Late Payments of Commercial Debts

United Kingdom

Late Payments of Commercial Debts

The Late Payment of Commercial Debts (Interest) Act 1998 (the “Act”) came to force on 1st November 1998 and in basic terms implies a statutory right to interest for late payment into certain contracts for the supply of goods and services entered into in the course of business. The Act implements the European Directive 2000/35/EC on combating late payment in commercial transactions. It has subsequently been amended by the Late Payment of Commercial Debts Regulations 2002 (the “Regulations”).

From 1st November 1998 to 31st October 2000 the Act provided for small businesses to claim interest from large businesses in the public sector. From 1st November 2000 to 7th August 2002 the Act allowed for small businesses to claim statutory interest from other small businesses. From 7th August 2002 the Act has become fully effective under the terms of the Regulations, allowing statutory interest to be claimed by all businesses and public sector organisations against other businesses and public sector organisations.

The Act applies to all contracts for the supply of goods or services where the purchaser and the supplier are each acting in the course of business. A contract for the supply of goods and services means a contract of sale of goods or a contract for a consideration (which must include money consideration) for the transfer or agreement to transfer to another of goods or property or the bailment or hire of goods or property or for the provision of a service.

Statutory interest does not apply to consumer credit agreement, contracts intended to operate by way of mortgage, pledge, charge or other security or a contract of service or apprenticeship.

Interest will only accrue on a qualifying debt. A qualifying debt is a debt created under the relevant contract to pay the whole or part of the contract price. A debt will not carry statutory interest if the supplier is entitled to interest under any other enactment (although the right to statutory instrument will not be effected by a discretionary power of the court, arbitrator or arbiter to award interest) or if the supplier has demanded interest to which it is entitled by virtue of any rule of law.

Statutory interest will run from the “relevant day” until payment is made. The relevant day will be the day that the supplier and purchaser agree payment is due unless the payment is an advance payment. The agreed date may be fixed or may be contingent upon an event happening or failing to happen. Where the payment is an advanced payment the relevant day will be the day on which the obligation to which the advance payment of the contract price relates is performed or in relation to a part payment the day on which the obligation or part of the obligation to which the part payment relates is performed.

In any other case the relevant is 30 days after the day on which the obligation to which the debt relates is performed or the day on which the purchaser gives notice of the amount of the debt or the claimed amount of the debt whichever is the latter.

If, by reason of the conduct of the supplier either before or after the creation of the debt, the interest of justice requires statutory interest may be held not to apply or to apply only in part or at a reduced rate.

In addition to any other statutory term such as under the “Unfair Contract Terms Act”, any contract term that purports to exclude the right to statutory interest will be void unless the contract also provides for a substantial contractual remedy for the late payment of debt. If a substantial remedy is agreed, then statutory interest will not apply, unless otherwise agreed.

The right to statutory interest cannot be varied unless the overall remedy for late payment is a substantial remedy.

The above restrictions on variation only apply before the debt is created. After that time the parties are free to agree terms dealing with the debt.

A remedy for late payment of debt will not be a substantial remedy unless the remedy is sufficient to compensate the supplier for payment and to deter the purchaser from making late payment and it is fair and reasonable to allow the exclusion or variation of the right to statutory interest. Regard will be had to all relevant circumstances when deciding whether a remedy is substantial or not including the benefit of commercial certainty, bargaining strength, whether the term was imposed to the detriment of the other (including under standard terms) and whether the supplier received an inducement to agree the exclusion or variation.

The Act will not apply if there is no significant connection between the contract and the United Kingdom and, but for a choice of English law, the applicable law would be a foreign law. The Act will however apply if a foreign law is chosen where, but for that choice, the applicable would be in the United Kingdom and there is no significant connection between the contract and a country other than the United Kingdom.

The right to statutory interest is not affected by a change in the identity of the parties to the contract or by assignment of the debt.

Any provision in the contract term which purports to postpone the time at which a qualifying debts would otherwise arise will be subject to the Unfair Contract Terms Act whether or not it is contained in the standard terms of business of the purchaser.

Drafting issues

The question remains whether given the right to statutory interest it is necessary for a supplier to include an interest provision in its contractual arrangements. The simple answer is that it is not necessary provided the Act applies to the contract concerned and provided the statutory interest provision is sufficient remedy for the supplier and sufficient deterrent to late payment.

It should be remembered that the Act does not apply to all contracts. It only applies to contracts for the supply of goods and services in a business-to-business context. It does not apply to business to consumer contracts nor does it apply in relation to the international supply of goods where the only connection with the UK is the choice of law.

It should be remembered that the rate of interest is fixed as at the relevant day at 8% over the Bank of England base rate. It may be that as a supplier you would wish in a contractual clause to ensure a variable rate of interest perhaps at a rate higher than the statutory rate. It may also be that you would wish, rather than simple interest to compound interest over the period of the debt. It should be remembered also that the statutory rate of interest would be superseded by the judgment rate after judgment on the debt. It may therefore be appropriate in the contractual clause to provide for continuing interest on the debt at the statutory rate after judgment.

