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Make customers aware of late payments policy

By Emily Paisley, solicitor specialising in debt recovery

For many businesses, pursuing and recovering business debt is a priority.

The Late Payment of Commercial Debts (Interest) Act 1998 should be of interest, as it inserts an implied term for interest, together with a fixed sum charge and, arguably, costs, in business to business contracts for the supply of goods and services, where the contract is otherwise silent.

The interest/charges only arise on a debt created by virtue of an obligation under a contract to pay the whole or any part of the contract price, not damages. The interest/charges don't arise on each invoice, but on each debt. Therefore, each time part of the price falls due under the contract, another qualifying debt is created, ie, each instalment gives rise to a debt.

For the purposes of this Act, 'business' includes professions and public authorities.

The Interest Rate: The rate is set twice a year by adding 8% to the Bank of England's official bank rate. Accordingly, the current rate would be 8.25%.

Fixed sum charge: Businesses should also remember that once interest begins to run, the creditor is entitled to a fixed sum in addition to interest on the debt. This fixed sum depends on the amount of debt. Below £1,000, it is £40, while from £1,000 to £10,000 it is £70. Over £10,000, it is £100.

For contracts made on or after March 16, 2013, if a fixed sum is payable, the creditor also has an implied contractual right to be paid the reasonable costs of recovering the debt, less the fixed sum.

This provision may be useful when seeking to recover costs where the relevant forum does not provide for costs, for example, the Small Claims Court or adjudication of construction contracts.

However, it is by no means guaranteed that a judge would grant costs in such circumstances.

Interestingly, there is no express power in the Act to reduce the fixed sum or costs. It is therefore arguable that the court has no power to deprive a supplier of these benefits, even in a case which justifies total remission of interest.

That was the conclusion reached by the County Court in Northern Ireland in Blue Autumn Ltd v Glenview Nursing Home (2013) NICty 2.

Interest cannot be charged on the fixed sum, interest or costs.

Interest may be reduced to nil in the interests of justice, if justified by the supplier's conduct.

• Contracting out of the Act

Parties to commercial contracts can exclude the right to interest under the Late Payments Act, but only if the contract provides an alternative 'substantial contractual remedy' for late payments.

Whether a remedy for late payment provides the necessary substantial remedy is assessed as at the time the contract was made.

The alternative remedy must be both sufficient to compensate the supplier, and deter late payment, and also be fair and reasonable to oust or vary the right to interest under the Act.

The court, in deciding whether the alternative remedy is fair, should consider the benefit of commercial certainty, the parties' relative bargaining strength, whether one party imposed the term on the other, and any inducement offered to the supplier to agree to the term.

As with most breach of contract cases, the deadline for issuing legal proceedings to claim interest under this Act is six years.

• Do you have to inform your customer that you will be claiming interest due to late payment, together with compensation and costs?

The short answer to this question is no.

However, you may wish to put warnings to this effect on your invoices, statements or terms of business, in the hope of prompting early payment.

• Your terms and conditions

As above, you can contract out of the Act if your contract provides for a suitable alternative remedy.

You may wish to review your terms of business to ensure they are as favourable as the Late Payment legislation.

If you do change your terms of business, make sure your customers know.

You should advise your customers that your terms and conditions have been revised, and when these revisions will come into effect.

Provide your customers with a copy of the revised terms. It is best to do so in writing.

Existing contracts will continue to be governed by the terms and conditions which applied at the time they were entered into.

Emily Paisley is a solicitor in Worthingtons Solicitors, managing debt recovery matters for local business clients. For more information, you can find our debt pack at https://www.worthingtonslaw.co.uk/media/2763/debt-pack.pdf , or contact us by e-mail at info@worthingtonslaw.co.uk or by telephone on 028 9043 4015.

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