The Late Payment of Commercial Debts Regulations 2013 came into force on 16 March and this article explores the key changes it introduces.

What?

The Late Payment of Commercial Debts Regulations 2013 came into force on 16 March. The Regulations amend the Late Payment of Debts (Interest) Act 1998 and implement changes required by the 2011 Late Payment Directive.

So What?

Businesses should be aware of the Regulations but as many different commercial considerations are balanced when deciding what the payment period should be under commercial contracts, and the rules of statutory interest will be just one of these, so we suspect in many circumstances, changes will not be made to contracts.

Under the Late Payment of Debts (Interest) Act 1998 (“Act”), prior to amendment, 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 Late Payment of Commercial Debts Regulations 2013 make three key changes:

  • they seek to curtail 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 seek to 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).

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.

There is no change to the statutory rate of interest which remains at 8% over the Bank of England base rate.

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 the parties expressly agree a longer period and that period is not ‘grossly unfair’ to the supplier. The pre-amble to the Directive envisages 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 Regulations however appear to give 90 days, though we note that no other commentators have yet commented on this divergence between the Regulations and the Directive. In practice we suspect that this won’t be a significant issue as it would be relatively unusual for a payment date to be set more than 60 days after delivery (unless it is a complex contract in which event a longer period is permissible (see above)).

Recovery of costs

Under the Act (if statutory interest accrues) suppliers are already able to claim a fixed sum of between £40-£100 (the amount depends on the size of the debt) to compensate them for the costs of recovering late payments. The Regulations introduce the additional right for a supplier to claim the difference between the reasonable costs it incurs in debt recovery (e.g. for appointing a debt recovery company or lawyer) and that fixed sum. Any attempt to exclude either the fixed sum or top-up costs is subject to the UCTA reasonableness test.

The concept of gross unfairness

When determining whether it is grossly unfair for a business purchaser to agree a time extension with a supplier (either for payment or verification), all the circumstances of a case are to be taken into account, including:

  • whether anything is a gross deviation from good commercial practice and contrary to good faith and fair dealing;
  • the nature of the goods or services supplied; and
  • whether the purchaser has an objective reason for deviating from the statutory provisions.

This concept is new to English Law and we will have to wait and see how the courts interpret it.

Expressly Agreed

Some provisions of the Regulations require terms to be “agreed” and others “expressly agreed”. There is no guidance on the intended difference between these two terms.

We’ve seen commentary from DLA on the Directive that queries whether terms contained in written standard terms would be considered to be “expressly agreed” though this won’t become clear until we see cases on the new legislation.

How do the changes fit with the concept of “substantial remedy” under the Act?

Contracting parties are currently allowed to exclude or vary the right to receive statutory interest if there is a substantial contractual remedy for late payment and this will remain the position after the Regulations come into force.

A remedy will not be substantial if it is insufficient to compensate the supplier for late payment or to deter late payment and it would not be fair or reasonable to allow the remedy to be relied on (section 9). What constitutes a “substantial” remedy for these purposes will be a question of fact. Government guidance on this issue issued in relation to the existing legislation states that to come to a decision a court will consider all the circumstances including the rate of interest, the length of the credit period, the bargaining position of each of the parties, any standard industry practice and whether the contractual terms will achieve the objectives of deterring late payment and recompensing the costs incurred by the supplier as a result of the late payment. It is possible that if the parties agree a long payment period (e.g. in excess of the 30 or 60 days envisaged for public authority or business contracts) that this would be a factor taken into consideration by a court, but it may be some time before we see any cases on this so that we can analyse the court’s approach to this issue. 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.

Which contracts do the Regulations apply to?

The Regulations do not have retrospective effect and only apply to contracts made on or after 16 March 2013.

The Act continues to apply to all contracts for the supply of goods and services that are business to business or between businesses and public authorities. Business is defined broadly and includes sole traders and professionals. Consumer credit agreements, mortgages, pledges, charges and other security contracts remain outside the ambit of the Act.

The Act continues to apply to all contracts governed by the law of part of the UK (unless the only significant connection with the UK is the choice of law). It also applies to a contract that is governed by a foreign law if there is no significant connection between the contract and any country other than the UK and but for the express choice of law clause the applicable law would be that of a part of the UK.

Conflict with the Directive

As noted by PLC, the Regulations do not appear to have enacted all of the provisions of the Directive into UK law. Even where provisions have been adopted they have not necessarily been introduced in the manner envisaged by the Directive. This may mean that they are revised in the future.

Those parts of the Directive that have not been enacted cannot be enforced against a business but could possibly be enforced against public authorities.