New proposals to give debtors a statutory right to charge interest for late payment

Late payment - interest charges

Victoria Peckett examines proposals to give debtors a statutory right to charge interest for late payment

Under the law as it presently stands, it is generally not possible to recover damages for late payment of a debt. That has been the rule ever since the decision of the House of Lords in 1893 in the case London Chatham and Dover Railway -v- South Eastern Railway. There are exceptions to that rule - for example, there may be a clause in the contract entitling a party to claim interest on late payment - but the Courts have consistently said that it is not for them to overrule the principle of Chatham Railways: this must be left to Parliament.

Parliament has now taken up that challenge: the Late Payment of Commercial Debts (Interest) Bill is currently being considered by it. If enacted, this will give debtors a statutory right to charge interest for late payment of a commercial debt.

The Bill is divided into three parts.

Part I

Part I (which is subject to Part II) sets out:-

• the contracts to which the Bill applies. These are contracts for the supply of goods and services where the purchaser and supplier are acting in the course of a business. There are excluded contracts (eg. mortgages) and the Secretary of State has the power to exclude further contracts from the operation of the Bill.
• "qualifying debts" to which the Bill applies. These are debts created under the terms of a contract to which the Bill applies. Amounts owed will not be "qualifying debts" if, for example, a right to charge interest applies by any other Act or if a debt is excluded from the application of the Bill by an order of the Secretary of State.

Part I then provides that a term is to be implied into contracts to which the Bill applies that qualifying debts carry simple interest from the day after the agreed date for payment or, if no date for payment is agreed, from the thirtieth day after either the performance of the obligation to which the debt relates or, if later, the date on which the creditor receives notice of the debt.

The rate of interest which is to apply will be provided in an order of the Secretary of State. In its Green Paper on the subject, the Government originally suggested that the rate should be 4% per annum above the prevailing base rate but it has since increased this to 8% above base on the basis that it wishes "to prevent the smallest of businesses suffering because they have to borrow overdraft finance to cover their late paid bills at a higher rate of interest than the base rate plus 4% initially proposed". It remains to be seen whether 8% above base is the rate which will be finally fixed by the Secretary of State's order.

Part I also provides that the statutory rate may not apply for a particular period, or may apply at a reduced rate if, by reason of the conduct of the creditor, the "interests of justice" require that this be the case. It is difficult to predict what sort of conduct this provision is aimed at. If the creditor has performed his obligations in a way that does not comply with the contract, then in most cases either the obligation to pay will not arise or the debtor will be entitled to make a set-off against the payment due.

Part II

Part II deals with contractual terms relating to late payment of qualifying debts. It provides that parties may agree to oust or vary the statutory right to interest but only if they provide a "substantial contractual remedy" for late payment.

A remedy is to be regarded as substantial unless:

• Firstly, it is insufficient either for compensating the creditor for late payment or deterring late payment and,
• Secondly, it would not be fair or reasonable to allow the remedy relied on to oust or vary the statutory right.

In determining whether a remedy is substantial, regard has to be had to all the relevant circumstances at the time of agreeing the terms in question.

It is this part of the Bill that has the most potential for causing disputes. For example, if the parties agree that a rate of interest lower than the statutory rate is to apply, it will depend on "all the relevant circumstances" whether that is to be regarded as a substantial remedy and the answer to this question will be very difficult to predict. Amendment 18 to JCT 80 (dealt with more fully elsewhere in this Bulletin) provides, in Clause 30.8.5, that simple interest is payable, at a rate of 5% over the base rate of the Bank of England, on amounts not paid by the final date for payment. Will this be a substantial remedy for the purposes of the Act?

There is also, of course, the question of the inter-action of the Bill with the Housing Grants, Construction and Regeneration Act 1996 ("the Construction Act"). The Construction Act provides that if a debtor does not make payment in accordance with the Construction Act - for example, he does not pay the due amount by the final date for payment, or he withholds sums from payments that are due without serving a valid withholding notice - then the creditor is entitled to suspend performance of his obligations until payment is made. If the parties agree that the right of suspension is to be the sole remedy for late payment, will this be regarded as a substantial contractual remedy? The answer will have to be that it depends on all relevant circumstances at the time of contracting and again cannot be predicted with any certainty.

Part III

Part III of the Bill contains various general and supplementary provisions. These include:

• provisions dealing with the treatment of advance payments of the contract price
• provisions dealing with assignments of contracts or debts under them
• provisions dealing with commencement.

Implementation

The commencement provisions provide that the Bill will be brought into force by order of the Secretary of State and specifically provides for phased implementation. Current proposals are for implementation as follows:

• small businesses (being those employing 50 employees or less) will be able to claim against large businesses and the public sector as from the date of the enactment of the Bill;
• small businesses will be able to claim against all businesses and the public sector 2 years after enactment of the Bill; and
• all businesses will be able to claim against all businesses and the public sector 4 years after enactment of the Bill.

The rationale for this appears to be that it will take longer for small businesses to gear themselves up to comply with the Bill and that the majority of those who responded to the Government's Green Paper thought that a phased implementation was a good idea. However, these proposals would create a great deal of difficulty in determining whether a particular company is subject to the provisions of the Bill or not as it may be impossible to tell whether it has more than 50 employees. The phasing provisions have come in for heavy criticism in debate in both the House of Lords and in the House of Commons' Standing Committee dealing with the Bill, and it remains to be seen whether the proposals for phased implementation will be adopted - and, indeed, whether any other parts of the Bill will be altered before it is enacted.

Conclusion

Cynics may say that the Bill will do little to assist small businesses improve their cashflow, either because:

• contractual credit periods will be extended, or
• debtors will dream up claims which can be set-off against amounts owed, or
• small businesses will not have the temerity to enforce their right to claim interest against larger companies with whom they wish to develop long term relationships.

However, these arguments are not sufficient reason for refusing to overturn the Chatham Railways rule, which surely has no place in today's commercial environment.