of the debt”. Matters to be taken into account include the benefi ts to commercial certainty; the strength of the bargaining position of the parties; whether the term was imposed by one party to the detriment of the other; and whether the supplier received an inducement to agree to the term. On the facts, the court decided that there were no special circumstances and the rate of 0.5% above base could not be regarded as a substantial remedy.