A critical part of the cash flow of every business is for payments from customers to be received promptly. The Late Payment of Commercial Debts (Interest) Act 1998 can greatly help to reduce late payments from debtors. This late payment legislation is now of even more importance following the recent changes to the limit of the Small Claims Court where claims with a value less than £10,000.00 are now allocated to the Small Claims track, where costs are not generally recoverable. The late payment legislation enables parties to recover their reasonable costs together with interest which is at a higher rate than that which the County Court usually awards.
The Act implies a term into the contracts for the supply of goods and services from one business to another that a simple rate of interest can be applied to “qualified debts”. Statutory interest begins to accrue, following a payment not being received on the day after the “Relevant Day”. The Interest is calculated at 8% above the Bank of England base rate. This is set at such a high rate in order to encourage payments to be made on time. Parties could agree an alternative amount provided that it gave the supplier a “substantial remedy” for late payment of the debt.
The Late Payment of Commercial Debts Regulations 2013 and the Late Payment of Commercial Debts (No.2) Regulations 2013 have amended the Act and in particular the way in which the Relevant Day is calculated. These amendments apply to those contracts entered into after the 16th March 2013 in England, Wales and Northern Ireland. Following an error in the original implementation, the No.2 Regulations apply to contracts entered into on or after 14th May 2013. It will be for the Courts to decide how the legislation will apply to contracts between 16th March 2013 and 13th May 2013.
The timing rules for advance payment have not been changed by the new regulations only those relating to how to calculate the Relevant Day.
What if there is no agreed payment date?
If the parties of a contract have not agreed a date for payment, then the default rules apply and the Relevant Day is the last day of the 30 day period starting on whichever is the later of:
- The date of receipt of the goods or services, or
- The day of receipt of invoice, or
- The day after the day on which any process verifying that the goods or services confirm to the contract is completed.
Payment date agreed
Special rules apply to contracts where the purchaser is a public authority. However, where a purchaser is not a public authority and the parties have agreed a date for payment of the contract price, the agreed date is the Relevant Day. Unless the agreed day would be later than 30 days after the date which would have been the Relevant Day under the default rules set out above.
If it would be later, then the Relevant Day will be the last day of the 60 day period starting on whichever is the later of the points set out above.
If payment terms are stated in the contract, interest will start to accrue after 60 days or from a later date as specified in the contract, unless the later date is obviously unfair, in which case the 60 day rule applies.
Is there a limit on the verification procedure?
If the verification procedure takes longer than 30 days which starts on the day on which the supplier performs the contract, the rules deem that the period for carrying out such procedures is 30 days from and including the date of the performance.
There is now a new provision which deals with the situation where the fixed sum provided in the Act does not cover the reasonable costs of actually recovering the debt. A supplier is now entitled to recover such reasonable costs where they are not met by the fixed sum.
The entitlement to fixed recovery costs and the new further recovery payment only arise once statutory interest begins to accrue.
The rules allow for a further period after verification is completed before statutory interest would start to accrue. The further extension period however, must not be considered “grossly unfair”.
When considering whether an extension period is “grossly unfair” the following would need to be considered:
- Is there anything that is a gross deviation from good commercial practice, and contrary to good faith and fair dealing
- The nature of the goods or services in question, and
- Whether the purchaser has any objective reason to deviate from the result which is otherwise provided for by the statutory provisions.
The aim of the new rules is to tighten the already strict regime regarding late payment. It is important to ensure that interest begins to accrue on a debt at a time that is anticipated by both parties and therefore express terms which comply with these new rules should be included in contracts for good and/or services.
Lisa Wainwright is an Associate Solicitor and Head of the Dispute Resolution Department at BHW Solicitors in Leicester. Lisa can be contacted on 0116 281 6223 or by email at firstname.lastname@example.org.