This article is the first of a two part note on the recent decision in Yuanda v WW Gear. It deals with the late payment of interest under the Late Payment of Commercial Debts (Interest) Act 1998 (see issue (a) below). Part two will appear in the next week and will address the issue of reasonableness under the Unfair Contract Terms Act 1997 (see issue (b) below).
What are the facts?
A trade contractor, Yuanda (UK) Co Limited (Yuanda) engaged WW Gear Construction Limited (Gear) to provide glazed curtain walling to the GLC building by Westminster Bridge, which was being developed into a luxury hotel.
Gear prepared a package of contract documents, to be issued to trade contractors and used as a starting point for negotiations. The package was based on the JCT standard form building contract (JCT Contract), which is often used in the construction industry, but with a number of amendments contained in a separate schedule of amendments. Following pre-contract negotiations between the parties, further changes were made to the schedule. However, the following two changes to the JCT Contract were not spotted by Yuanda during negotiations. The changes were favourable to Gear and remained in the schedule and, therefore, the final agreement:
- the rate of interest for late payment was changed from 5% above the base rate in the JCT Contract to 0.5% above the base rate; and
- the adjudication provisions of the JCT Contract were substituted for an adjudication clause which, among other things, imposed on Yuanda the entirety of the parties' adjudication costs (i.e. Yuanda's and Gear's legal and professional fees).
What issues were raised?
The case raised the following issues:
- whether an interest rate of 0.5% above base rate on the late payment of debts is a "substantial remedy" under the Late Payment of Commercial Debts (Interest) Act 1998 (LPCDIA 1998); and
- whether the new adjudication clause was contrary to the reasonableness test in section 3(1) of the Unfair Contract Terms Act 1977.
What did the judgement say?
Yuanda argued that the provision for a rate of interest of 0.5% above base on the late payment of debts was void because 0.5% was not a substantial contractual remedy for the late payment of a debt under sections 8 and 9(1) of LPCDIA 1998.
In reviewing sections 8 and 9 of LPCDIA 1998, the court identified a number of relevant points:
- interest rates can vary;
- LPCDIA 1998 does not automatically substitute the statutory rate for a lower rate of interest in the contract. It is a question of whether that lower rate is a "substantial remedy" – if it is not, then the LCPDIA 1998 will substitute the statutory rate for the rate expressed in the contract;
- the statutory rate could be described as penal, as it was more than double the base rate when it was set; and
- commercial cases have, historically, awarded interest on damages at rates between 1% and 3% over base rate, more commonly the former. Also, the court ruled that it was legitimate to take note of what courts have traditionally done in this regard.
The court held that Parliament did not intend to treat a contractually agreed rate of interest as not meeting the substantial remedy test simply because it was lower than the statutory rate. Accordingly, the court held that the rate of 5% above the base rate specified in the JCT Contract should be regarded as a "fair rate of interest" and a substantial remedy within the meaning of LPCDIA 1998, even though it was 3% less than the statutory rate.
However, in the absence of any special circumstances relating to the parties' intentions when agreeing the contract, 0.5% above the base rate would not be regarded as a substantial remedy within the meaning of LPCDIA 1998. The court held that as there were no special circumstances, it was not fair or reasonable to allow Gear to rely on the amendment to replace the statutory rate (and thereby allow Gear to take advantage of Yuanda's failure to spot the amendment during pre-contract negotiations). The court held that the interest clause was void insofar as it provided a contractual rate of interest of 0.5% and held that it should be substituted for the statutory rate of 8% above the base rate.
Why is this case important?
The court's decision that 0.5% above the base was not a substantial remedy is not surprising as the statutory rate is set at 8% above the base rate. However, in the current economic climate, and with the Bank of England base rate being set at 0.5% for over a year, many may consider this outcome harsh. But, the decision should be considered in light of the fact that the imposition of the statutory rate is the price that a contracting party pays for failing to provide a fair remedy for late payment to suppliers in its contracts. On the other hand, this decision may provide support for those suppliers who wish to negotiate an increase in their contractual rate of interest. Many in the construction industry will also welcome the court's guidance that an interest rate of 5% over base rate, included in the JCT Contract, is indeed a "substantial remedy", especially as the JCT Contract's rate of interest had not previously been tested in the courts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
