Late payment of invoices has long caused, and continues to cause, significant issues for businesses, especially in light of the current economic climate, with small/medium size companies often being the worst affected.
Late payment of invoices has long caused, and continues to cause, significant issues for businesses, especially in light of the current economic climate, with small/medium size companies often being the worst affected. This article provides a brief overview of the existing legislation and looks at some recent developments, including a case concerning the rate of interest payable and the proposed changes to current legislation that would have a particular impact on local authorities.
Until the government introduced the Late Payment of Commercial Debts (Interest) Act 1998 (the “Act”), businesses in the UK had no statutory right to claim interest for late payment. The Act provides for a compensation fee and the payment of interest on late payments at a rate of 8% above the base rate, which starts to accrue the day after the final day for payment. If no payment date has been agreed between the parties then the Act provides for a 30 day interest free period after which interest is payable. This statutory credit period starts to run from the date of delivery or the invoice, which ever is the later. Such statutory provisions are implied into contracts for the supply of goods and services unless the parties agree otherwise in the contract. However, this is based on the proviso that any alternative contractual remedy must be “substantial” otherwise it will be deemed void and the statutory provision will apply.
Since the Act was introduced, there has been some debate on what constitutes “substantial”. A recent case, Yuanda (UK) Co. Ltd –v- WW Gear Construction Ltd (2010) EWHC720 (TCC) provides further guidance on this. In this case, a contract provided for an interest rate of 0.5% over base rate on late payments. The court held that this was not a substantial contractual remedy as defined by the Act. Accordingly, the court held that this term of the contract was void and replaced it with the statutory rate of 8% over base rate.
Whilst an interest rate of 0.5% over base rate is at one end of the spectrum, courts have held that interest rates between 2% and 4% above base rate are normal in contractual relations, although it has been held in one case at an interest rate of 15% was substantial yet not a penalty. In light of this, anyone wishing to insert an interest rate into a contract significantly below the statutory rate or indeed the industry norm, should consider the outcome of the Yuanda case and, at the very least, draw the other party’s attention to the proposed rate of interest prior to the contract being signed to allow the parties the opportunity for negotiation.
Last year, the European Commission proposed changes to the law that will affect public authorities. The objective of such proposals is to encourage public authorities within member states to lead by example in relation to the prompt payment of commercial debts. The proposed changes, if adopted, would mean that businesses may impose a “fine” of 5% of invoice value, in addition to the current available remedy of interest plus recovery costs on public authorities that take longer than 30 days to pay an undisputed invoice.
The Local Government Association (“LGA”) considers that while a statutory 30 day payment period should not cause a significant problem for public authorities because they have for several years paid the vast majority of undisputed invoices within 30 days in line with government guidance, the introduction of an uncapped 5% flat rate compensation penalty in addition to both interest and recovery charges is disproportionate.
The European Commission has estimated that, if agreed by the European Parliament and member states, its proposals would come into effect sometime this year. Accordingly we will have to wait to see whether the LGA’s lobbying will be successful in removing the 5% flat rate compensation penalty. Watch this space!
If you have any questions please contact Matthew Hattersley, Commerical Partner, on 0113 336 3351.