Interest on Late Payments: New Development

Author:Mr Scott Johnston
Profession:McGrigor Donald

The Late Payments Act: Background

The Late Payment Act (or to give it its full title the Late Payment of Commercial Debts (Interest) Act 1998) came into force in November 1998. The Act introduced a statutory right to interest on debts which remain outstanding beyond final dates for payment. Prior to the Act interest on late payments could only be recovered (i) if a contract provided for this; (ii) from the date court proceedings were commenced to recover the debt itself; or (iii) in other very limited circumstances.

The Act applies to debts of any size incurred under contracts for the supply of goods and/or services where the supplier and the purchaser are each acting in the course of a business. Contracts for the hire of goods also fall within the ambit of the Act. A diverse range of contracts entered into across the spectrum of industry and commerce - construction, manufacturing, engineering, information technology, professional services - are therefore affected by the Act.

The rate of interest currently provided by the Act is 8% above the Bank of England base rate current at the time a debt falls due. The right to statutory interest is implied by the Act into qualifying contracts, but can be displaced if the parties to a contract agree a remedy for late payment alternative to that proposed by the Act. Any such agreed term must be a "substantial remedy" for the late payment of a debt. One example of such a remedy is the right to interest on late payments at 5% above the Bank of England base rate set out in the JCT suite of building contracts.

Application of the Act: The Position Pre-7 August 2002

The Act has been introduced in phases. Debts which have fallen overdue prior to 7 August 2002 only attract statutory interest if they are owed to "small businesses". The Act defines a small business as one with less than 50 employees. Small businesses can rely on the Act (in the absence of express contractual provision for interest) to recover interest on debts falling due prior to 7 August 2002.

On 7 August 2002, however, the position will change and the final phase of the Act will come into effect.

The New Regulations - Key Features

It has always been anticipated that businesses of any size would eventually be able to rely on the Act to recover interest. The original government timetable indicated that this would be the case from November 2002 onwards. The government has, however, accelerated the phasing-in process (and introduced other...

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