All business to be entitled to statutory interest on late payment

From today, 7th August 2002, the UK legislation which provides for interest on overdue debts will apply to all businesses. Previously only small businesses benefited from this right. Now, any business owed money will be able to apply a statutory interest rate of 8 percent over base unless the contract provides an alternative remedy which is substantial.

It is up to the courts ultimately to decide what counts as a substantial remedy and so we await some reported decisions for clarification. However, DTI guidance suggests that the interest rate should compensate the supplier - so it must be at least equivalent to the authorised overdraft rate at which it has to fund its cashflow shortfall - and should incentivise the customer not to pay late - so it must be more than the interest the customer earns on its bank balance.

The Late Payment of Commercial Debts (Interest) Act 1998 which introduced a statutory right to interest on late payment of commercial debts has been brought into force in stages. Details of the Act can be found by copying and pasting or clicking on the following link: http://www.law-now.com/law-now/press.cfm?id=3691. However, the government has recently amended the original legislation in order to implement an EU directive on late payment. The effects of these amendments are:

• the final phase of implementation has been brought forward - from 7th August 2002 (rather than 1st November 2002 as originally planned), any business or public sector supplier will have the right to claim statutory interest from any other business or public sector supplier which owes it money;
• the power of the Secretary of State to exempt certain contracts from the right to claim interest has been repealed;
• creditors can now claim "reasonable" debt recovery costs - these are fixed by law and range from 40 GBP to 100 GBP depending on the size of the debt;
• representative bodies can challenge grossly unfair contractual terms on behalf of small and medium-sized enterprises;
• calculation of the interest rate has been simplified - instead of having to find out the base rate applicable on the day the debt fell due, the rate applicable to debts falling due in the first half of the year is now 8 percent over the base rate on the previous 31st December and for debts falling due in the second half of the year the rate is 8 percent over the base rate on 30th June. These reference rates can be found on the website www.payontime.co.uk.

The aim of the legislation was to encourage a culture of prompt payment, especially for small and medium enterprises, but suppliers are not required to apply the statutory rate and it remains to be seen whether small suppliers will feel able to impose such a rate on large customers.

For further information about the late payment regime, please contact Alex Smith in London ([email protected] or on +44 (0)20 7367 3480) or Judith Aldersey-Williams ([email protected] or on +44 (0)1224 622002) in Aberdeen.