The Late Payment of Commercial Debts (Interest) Act 1998 (“the Act”) introduced a regime entitling creditors to claim an enhanced rate of interest when pursuing commercial debts. Those companies that are able to rely upon the Act can charge 8% over Base Rate, which is significantly more than most contracts would provide and has been particularly beneficial in this prolonged period in which Base Rates have been so low.
The European law that this Act was designed to implement has now been tightened. Changes have been made in an effort to try to reduce the number of situations in which companies become insolvent as a result of slow payment by their commercial debtors. These changes have been implemented into UK law by the passing of the Late Payment of Commercial Debts Regulations 2013, which change certain provisions of the Act and have been in place since 16th March 2013.
A key provision to note is the introduction of statutory periods for payment in such a way that interest will start to run automatically (at the enhanced rate) if the period for payment is not specified in the contract (or, where specified, it is “grossly unfair”). The Regulations now provide that interest at the enhanced rate will usually run from a date 30 days from the later of the following:
- Receiving the supplier’s invoice;
- Receiving the goods or services.
In determining whether any agreed terms for payment are grossly unfair, all circumstances of the case shall be considered; and for that purpose, the circumstances of the case include in particular:
(a) anything that is a gross deviation from good commercial practice and contrary to good faith and fair dealing;
(b) the nature of the goods or services in question; and
(c) whether the purchaser has any objective reason to deviate from the intended period of 30 days.
Conclusion
If you have a regular ongoing relationship with a commercial customer (including a public authority) in which delays in payment are causing cash flow problems, then it can be helpful to refer to the Act and /or the Regulations. The customer needs to be reminded that you are entitled to charge an enhanced rate for interest and that if they wish to “borrow money” (for that is what delayed payment involves) they can do so much more cheaply from their own bank. If payment terms are exceptionally long, they may be “grossly unfair” and it may be possible to challenge them.