With the Bank of England base rate now at an historic low of 0.25% (and with many commentators suggesting it could go lower) it is an “interesting” time to revisit the provisions of the Late Payment of Commercial Debts Interest Act 1998 and how it can be used to deter late payments or to compensate creditors if payments are made late.
The Act was brought in to force by the UK Government to try to break the culture of late payment of commercial debts by imposing a statutory right to interest on unpaid bills. The Act has been further strengthened by EU legislation which has extended creditors’ rights further.
The Act applies in business to business contracts for the supply of goods and/or services. The contract does not have to be writing. The Act applies where the contract itself does not provide for an interest rate. Even if an interest rate is provided in the contract, the Act may still apply if the interest rate stated in the contract is not a “substantial contractual remedy for late payment of the debt” and is insufficient either for the purpose of compensating the supplier for late payment or for deterring late payment. Although there have only a few reported cases on this point, in my view it is likely that a contractual interest rate set at the Bank of England base rate would no longer be seen as a “substantial contractual remedy”.
The interest rate under the Act is 8% above the Bank of England base rate. The interest rate is set twice a year based on the base rate at 31 December and 30 June. Currently therefore the interest rate is still 8.5% but (assuming the base rate remains unchanged) will reduce to 8.25% on 1 January 2017.
Interest is simple interest, not compound. Lawyers can do many things, but compound interest makes our heads hurt!
The really good parts come from the amendments to the Act by EU legislation.
A creditor is also entitled to a fixed sum in addition to the interest on the debt. The amount is fixed according to the size of the debt:
- £40 for a debt below £1,000
- £70 for a debt of at least £1,000 but below £10,000
- £100 for a debt of £10,000 or more
A fixed sum can be claimed for each debt, so multiple unpaid invoices may attract multiple fixed sums.
For contracts made on or after 16 March 2013, if the fixed sum is not sufficient to meet the creditors’ reasonable costs in recovering the debt, the creditor is entitled to be paid the reasonable costs of recovering the debt less the fixed sum. The term “reasonable costs” should include the costs of instructing a lawyer in chasing the debt.
Although the Bank of England base rate is at an all-time low, the Act still operates to imply a penal rate of interest on those companies that refuse to pay their commercial debts on time. In certain circumstances the rate under the Act will override a derisory contractual interest rate. Whilst the Act hopefully operates as a deterrent to encourage payment on time (the jury is out on that one!), if a business is faced with a persistent late payer, the Act does have sufficient force to penalise those late payers and to provide creditors with a right to recover their legal costs of pursuing a late payer.
