UK: Late payment of commercial debts

Regulatory Update

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Prompt payment is critical to the cash flow of every business. The Late Payment of Commercial Debts (Interest) Act 1998 (the "Act") therefore implies a term into contracts supplying goods/services between businesses (including public authorities), that "qualifying debts" carry simple interest at a punitive rate ("statutory interest").

Statutory interest starts to accrue, if payment has not been received, on the day after the "Relevant Day" (as described below) and is calculated as 8%[1] above the Bank of England base rate (set at a high rate so as to deter non-payment). As such it is particularly important for the purchasing party to understand exactly when the Relevant Day falls.

New regulations

This spring, two regulations (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 to be calculated.

The amendments apply to contracts entered into on or after 16 March 2013 in England, Wales and Northern Ireland. However, due to an error in the original implementation, verification timings are those set out in the No 2 Regulations, which will apply to contracts entered into on or after 14 May 2013. This note reflects the law as at 14 May 2013.

It remains to be seen how the courts would interpret the verification timings for contracts entered into between 16 March 2013 and 13 May 2013 and such potential interpretation is outside of the scope of this note.

When is the relevant day?

The rules discussed below apply when calculating the Relevant Day for a contract caught by the Act, but they do not apply in relation to "advance payments[2]". The timing rules for advance payments have not been changed by the new regulations and are not discussed in this note.

No agreed payment date

Where the parties have NOT agreed a date for payment, default rules provide that 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/services[3], or
  • The day of receipt of invoice[4], or
  • The day after the day on which any process verifying that the goods/services conform to the contract (eg to a specification and/or to regulatory requirements) is completed (provided that the contract and/or any legislation makes provision for such a right of verification and/or acceptance and the purchaser has received notice of the amount of the debt on or before the day on which the procedure is completed) - see below for restrictions on the maximum length of the verification procedure itself.

Payment date agreed - public authority purchaser

Where the purchaser is a public authority, and the parties HAVE agreed a date for payment of the contract price, the agreed date is the Relevant Day UNLESS that agreed date would be later than the day which would have been the Relevant Day if the default rules set out at "No agreed payment date" above had applied.
If it would be later, then the Relevant Day will instead be the date calculated by reference to the default rules set out in "No agreed payment date" above. This period cannot be extended.

Payment date agreed - purchaser is not a public authority

Where the 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 that agreed date would be later than 30 days after the date which would have been the Relevant Day if the default rules set out at "No agreed payment date" above had applied.

If it would be later, then the Relevant Day will instead be the last day of the 60 day period starting on whichever is the later of:

  • The date of receipt of the goods/services[5], or
  • The day of receipt of invoice[6], or
  • The day after the day on which any process verifying that the goods/services conform to the contract eg to a specification and/or to regulatory requirements is completed[7] (see below for restrictions on the maximum length of the verification procedure itself).

However, if the contract expressly agrees a later payment date than this, which is not grossly unfair to the supplier, then that is the Relevant Day.

Limitations on length of verification procedure

Where the verification procedure actually takes longer than 30 days (starting on the day on which the supplier performs), the rules deem the period for carrying out verification to be a period ending 30 days from and including the date of performance. The verification period can only be longer than 30 days if the longer period is expressly agreed in the contract, AND the longer period is not "grossly unfair" to the supplier.

Timelines showing the periods explained above in diagrammatical form are attached.

Costs of recovery

A new provision addresses the position where the fixed sum provided for in the Act does not cover the reasonable costs of recovering the debt. In that case, the supplier is entitled to such reasonable costs of recovery which are not met by the fixed sum.

Any term attempting to exclude or limit this right is subject to the reasonableness test under the Unfair Contract Terms Act 1977, whether the term is contained in the purchaser's written standard terms or not.

Effects of a verification period

It has already been explained above that where verification procedures apply the rules allow for a period of verification which occurs after performance (and such period can in some cases be extended). The rules then allow for a further period after verification is completed before statutory interest would start to accrue. The duration of this further period would depend upon whether a payment date had been agreed or not, and, if it had, whether the purchaser was a public authority. This further period can also, in some cases, be extended.

