Late Payment Interest

The Late Payment of Commercial Debts (Interest) Act 1998 ("the Act") was introduced on 1 November 1998 to give businesses a statutory right to claim interest from certain slow payers.

The Act applies to contracts for the supply of goods or services where the purchaser and the supplier are each acting in the course of a business. Certain types of contract, for example mortgages, are excluded from the application of the Act.

The Act was amended and supplemented by the Late Payment of Commercial Debts Regulations 2002 which implemented European Directive 2000/35/EC.

The rights established by the legislation were introduced in stages. Originally the 1998 Act was to introduce rights in 3 phases that were to come into effect on 1st November 1998, 2000 & 2002, however the 2002 regulations amended the third phase, which was introduced on 7 August 2002.

Phase 1

• from 1 November 1998 small businesses have a statutory right to claim late payment interest from large businesses and the public sector on debts incurred under contracts agreed after 1 November 1998;

Phase 2

• from 1 November 2000 small businesses have a statutory right to claim late payment interest from other small businesses on debts incurred under contracts agreed after 1 November 2000; and

Phase 3

• from 7 August 2002 all businesses and the public sector have a statutory right to claim late payment interest from all businesses and the public sector on debts incurred under contracts agreed after 7 August 2002.
• In addition to interest, a further sum in respect of "reasonable debt recovery costs" can also be claimed.

The amount of "reasonable debt recovery costs" that can be claimed following implementation of phase 3, is determined by reference to a simple table:

A "public sector" body includes any government department, local or public authority.

A "business" may be a limited company, partnership or sole trader. The Act does not apply to consumers contracting as such.

A "large business" is a business with more than 50 employees.

A "small business" is a business with 50 or fewer employees.

An "employee" is a person who works in a business whether under a contract of employment or not (including sole traders and partners). Provision is made for counting part-time employees (employees who work for less than 35 hours per week) as fractions of full-time employees (employees who work for 35 hours or more per week) and also for employees of associated businesses to be counted. For the purposes of the Act, the number of employees employed in a business is the average number of employees employed in the business in the period of 1 April to 31 March immediately preceding the making of the contract (or employed in a shorter period, details of which appear in the first commencement order, for new businesses).

The vast majority of small businesses in England and Wales employ far fewer than 50 employees and for these businesses it will be relatively easy to decide whether or not late payment interest can be claimed under the Act. For other small businesses employing around 50 employees, it will be necessary to consider the detailed legislation and in particular the Late Payment of Commercial Debts (Interest) Act 1998 (Commencement) No. 1 Order 1998 to determine whether or not the Act can be used.

The question of whether or not the Act applies to a contract is determined by reference to the circumstances when the contract was made, and accordingly is not affected by any subsequent change in those circumstances.

A claim for interest under the Act can be made when a payment is late, either because:

• it is not made within a credit period agreed between the supplier and the purchaser; or
• where no credit period has been agreed, it is not made within 30 days after the later of:
  • the delivery of the goods or the performance of the service by the supplier; and
  • the day on which the purchaser had notice of the amount of the debt.

Interest starts to run on the day after the day on which payment should have been made in respect of the debt, at the prevailing rate. The current prevailing rate is 8% over the official dealing rate of the Bank of England (more commonly known as the Base Rate).

The interest can be pursued separately from the principal debt and assignment of the interest to third parties, such as factoring companies, is possible.

No minimum level has been set below which a claim for interest cannot be made.

If by reason of any conduct of the supplier, the interests of justice require that interest should be remitted in whole or part in respect of a period for which it would otherwise run in relation to a debt then a Court can order that the supplier should receive no interest for that period.

The right to claim interest under the Act does not apply retrospectively of the 3 implementation dates. Therefore, a supplier claiming interest under the Act in respect of a period prior to the implementation of the third phase on 7 August 2002 may be required by a debtor to prove that the supplier is a small business. Establishing that a supplier is a small business is likely to be relatively straightforward. Most suppliers will have personnel records readily available.

A false claim by a supplier to be a small business may have serious consequences.

The Government wants to encourage businesses to agree their own contractual terms giving a right to interest if bills are paid late. The legislation therefore gives precedence to contractually agreed provisions. It would therefore be prudent for all businesses to consider and possibly revise their standard terms and conditions, as the right to claim interest under the Act may be more advantageous than those included in their standard terms.

The Act applies to contracts made under the law of England and Wales. It also applies to Scotland and Northern Ireland. Although the Scottish Parliament has the power to amend or replace the Act, it is likely that this will only be done in co-ordination with changes to the Act in England and Wales.

LRC's systems are programmed to enable interest and compensation to be claimed automatically on your behalf - contact Claire Clark for details of how we can help you.