UK: Late Payment Of Commercial Debts (Interest) Act 1998

Unpaid sellers now have a statutory right to claim interest on overdue debts as the Late Payment of Commercial Debt (Interest) Act ("the Act") came into force on 1 November 1998.

Until the Act, interest on overdue debts could only be claimed where the contract specifically allowed, or where the seller sued for payment through the courts, save for a few limited exceptions. Under the Act sellers will be entitled to interest automatically from the due date for payment until payment is made with a set rate of interest of 8% above base rate (simple interest).

The Act applies to debts arising under most contracts for the sale of goods or supplies of services made between businesses. Certain types of contract (such as consumer credit, conditional sale or hire purchase agreements and mortgage, or other security agreements) will be excluded. Where it applies the Act provides that

• interest can be claimed automatically from the due date for payment until payment is made;
• the claim for interest does not need to be pursued immediately but if it is to be claimed it must be pursued within the limitation period (usually 6 years);
• the right to interest is assignable.

The Act comes into force in three stages:

• at first (from 1 November 1998) it extends only to small businesses (those with no more than 50 employees) in claims against large enterprises (i.e. a business with more than 50 employees or a Government department);
• after two years (from 1 November 2000) it will be extended to allow small businesses to claim against all enterprises (including other small businesses), and
• after a further two year period (from 1 November 2002) the provisions will apply to all businesses, regardless of their size, so that a large business which sells to a small business would then have the right to claim statutory interest on outstanding debts.

The time for payment of the debt will be the time agreed in the contract between the parties or, in the absence of specific agreement, 30 days after the date of invoice, delivery or performance of the contract (whichever is later).

Although it will be possible to vary these provisions in the terms of contract, careful drafting will be needed. Any variation will have to provide a "substantial contractual remedy for the late payment".

The Act aims to provide both a deterrent to late payers and adequate compensation to a creditor which reflects accurately the actual cost of funding the additional credit. With an interest rate of 8% above the official dealing rate of the Bank of England it should achieve both aims.

There will be many small companies which will take advantage of the new rights granted to them under the Act. However, commercial considerations will no doubt take precedence and small companies will be wary of exercising their rights against their larger and more important late paying customers during the course of an ongoing commercial relationship. A claim for late payment does not need to be pursued immediately and could be pursued up to six years after the end of the contract under which the payment fell due. It might be expected therefore in due course that once the commercial relationship comes to an end a small company might then claim interest from a persistent and regular late paying large customer going back some years. The entitlement is one that liquidators will be anxious to exercise!

As a result of the Act, small companies should ensure that they claim their entitlement and large companies will need to review their payment procedures and terms of business to avoid falling foul of the payment requirements.