The Late Payment of Commercial Debts (Interest) Act 1998 ("Late Payments Act") allows high interest rates to be levied on late payments under construction contracts in certain circumstances. A recent decision of the Court of Appeal has clarified the operation of the Act and will be of interest to contractors faced with worsening payment practices in the current economic climate.

There are four ways in which interest may be recovered for delayed payments under construction contracts:

Under a specific contractual provision allowing interest

  1. Under a specific contractual provision allowing interest
  2. Under the Late Payments Act, which presently allows 8% above the Bank of England base rate
  3. By proving one's actual financing costs (or loss of investment return) as damages for breach of contract
  4. Under the general powers of courts and arbitral tribunals to award interest on top of their judgments/awards (and also by adjudicators where the applicable adjudication rules so provide)

Of these four, the substantial rate of interest allowed by the Late Payments Act often provides the best recovery (although only as simple interest – the other ways mentioned above sometimes allow compound interest). Whilst the Act is generally applicable to most payments under construction contracts, the parties are free to agree otherwise. The Act requires however that any such agreement still provide a "substantial remedy" for late payment. If it does not, because it provides too low a rate for example, then the higher rate under the Late Payments Act will continue to apply. Although most standard forms substitute a lower rate of interest, some still leave room for the higher statutory rate to apply in certain circumstances and it remains to be seen whether the lower rates found in all standard forms will amount to a "substantial remedy" (one TCC judge recently suggested they may not).

Unless the amount claimed to be due is precisely specified in the contract, the contractor is required under the Act to give notice of the sum "which it claims is the amount of the debt". The Court of Appeal's decision has clarified the meaning of this phrase and particularly how it applies to claims which are initially overvalued. The case concerned invoices issued by a contractor at an early date which were subsequently agreed at a lesser amount in a Final Account document. The employer argued that interest should be calculated based on the date of the Final Account document whereas the contractor argued for the date of the invoices.

The Court of Appeal agreed with the contractor, deciding that an overvalued claim was still able to set time running under the Late Payments Act. The initial invoices sufficed for this purpose, particularly as they contained sufficient supporting documentation to enable the employer to calculate the true value of the claim. As a consequence, the higher rate of interest under the Late Payment Act applied.

As mentioned above, the Late Payments Act can be, and often is, excluded by agreeing a substitute rate of interest. The present decision will nevertheless be of relevance to contractors preparing claims in a number of situations, including:

  • Under bespoke contracts which make no provision for late payments
  • Under standard forms whose interest provisions do not cover all payments which might be made or which exclude interest on late payments in certain circumstances (such as the exclusion in GC/Works/1 of interest resulting from a Final Account disagreement). Such forms may leave room for the Late Payments Act to apply to those late payments they do not cover or purport to exclude
  • Under standard forms whose interest provisions may be found not to provide a "substantial remedy" for late payment

Reference: Ruttle Plant Hire Ltd v Secretary of State for Environment Food & Rural Affairs [2009] EWCA Civ 97

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 28/04/2009.