Claiming interest on late payments

Introduction to “the Act”

Almost every contractor will suffer from late payments at some point in their trading, it seems chasing overdue monies is just one of the expected list of weekly tasks to carry out. Should this be the case and how can you apply pressure to your late paying clients?

The Late Payment of Commercial Debts (Interest) Act 1998 (LPCD(I)A 1998), otherwise known as “the Act” was introduced in 1998 and has given businesses the right to claim interest along with fixed sum fees from their clients for late payment. Before “the act” was introduced interest on overdue debts could only be claimed where a contract specifically detailed, or where the courts allowed through official proceedings.

Since the initial introduction of the Act it has been amended with the latest amendments being the Late Payment of Commercial Debts (Amendment) Regulations 2018 which came into force on 26 February 2018, and apply to contracts made on or after that date. This latest set of amendments, amends the Late Payment of Commercial Debts Regulations 2002, which in turn amended the Late Payment of Commercial Debts (Interest) Act 1998.

The Act has two purposes – to deter late payment and to compensate creditors for the late payment of debts

The most recent 2018 amendments substitute the original Regulation 3 for a new provision that allows representative bodies to challenge grossly unfair contractual terms and practices in, or in relation to, contracts to which the Regulations apply. The Regulations however do not provide a definition for “grossly unfair” with current cases addressing this point being few and far between.

The lack of definition of this wording is in an attempt to allow the courts the opportunity to determine what terms and practices are “grossly unfair” and what are not. The intent appears to be to allow for more case law, which will ultimately result in more clarity on the definition of the term for businesses. 

The new 2018 amendments also expand the ability of representative bodies to challenge contract terms on behalf of smaller businesses, with the intention of seeking to address the power imbalance between SMEs and larger companies (who may have more influence when entering into contracts). The amendments may provide support in resolving any unfair payment terms included in such contracts, resulting in a challenge. This is particularly true given the fact they allow any business to approach a representative body where they consider that a contract they have entered into, may contain “grossly unfair” contractual terms and practices.

So what can you claim under the Late Payment of Commercial Debts (Amendment) Regulations 2018?

LPCD - You may be able to claim interest on late payments

The act allows all business-to-business contracts that contain no provision for interest due on late payments shall have an implied term granting an interest rate of 8% simple interest (above the bank of england base rate http://www.bankofengland.co.uk/boeapps/iadb/Repo.asp) a year on the price of goods or services.

LPCD - You may be able to claim additional fixed sums relating to the late payments

A fixed sum may also be applied to the late payment claim as compensation to recover the debt depending on the level of the debt. The amount you’re allowed to charge depends on the amount of debt. You can only charge the business once for each payment at the rate detailed in the below table:

Amount of debt What you can charge
Up to £999.99 £40
£1,000 to £9,999.99 £70
£10,000 or more £100

These amounts are set by late payment legislation.

If you’re a supplier, you can also claim for reasonable costs each time you try to recover the debt.

LPCD - When does interest begin to accrue?

Under the Act, the date from which interest accrues depends if the contract specifies an agreed payment date within its details and when the contract was entered into.

If a payment date is specified within the contract details, interest generally accrues from the day after the agreed payment date. However, If an agreed payment date is not specified within the contract then:

  1. for contracts made on or after 14 May 2013, interest accrues from 30 days after the later of the :

(i) goods or services have been provided;

(ii) notice of the amount owed has been provided; or

(iii) any acceptance procedure is complete (i.e. the procedure for checking whether goods or services conform with the contract)

2 .for contracts made before 14 May 2013, item (iii) “acceptance” is not a factor so interest accrues from 30 days after the delivery or invoice, whichever is the latest.

This process for most contractors is very stressful and time consuming, many of Contract Rite’s clients offset these stresses to our expert team allowing them to do what they do best with the comfort that they have our support and guidance.

This article is for general information purposes only and should not be relied upon in any specific situation without appropriate advice. If you require advice or wish to discuss any of the issues raised in this article, please contact us.