A recent decision in the English Commercial Court has given helpful guidance as to the circumstances in which the UK’s late payment legislation will apply to international contracts. This legislation requires parties to specify a “substantial remedy” for late payment and if no such remedy is specified, a statutory interest rate will apply (presently 8.5%), together with an entitlement to the reasonable costs of recovering payment (which may include legal costs).
The legislation in question is the Late Payment of Commercial Debts (Interest) Act 1998 and reflects the UK’s implementation of European directives on combatting late payment in commercial transactions. Section 12 of the Act concerns international contracts and prescribes that a choice of English law alone is not sufficient to attract the applicability of the Act. In such cases, the Act will only apply where (i) there is a “sufficient connection” between the contract and the UK; or (ii) the contract would be governed by UK law apart from the parties’ choice.
In Martrade Shipping v United Enterprises the Commercial Court overturned an arbitral finding that a “significant connection” to the UK had been established by the presence of an English arbitration clause and the use of the English language in the contract and contract documents. These were rejected by the court as providing any evidence of a significant connection to the UK for the purpose of the Act. The court also provided four examples of matters which might provide such a connection:
- Where the place of performance of obligations under the contract is in the UK.
- Where the parties or one of them is of UK nationality. The court noted that the policy behind the Act was likely to be engaged where a paying party was a UK national and fairness may then require that both parties should be placed on an equal footing, even if the other party was not a UK national.
- Where the parties are carrying on some relevant part of their business in the UK.
- Where the economic consequences of a delay in payment might be felt in the UK. The court noted that this could involve the consideration of related contracts, related parties, insurance arrangements or the tax consequences of transactions.
The above criteria have the potential to apply to international construction projects located outside of the UK where the parties have chosen English law to govern the contract. The incorporation of one of the parties in the UK is an obvious example. Another could be the granting of performance securities by a UK bank. Parties would therefore be well advised to consider the potential application of the Act when negotiating such contracts. Where facts connecting the contract to the UK are present, steps should be taken to ensure that the payment provisions of the contract comply with the Act.