In Britain, a customer may be forced to pay interest on late payment if one of the following three circumstances apply:
- in many cases, if legal action has been taken and judgment obtained
- if provision is made for it in a contract
- if statutory interest applies
These circumstances are very different, so we will look at each one in turn.
If legal action has been taken and judgment obtained
If an action is brought in a county court, interest at the statutory rate may be claimed from the date of the issue of the summons to the date of judgment, or of payment if earlier. Interest continues to run in some cases. Interest also applies if judgment is obtained in the High Court.
If provision is made for it in a contract
It has always been free to both parties to a contract to agree that interest will be payable in the event of late payment. Provided that such interest provides a ‘substantial remedy’, it takes precedence over statutory interest. It is up to supplier and customer to negotiate the agreed terms.
If statutory interest applies
Many countries have a law that provides for interest to be paid in the event of late payment, though in many cases the law is not particularly effective. Until recently, Britain did not have such a law, but we now have The Late Payment of Commercial Debts (Interest) Act 1998. It only applies to commercial debts and excludes consumer credit, hire purchase, mortgages etc. The new Act takes effect in three stages:
1 contracts made from 1 November 1998 — small businesses against large businesses and the public sector;
2 contracts made from 1 November 2000 — small businesses against all businesses and the public sector;
3 contracts made from 1 November 2002 — all businesses and the public sector against all businesses and the public sector.
A small business is one with 50 or fewer employees (averaged over a year) and with part-time employees counting pro rata. It is felt that small businesses are particularly vulnerable to the sin of late payment, and so they have been given a four-year advantage period.
The Act states that if a contract specifies a payment period, that payment period will apply so long as it is reasonable. If this is not the case, custom and practice may apply, but stern tests will be made. The onus is on the customer to show that it is reasonable. Failing this, it will be deemed to be 30 days. The 30 days run from the later of the supply of goods or services and the giving of notice of a required payment (usually by sending an invoice).
The Act also states that if a contract specifies a rate of interest, that rate of interest will normally apply. But the contractual rate of interest must give a ‘substantial remedy’. If it does not do so, or if there is no agreement at all, the rate of interest will be ’8 per cent over base rate’. This is a high rate and enough to be a real deterrent. In the absence of an agreement on interest and the payment period, it is 8 per cent over base starting on day 31.
Statutory interest does not have to be claimed at once, and a claim may be made at any time until it is statute-barred. This is five years in Scotland and six years in the rest of the UK. A liquidator or administrator may make a claim within these periods, as well as the business itself.
This is very significant in cases where payment is late, but a supplier does not claim statutory interest for fear of annoying a customer. If the relationship subsequently goes sour, the supplier can resurrect the matter and make a claim. A lot of slow payers are going to get a nasty shock in the coming years.
The supplier may make a claim for statutory interest by notifying the purchaser that a claim is being made. It is recommended that this be done in writing and that the purchaser be given full details of the claim, including invoice numbers, dates, amounts etc. The purchaser should also be given the daily interest rate. If there is a dispute that cannot be settled, or if the purchaser just does not pay the interest, the supplier may commence a legal action. If there is an unresolved dispute, the court will decide.
A business that is paid late has the option of making a claim for interest under the Act. In practice, many businesses do not do so, the main reason being that they do not wish to upset their customers. This has to be an individual decision, but you should be aware of statutory interest and your rights. You should also be aware that you may make a claim after a considerable time has elapsed.
Interest is a big and important subject. We will close with a checklist of some of the key points.
- Interest may be claimed if a legal action is successful
- Provision for interest can by agreement be included in a contract
- The law on statutory interest takes effect in three stages
- Until 1st November 2002, only small businesses can claim statutory interest
- Unless a contract or custom and practice says differently, statutory interest starts after 30 days
- Unless a contract says differently, the rate for statutory interest is ‘base plus 8 per cent’
- If a customer refuses to pay statutory interest, legal action may be taken
- Statutory interest may be claimed until the matter is statute-barred