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If you are paid late you may well be unsure as to whether you should be paid interest on the outstanding money. This article looks at the options available to the “injured party”. We would be very interested to hear about your opinions on this – and maybe even get your true stories, if we are lucky!

Statutory Interest on Qualifying Debts

The government enacted the Late Payment of Commercial Debts (Interest) Act in 1998 to give a right of interest on the late payment of certain debts arising under commercial contracts for the supply of goods or services; and for connected purposes.

The Act implies a term in a commercial contract that any qualifying debt created by the contract carries simple interest. Interest carried under that implied term shall be treated, in the same way as interest carried under an express contract term.

Contracts to which the Act applies

In this Act “contract for the supply of goods or services“ means:

(a) a contract of sale of goods; or

(b) a contract that is a money consideration for (i) the transfer of property in goods, (ii) bailing or agreeing to bail goods to another by way of hire, or (iii) agreeing to carry out a service.

Qualifying Debts

Those created by virtue of an obligation under a contract to pay the whole or any part of the contract price.

The fact that a court or arbitrator has power to award interest on the sum due does not prevent the right to statutory interest.

Period for which statutory interest runs

Statutory interest starts on the day after the relevant day for the debt, at the rate prevailing at the end of that day.

Where the supplier and the purchaser agree a date for payment of the debt under the contract, that is the relevant day unless there is an obligation for any advance payment.

In any other case the relevant day is the 30th day after the obligation of the supplier is performed or the day on which the purchaser has notice of the amount of the debt, whichever is the later.

For hire of goods the last day of the hire period is the date for completion of the obligation of the supplier’s performance.

Compensation arising out of late payment

Once statutory interest begins to run for a qualifying debt, the supplier shall be entitled to a fixed sum in addition to interest:

for a debt less than £1000, the sum of £40, for £1000 – £9,999, the sum of £70, and for £10000 or more, the sum of £100.

Rate of statutory interest

The Secretary of State shall set the rate of statutory interest by prescribing:

(a) a formula for calculating the rate of statutory interest; or

(b) the rate of statutory interest.

* Currently (b) applies at 8% above the Bank of England base rate.

(* as of Ist July 2004 this is subject to the Secretary of State’s 6 monthly review)

Can the Parties agree the rate of interest payable on late payment?

Although the parties can agree between themselves the rate of interest and insert it in their agreement, any contract terms which tries to exclude the right to statutory interest for late payment will be void. Essentially the law requires a substantial contractual remedy for late payment of the debt which if acceptable will supplant the rate of statutory interest.

Any contract terms are void to the extent that they purport to –

(a) confer a contractual right to interest that is not a substantial remedy for late payment of the debt, or

(b) vary the right to statutory interest so as to provide for a right to statutory interest that is not a substantial remedy for the late payment of the debt.

So what is a substantial remedy?

To answer this will require examination of the relevant circumstances at the time of the agreement:

(a) the benefits of commercial certainty;

(b) the strength of the bargaining positions of the parties;

(c) whether the term was imposed by one party to the detriment of the other;

(d) whether the supplier received an inducement to agree the term.

It would not however, be considered to be a substantial remedy where:-

(e) it is insufficient as a compensation; or

(f) where relied upon to oust or vary the right to statutory interest, it was not fair and reasonable.

It is noteworthy that most JCT 2005 forms have a default provision for interest at 5% over the official dealing rate of the Bank of England. This would seem to meet the requirements of being a `substantial remedy` in accordance with the Act. Of course this could be reduced but the risk would be that the requirement would not be met and the statutory rate substituted instead.

Author: Alway Associates