Late Payment of Commercial Debts

Claiming Interest Under the Late Payment of Commercial Debts (Interest) Act 1998

Where a commercial contract is in place for the procurement of goods or services, businesses are able to charge interest on debts when payment is not forthcoming. The legislation that relates to this includes The Late Payment of Commercial Debts (Interest) Act 1998 and the Late Payment of Commercial Debts Regulations 2002.

The law states that only businesses are able to claim interest under the Late Payment of Commercial Debts Regulations. A ‘business’ in this sense will include any activity of a government department, local or public authority or a profession.

Following on from changes made to the legislation in 2002, all businesses regardless of size can now claim interest.

Late Payment of Commercial Debts

Charging Interest

If there is a contract for goods or services in place, under the Act interest can be charged provided that the buyer and supplier are both acting in the course of business. There are some exceptions to this rule and this is applicable to what is known as an ‘excepted contract’.

It is also possible for businesses to override or amend certain provisions in the Act.

Before you can think about charging interest, you must first establish that there is a contract in place.

A contract for the provision of goods or services will include:

  • A contract relating to the sale of goods
  • Payment under a contract for the actual or agreed transfer of goods
  • Payment under a contract for the actual or agreed hire of goods
  • Payment under a contract to supply a service
  • Any type of transaction where fees are paid for professional services to a member of the Faculty of Advocates
  • Where the contract has been created as a contract of service or contract for apprenticeship, these cannot be dealt with under the supply of goods and services.

Excepted Contracts

As outlined above, excepted contracts are exempt from this legislation.

There are several different types of excepted contract, but they primarily fall into two categories:

  • Those which fall under a consumer credit agreement
  • Those which fall under an agreement such as a pledge, mortgage, charge or type of security

Overriding or Varying Statutory Interest

In certain circumstances it may be possible for a business to agree to vary or override provisions outlined in the Act. That being said, any attempt to do this is only valid provided that both parties have agreed that there is a substantial remedy available in the event of late payment.

Under the Act, any remedy is not deemed to be ‘substantial’. It must adequately compensate the supplier for late payment or be sufficient to deter late payment. However the substantial remedy must not be unreasonable or unfair.

If a case proceeds to court, they will make a decision as to whether the remedy was substantial. In doing so, the Court will consider a number of factors such as the individual circumstances of the case along with the strength of bargaining position for each side.

Sometimes, businesses may rely on standard terms and conditions and these may seek to override the provisions of the Act. In doing so, this may be contrary to the terms outlined in the Act. A representative body, this is an organisation that has been created to represent the collective interests of independent businesses with 250 employees or less and a turnover of 40 million Euros or less, can make an application to the High Court to prevent a business from using these terms.

Calculating Interest

The interest that can be charged is set by the Bank of England base rate in addition to a further 8%. This interest rate is fixed every six months. Any interest claimed is referred to as statutory interest and it can be claimed from the day after the date that the debt was due until such time as the debt is settled in full.

Relevant Day for the Debt
This term is used to describe the date which has been agreed between the supplier and buyer for the payment to be made, unless arrangements have been made for an advanced payment. The date that is agreed could be fixed or it could be dependent on a specific event. As an example, it may be agreed that the debtor will make a payment on the 25th of each month or an agreement may be made to make payment within seven or fourteen days of receiving the goods or services.

If the involved parties do not make any agreements for payments, then the day that the debt becomes due will be 30 days after the delivery of the product or service or the date that the buyer has been notified that they must pay, whichever date is later. When it comes to payment for contracts in relation to the hire of goods or where a date for payment has not been agreed, the relevant day for the debt will be the date at which the hire period expires.

Advanced Payments
Sometimes it may be necessary to make advanced payment. In this instance, the date that the debt becomes due will be the day when the supplier’s obligations have been carried out.

If a case goes to court, the Courts do have the power to use something called a ‘remit’. This is where they can either reduce or cancel entirely the amount of interest that is payable. The Court will do this when they believe it would be unfair to the buyer to have to pay the interest or the conduct of the supplier was questionable in some way. If an entitlement to claim interest occurs under any other legislation, this interest should be applied in the most suitable manner.

Late payments can cause small businesses serious financial difficulties and many businesses experience cash flow problems due to the late payment of invoices. Where invoices remain outstanding they are entitled to claim interest in accordance with the Late Payments Act.

About the author:

This article was written by a member of the Expert Answers legal advice team and posted by Lloyd Barrett. Expert Answers provides online legal advice on all aspects of UK Law to users in the United Kingdom.

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