The Late Payment of Commercial Debts (Interest) Act 1998 has been updated with effect from 16 March.
What has changed?
The Act continues to apply to contracts for the supply of goods or services where the customer is either a business or public authority and still imposes a statutory rate of interest of 8% over Bank of England Base on late payments unless the parties have agreed a ‘substantial remedy’. However the Act has been amended so as to:
- impose maximum payment periods;
- limit the amount of time a purchaser has to verify goods or services; and
- increase the amount of payment enforcement costs a supplier can recover.
These changes only apply to contracts under which statutory interest is accruing (ie if there is not a ‘substantial remedy’ under the relevant contract).
The maximum payment period
In a contract where the customer is a public authority the parties can agree a date for payment of up to 30 days from the latest of the customer:
- receiving the goods or services;
- receiving the supplier’s invoice; or
- verifying that goods or services conform to the contract.
If the customer is a business, the payment period can be up to 60 days after the latest of the events listed above. The period can also exceed 60 days but only if expressly agreed by the parties and if it is not ‘grossly unfair’ to the supplier.
The maximum verification period
The Act limits the amount of time purchasers have to verify the conformity of goods or services to 30 days, unless the parties expressly agree a longer period and that period is not ‘grossly unfair’ to the supplier. Longer periods may be appropriate in particularly complex contracts.
Recovery of costs
Suppliers were already able to claim a fixed sum of between £40-£100 (dependent on the size of the debt) under the existing legislation to compensate them for the costs of recovering late payments. The changes introduce the additional right for a supplier to claim the difference between the reasonable costs it incurs in debt recovery (eg for appointing a debt recovery company or lawyer) and that fixed sum. Any unreasonable attempt to exclude either the fixed sum or top-up costs will not work.
Do my businesses’ trading terms need updating?
On one analysis the changes aren’t important as many clients will already have sought to draft their contracts for the supply of goods and services (especially where they are a customer) so that they provide for a ‘substantial remedy’ in order to avoid the statutory rate of interest applying. As the new changes only apply to those contracts where there isn’t a substantial remedy a simple analysis is that the changes won’t affect most clients.
However, if payment (or verification) periods are in significantly excess of those outlined above then we take the view that this could possibly be a factor that the court considers in determining whether or not there is a substantial remedy under the relevant contract. For example if a contract provided for a rate of interest of 7% over base but allowed a payment period of 90 days from delivery a court could possibly take the view that this is not substantial remedy. If the court considers that the contractual remedy isn’t substantial the contractual provisions become unenforceable and the statutory terms apply instead. Similarly, it is possible that an exclusion of a supplier’s right to recover its costs of debt enforcement may be taken into account by a court in considering the substantial remedy point. Therefore clients should consider reviewing payment periods (and other terms) in their contracts, though we note that there will be other commercial considerations and the risk statutory interest provisions apply is just one factor to be weighed against others.
As the changes to the Act result from the current Late Payment Directive clients should also consider the trading terms they use in other EU members states. Eversheds has experience of undertaking such reviews for a number of clients and a network of European offices with local law expertise.
The BIS Guidance on the changes can be accessed here.