The effect of the combination of these two distinct periods should be carefully considered. In aggregate these can result in long periods of time between supply/performance and the date on which statutory interest begins to accrue.

The concept of "grossly unfair"

To determine whether an agreed extension is "grossly unfair", the new rules direct that all circumstances of the case shall be considered, and for that purpose the circumstances of the case include in particular:

  • 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.

Will the new rules always apply?

The Act states that: "Where the parties agree a contractual remedy for late payment of the debt that is a substantial remedy, statutory interest is not carried by the debt (unless they agree otherwise)". This has not been changed by the new Regulations, so the ability to oust or vary the right to statutory interest still remains.

The entitlement to fixed recovery costs and to the new further recovery payment described above only arise once statutory interest begins to accrue. This means that they will not be available where the right to statutory interest has been successfully excluded.

What is a substantial remedy?

The Act sets out the meaning of "substantial remedy". Taking into account "all the relevant circumstances at the time the terms in question are agreed", a remedy is "substantial" unless:

  • It is insufficient either for the purpose of compensating the supplier for late payment or for deterring late payment, and
  • It would not be fair or reasonable to allow the remedy to be relied on to oust or vary the right to statutory interest that would otherwise apply having regard to:
    • the benefits of commercial certainty
    • the strength of the relative bargaining positions of the parties
    • whether the term was imposed by one party to the detriment of the other, and
    • whether the supplier received an inducement to agree to the term.

The concept of a "substantial remedy" was reviewed by Mr Justice Edwards-Stuart in Yuanda (UK) Co Limited v WW Gear Construction Ltd [8].

"Bearing these considerations in mind, I consider that it was not the intention of Parliament to treat a contractual rate of interest for late payment as not meeting the "substantial remedy" test simply because it is materially lower than the statutory rate. Putting it crudely, it seems to me that the imposition of the statutory rate is the penalty that a contracting party pays for failing to provide in its contracts a fair remedy for late payment to suppliers".

On the facts of that case the contractual rate was not, however, considered to meet the requirements for a "substantial remedy".

Conclusion

The new Regulations aim to tighten the regime for interest on late payment, but there is still flexibility within the rules, especially for non-public authority purchasers, and the ability to oust or vary the right to statutory interest by providing a "substantial remedy" still remains. In order to ensure that interest begins to accrue on a debt at a time anticipated by both parties, express terms which comply with these new rules should be included in contracts for goods and/or services.

For further information please contact either Peter Brook, Liam Cowell or Paddy Dwyer.

Contact us
Peter Brook, Partner - Liverpool
peter.brook@dlapiper.com  
T: +44 (0)151 237 4782

Liam Cowell, Partner - Manchester
liam.cowell@dlapiper.com  
T: +44 (0)161 235 4128

Paddy Dwyer, Associate - Liverpool
paddy.dwyer@dlapiper.com  
T: +44 151 237 4737

[1]Determined by Late Payment of Commercial Debts (Rate of Interest) (no 3) Order 2002 SI 2002/1675

[2]Section 4(4) and 11 of the Act

[3]There is a discrepancy in wording between Directive 2011/7/EU of the European Parliament and of the Council of 16 February
2011 on combatting late payment in commercial transactions ("the Directive") and the Act. The Directive refers to the receipt of the goods/services whilst the Act refers to the performance of the obligation of the supplier

[4]There is a discrepancy in wording between the Directive and the Act. The Directive refers to receipt of the invoice or an equivalent request for payment whilst the Act refers to notice of the amount of the debt

[5]There is a discrepancy in wording between the Directive and the Act. The Directive refers to the receipt of the goods/services whilst the Act refers to the performance of the obligation of the supplier

[6]There is a discrepancy in wording between the Directive and the Act. The Directive refers to receipt of the invoice or an equivalent request for payment whilst the Act refers to notice of the amount of the debt

[7]This is provided that the contract and/or any legislation makes provision for such a right of verification and/or acceptance and the purchaser has received notice of the amount of the debt on or before the day on which the procedure is completed

[8][2010] EWHC 720 (TCC)