Social Housing Speed Read – invoicing
25th April, 2016
This week we look at a cautionary tale of everyday invoicing...
The Late Payment of Commercial Debts (Interest) Act 1998 (“the Act”) may not be a piece of legislation that the sector is not overly familiar with. Essentially it allows for interest, and more crucially compensation, to be claimed for late payment of commercial invoices.
We were recently asked to assist a client Registered Provider in the following situation.
A Housing Association (HA) employed a property maintenance company (PMC) to carry out reactive maintenance works on its housing stock. The parties had a good working relationship, which lasted around ten years.
As the contract was for reactive works, the dates on which the invoices were raised and the amounts varied greatly. Typically, an invoice was sent to HA and would be payable on a “30 day Nett” basis – so that payment was due 30 days from the end of the month in which the invoice was issued.
Perhaps unsurprisingly, over the course of this contract, occasionally some invoices were paid late. In one instance this was due to staff sickness and on another due to a new member of staff joining the accounting team. Additionally, there were instances where the invoices were queried and delays in payment resulted from settling the queries.
PMC’s chasing policy was irregular and unpredictable but the payment was always accepted. The relationship worked well and PMC never made an issue of these very slightly delayed payments.
Without warning, (and entirely unrelated to the contract with HA) PMC went into liquidation. The Liquidators in the Bankruptcy transferred (sold) all interest in the invoices to a company (LC) although no invoices were unpaid by this stage.
LC made a claim against HA, having put together a spreadsheet of invoices raised by PMC and paid in full by HA, but paid later than the 30 day nett date.
Their claim related to the interest and compensation. The interest claimed, given most invoices were literally paid a day or two late, was negligible. The compensation, however, was substantial.
HA received a letter of claim from LC stating that over a three-year period, dating back to 2013, they were owed in excess of £40,000 and if the claim was not settled they would be taken to Court.
HA then received a second letter with an updated claim in excess of £55,000. LC now sought to argue that HA was a public authority, in accordance with the decision in Weaver.
The Late Payment of Commercial Debts Regulations 2013 introduced an even more onerous payment regime for public authorities, who are bound by strict 30 day terms (calendar days, rather than nett days) for payment to all suppliers.
HA had found themselves on the receiving end of a totally unexpected claim, essentially made by a third party they had had no relationship with, in excess of £55,000.
The Late Payment of Commercial Debts (Interest) Act 1998
The Act imposes an implied term to any qualifying business to business contract for the supply of goods and services, allowing the invoicing party to charge interest at 8% above base rate on any late paid debt. It also allows the party to claim a fixed compensation payment once interest begins to run, in addition to the interest.
The compensation payment is fixed according to the size of the overdue debt – (i) debts below £1000 – compensation £40 (ii) debts between £1000-£10,000 – compensation £70 (iii) debts over £10,000 – compensation £100. LC are also entitled to claim their reasonable costs of recovering the debt.
Relevant provisions of the Act include:
- There is no requirement for the relevant contract in question to be in writing, therefore a contract was formed by a course of dealings (section 16(2));
- ‘Public authorities’ count as businesses for the purposes of the Act. ‘Business’ includes the activities of any government department or local or public authority (section 2(7));
- Where a supplier and purchaser have agreed a date for payment (here 30 days nett), that date is classed as the Relevant Day for payment and interest runs from the day after the Relevant Day (Section 4(2));
- A party can only exclude a supplier’s right to claim interest and compensation pursuant to the Act if there is a written contract in place which provides for an alternative substantial contractual remedy for late paid debt (section 8(1));
- The Act states that interest may not be claimable “by reason of conduct at any time (whether before or after the time at which the debt is created)” (section 1(4)(a)). It is not generally arguable that just because a supplier tolerated late payment historically, then it has given up its right to claim under the Act at a later date. However, interest may be reduced if the payment was late because of the fault of the supplier, e.g. they were resolving a query;
- The Late Payment of Commercial Debts Regulations 2013 (“2013 Regs”) amended the definition of the Relevant date for a payment of debt to a strict 30 day payment date. However, this only applies where the purchaser is a public authority, other businesses can agree longer terms.
There are a number of issues to take away from this:
- You might have a good relationship with a supplier, however, if that situation changes (they lose a tender or contract, or go into liquidation and the invoice ledger is transferred) you can find yourself facing a large claim.
- Be punctual with the payment of invoices and stick to contract terms. In the event that there is a query with an invoice and a delayed payment is inevitable, keep a careful record of the reason why and save relevant correspondence.
- Establish whether your business is a public body for the purposes of the Act and 2013 Regs. This will ultimately depend on how the definition in the Act applies to you.
- Review the written contact/terms and conditions that you have with your suppliers. Specific wording can remove the implied terms of the Act in relation to interest.
In this case, Ward Hadaway were able to persuade LC that HA was not a public body for the purposes of the Act. We were also able to negotiate a substantial reduction in the amount sought, and avoid court proceedings.
It is apparent, however, that the Act and 2013 regulations are draconian and serious. The loss of a tender or contract, or an insolvency may result in a claim being made under the Act which had not been hinted at previously.
Our social housing team has experience of dealing with this specific issue, can advise on your status as a public body, and review any written agreements that you have with suppliers. Please do not hesitate to contact John Murray or a member of our expert Social Housing Team.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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