The late payment of commercial debts can have a detrimental impact on any size of business, but perhaps more so for a smaller business where cash flow is more likely to be reliant on the timeous payment of invoices.
The enactment of the Late Payment of Commercial Debts (Interest) Act 1998 makes provision for creditors to be compensated where instances of late payment of debts arise. The introduction of the Late Payment of Commercial Debts Regulations 2013 further amended the provisions of the Late Payment of Commercial (Interest) Act 1998 extending the scope of the Act. It added an implied term to qualifying contracts whereby providing a statutory right to claim interest and compensation arising from the late payment of commercial debts. It is important to be aware of the terms of the relevant legislation as they essentially act as a deterrent to the late payment of commercial debts.
Who Can Claim?
The qualifying contracts are those between business and business made after 7 August 2002 and for the supply of goods and/or services for monetary consideration. It should be noted that a consumer credit agreement or other contract operating by way of mortgage, charge or other security are expressly excluded for the purposes of the Act.
On the agreement of both parties, there is an allowance for them to opt out of the Act and instead agree a contractual remedy for the late payment of commercial debts. However, if there is no express provision within the contract stipulating an agreed remedy for the late payment of commercial debts, then the Act will automatically apply.
The Late Payment of Commercial Debts (Interest) Act 1998
Prior to the Regulations, a qualifying business would have had a Statutory Right to claim interest at 8% over the Bank of England Base Rate. The Statutory interest was calculated from the day after the agreed date of payment of debt and ending with the date the debt was actually paid. If there was no agreed date then the Statutory interest would be calculated from the later of either:-
- The date the Supplier performed its obligation; or
- The date the Customer received the invoice.
Compensation
In addition to a claim for statutory interest, the creditor could also have a claim for compensation for the costs incurred in recovering the debt. This compensation was calculated in the form of a fixed sum as set out below: -
- Compensation in the sum of £40 would be awarded for a debt less than £1,000;
- Compensation in the sum of £70 would be awarded for a debt between £1,000 and £10,000; and
- Compensation in the sum of £100 for a debt of £10,000 or more.
Compensation could be claimed for every invoice that was not paid within the credit period, with the allowance to claim compensation for the delayed period even where the invoice had thereafter been paid.
The Late Payment of Commercial Debts Regulations 2013
The above criterion for the calculation of statutory interest has now been amended by the enactment of the Late Payment of Commercial Debts Regulations 2013. The Regulations introduced a differentiation in the time periods for a public authority as the customer and for another business as the customer.
Public Authorities:-
Where a public authority has purchased the goods or services, statutory interest will start to run on any unpaid invoices from 30 days after the invoices have been received, the goods or services have been received, or where the goods or services are vertified and accepted, whichever is the later.
Other Organisations/Businesses:-
Where another organisation or business has purchased the goods or services, and a payment period has not been agreed, statutory interest will start to run on outstanding payments from 30 days after the invoice has been receive, the goods or services have been received or where the goods or services are vertified and accepted, whichever is the later. As was the position prior to the Regulations, if a payment period has been agreed and specified in the contract, then the statutory interest will start to run from that date. However, the Regulations have introduced a further amendment for when that agreed payment period is more than 60 days after any of the events listed previously. In such circumstances, the statutory interest will begin to run from the date 60 days after the events listed above despite the express contractual terms, except where the longer payment period agreed between the two partied is not ‘grossly unfair’ to the supplier. In determining whether the longer payment period would constitute as being ‘grossly unfair’ the Regulations insist that all circumstances be taking into account, with particular consideration given to the nature of the goods and services; whether the purchaser has an objective reason for requiring the extended period and whether the long payment period is a gross deviation from good commercial practice and contrary to good faith and fair dealing. It is also important to note that statutory interest rate payable remains unchanged under the Regulations as 8% above the base rate.
Compensation
With regard to Compensation under the Regulations, the fixed sum amounts stated above remain unchanged. However, the Regulations have introduced a further level of compensation. The creditor may now claim as compensation any further reasonable costs which are incurred in recovering the debt and which are not included in the fixed sum. Therefore, it is possible for the creditor to recover any legal costs that they may incur in recovering the debt as long as such costs are reasonable in the circumstances.
Important Points to Consider
- If a contract expressly provides a substantial contractual remedy for late payment then the Act and Regulations will not apply.
- The Regulations only apply to contracts that have been made on or after 16th March 2013. The Regulations do not apply retrospectively.
- Public Authorities should review their payment terms to ensure they do not exceed the maximum 30 day period.
- Other Organisations and Businesses should also review their payment terms to ensure that they do not exceed the maximum 60 day period.
Summary
The Late Payment of Commercial Debts (Interest) Act 1998 and subsequent Late Payment of commercial Debts Regulations 2013 are crucial in combating the EU-wide culture of late payments in commercial transactions. Late payments affect business sizes and it is therefore important that you are aware of the sanctions and remedies available in order to prevent the problems caused by late or unpaid invoices.
Contact our Litigation Solicitors in Glasgow
Please note that this article is for general information only. Nothing in this article should be taken as legal advice. Should you require any further information with regard to the Recovery of Commercial Debts, contact our litigation team on 0141 221 1919.