When deciding to alter the rates or the provisions relating to the accumulation of statutory interest e.g. compounding, variation etc., care should be taken to ensure that the contractual clause does not become a penalty. The effect, however, of the contractual clause being a penalty is that it will be void and therefore the supplier should still be able to rely upon statutory interest accruing by virtue of the Act.

It should always be remembered that the supplier could lose its entitlement to interest under the Act if its conduct is such that in the interest of justice, statutory interest should be remitted in whole or in part. Although equitable remedies may be relevant, generally a contractual right of interest will apply notwithstanding any misconduct on the part of the supplier.

If a contractual right to interest is included in the contract then the exercise of such right in respect of a debt will effectively exclude the right to the statutory interest in respect of that debt. It should always be remembered therefore at the time interest is claimed whether it is better to rely upon statutory interest or on the contractual right to interest. When drafting the contractual clause it would be worthwhile stating that the supplier has the choice of relying on the contractual right to interest or statutory interest.

Statutory interest will only start to accrue once notice of the debt has been given to the purchaser. It is important, therefore, to ensure notice is given and there is an appropriate record of notice being given.

Statutory interest will only accrue in relation to the contract price. If other monies are payable under a contract then it would be important to include a contractual interest clause which applies to such payments. Contractual interest on debts due under indemnities, for instance, may be appropriate.

In relation to advance payments it should be remembered that statutory interest will only commence to accrue on advance payments once the obligation to which the advance payment relates has been performed. From the supplier’s point of view it may be appropriate to have interest accruing on the advance payment from the date the payment should have been made.

Variation/exclusion of statutory interest

The possibilities for variation or exclusion of statutory interest by the purchaser are restricted. If the purchaser intends to exclude or vary statutory interest, then this should be expressly stated in the clause. It should be remembered that statutory interest can accrue in addition to other remedies provided to the supplier.

It may be possible to vary the rate at which statutory interest accrues. It should be remembered that the European Directive provides for interest at 7% over the European and Central Bank rate. This may or may not be of benefit to the purchaser but should be considered. If there is to be a lowering of the rate then it would be important to counter-balance the detriment to the supplier with other benefits, for instance, by making the rate compound rather than simple, or by providing other remedies such as payment in advance for the remainder of the term if a debt has not been paid or an increase in the price of the goods concerned.

It may also be possible to delay the due date for payment i.e. the relevant day, however, any remedy must still be substantial and the delay must not be unreasonable under the provisions of the Unfair Contract Terms Act 1977 (whether or not the delay results from standard terms and conditions). It may also be possible to extend the performance obligation itself so that statutory interest would not accrue until the obligation had been performed in whole.

It is not clear to what extent a provision which prevents a debt becoming due if it is disputed, will work. It will probably only work to the extent that the dispute results in the payment not becoming due i.e. the purchaser being justified in its dispute.

It should be remembered that statutory interest only applies to the benefit of the supplier i.e. in relation to the contract price. If there are or may become sums due and payable to the purchaser, then a contractual rate of interest should be included for the benefit of the purchaser.

Interest on late payment

The Parties agree that statutory interest shall not apply in relation to obligations under this Agreement and that (provided this exclusion of statutory interest is effective) a Party that fails to pay any sum payable by it under this Agreement on the due date for payment shall pay interest on such sum for the period from and including the due date up to the date of actual payment (after as well as before judgment) at:

the rate which is the aggregate of [ ]% per annum and the base rate from time to time of [ ] Bank plc; or

a rate equivalent to the rate of statutory interest which would otherwise apply,

whichever is the lower at the due date. The interest will accrue from day to day on the basis of the actual number of days elapsed and a 365-day year and shall be payable [on demand] and compounded [quarterly]/[monthly] [in arrear].

In this clause, “statutory interest” means interest within the meaning of section 1 of the Late Payment of Commercial Debts (Interest) Act 1998. Notes:

  • The clause is designed to benefit the recipient of the supply. It is supposed that, in order to exclude the automatic application of statutory interest (currently 12% pa), the contract must at least provide for default interest (albeit at a lower rate) so as to include an alternative “substantial contractual remedy” within the meaning of Part II of the Act. If the compounding provisions are retained, the clause will in that respect represent an improvement on the supplier’s position under the Act (as statutory interest is simple interest) and therefore enhance the credibility of the clause as a reasonable alternative.

  • The clause expressly excludes the possibility of both statutory and contractual interest running (although the whole clause might become void anyway if it is held not to constitute a substantial contractual remedy).

  • If the contractual rate ever exceeds the statutory rate (admittedly a remote chance, but possibly worth bearing in mind for long-term contracts), the lower rate will prevail – although it will still represent a better position than under the Act if the compounding provisions are retained.