The Late Payment of Commercial Debts (Interest) Act 1998 (“the Act”), as amended by the Late Payment of Commercial Debts Regulations 2002, enables businesses to charge interest on certain debts arising under commercial contracts for the supply of goods and/ or services and for connected purposes.
Who can claim interest under the Act?
Only businesses are able to claim interest under the Act. “Business” includes a profession and the activities of a government department or a local or public authority. Since 2002 businesses of any size can claim interest under the Act.
When can interest under the Act be claimed?
Interest can generally be claimed under the Act if there is a “contract for the supply of goods or services” and the purchaser and the supplier are each acting in the course of a business. There are some exceptions to this for contracts known as “excepted contracts” and it is possible in certain circumstances for businesses to oust or vary the provisions of the Act.
What is a contract for the supply of goods or services?
For the purposes of the Act the following amount to a “contract for the supply of goods or services”:
- A contract for the sale of goods;
- A contract involving the transfer or an agreement to transfer goods to another in return for payment;
- A contract under which someone hires or agrees to hire goods to another in return for payment;
- A contract for the supply of a service in return for payment;
- A transaction in respect of which fees are paid for professional services to a member of the Faculty of Advocates.
Contracts of service and apprenticeships do not amount to contracts for the supply of goods or services for the purpose of the Act.
What is an excepted contract?
The following types of contract are “excepted contracts” and are, therefore, not covered by the Act:
- Consumer credit agreements;
- Contracts intended to operate by way of a mortgage, pledge, charge or other security.
When can Statutory interest be ousted or varied?
It is possible in certain circumstances for businesses to agree to oust or vary the provisions of the Act. However, any attempt to oust or vary the provisions of the Act will only be valid if the parties have agreed that there will be a “substantial remedy” for late payment of the debt.
For the purposes of the Act a remedy does not amount to a “substantial remedy” if it insufficiently compensates the supplier for late payment or insufficiently deters late payment and if it unfair or unreasonable.
When determining whether a remedy is a substantial remedy or not a Court will take into the circumstances of a case, such as the strength of the bargaining positions of the parties.
Where a business relies on standard terms and conditions and those terms and conditions seek to oust or vary the provisions of the Act in an manner which is contrary to the Act it is possible for a “representative body” (an organisation established to represent the collective interests of independent businesses who employ fewer than 250 employees and have a turnover of less than €40 million or an annual balance sheet total not exceeding €27 million) to apply to the High Court for an injunction preventing that business from using the offending terms.
How much can be claimed under the Act by way of interest?
The interest rate is the Bank of England base rate that applies during the period in which the debt falls due plus 8%. The Bank of England base rate (also known as the “reference rate”) is fixed every 6 months.
Interest claimed under the Act (known as “Statutory Interest”) can be claimed from the day after “the relevant day for the debt” until the debt is paid.
What is the relevant day for the debt?
The “relevant day for the debt” is the date agreed by the supplier and the purchaser for payment of the debt unless it was agreed that the purchaser would make an advance payment. The date agreed could be a fixed date or the date agreed may be dependant on an event happening or the failure of an event to happen. For example the parties may agree that the purchaser will pay by 31st of the month or they may agree that the purchaser will pay within 7 days of delivery of the goods.
If the parties did not agree a date for payment then the relevant day for the debt will be 30 days from the date on which 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 example, the relevant day for the debt could be 30 days from the date on which the supplier supplied goods or 30 days from the date on which the purchaser received the supplier’s invoice.
In the case of contracts for the hire of goods where a date for payment is not agreed between the parties then the relevant day for the debt is the date when the hire period comes to an end.
In the case of advance payments the relevant date for the debt is the day on which the supplier’s obligation is performed or if the advance payment only relates to part of the contract price it is the day on which that part of the contract is performed.
Is there an automatic right to interest under the Act?
The Courts have the power to “remit” (cancel or reduce the amount of interest payable) interest where it would be unfair for a purchaser to have to pay interest given the manner in which the supplier has conducted it self.
If an entitlement to claim interest arises under another piece of legislation interest should be claimed in accordance with that legislation.