Law tightens up on late payments
1st March, 2013
New rules have come into force cracking down on late payments to commercial suppliers.
What are the new rules?
The Late Payment of Commercial Debts Regulations 2013 apply to all commercial contracts made on after 16 March 2013 for the supply of goods or services.
Where a public authority purchases goods or services, interest will start to run on outstanding payments from 30 days after the latest of receiving the supplier’s invoice, receiving the goods or services, and verification or acceptance of the goods or service.
The same rules apply for a business purchasing goods or services where the parties have not agreed a due date for payment. A business and supplier can, however, agree a due date for payment of up to 60 days after the latest of the events above, and, providing it is not “grossly unfair” to the supplier, can expressly agree to extend the due date for payment beyond that.
“Gross unfairness” is a new concept in English law, but when determining whether it is grossly unfair for a business purchaser to agree a time extension with a supplier, all the circumstances of the case will be taken into account.
What interest will be charged?
Defaulting purchasers (either public authorities or businesses) are required to pay interest at a rate of 8% over the statutory rate (or at least a rate which provides a substantial contractual remedy) as well as compensation for the costs of recovering the debt at a rate of £40, £70 or £100, depending on the size of the debt, in addition to further reasonable costs of recovery.
How does this affect me?
The Regulations effectively impose payment periods for commercial contracts for goods or services, by providing that interest on outstanding payments will start to run after certain events. Creditors are not obliged to, but have the right to take these actions against debtors in relation to contracts entered into on or after 16 March 2013.
However, the Late Payment of Commercial Debts (Interest) Act 1998 still provides that, where parties agree a remedy for the late payment of the debt that is a substantial contractual remedy, statutory interest will not apply (unless otherwise agreed). Unless statutory interest begins to run, no claim can arise for fixed recovery costs or the further payment of costs. It is therefore possible to effectively contract-out of the Regulations.
What action should I take?
Businesses and public authorities should carefully check their terms of business for the supply of goods and services to ensure, where relevant, that they provide for a substantial contractual remedy in relation to late payment, to ensure the statutory provisions do not apply by default in relation to new contracts.
How can I find out more?
For further details on these new regulations please click here to view the BIS guidance paper or alternatively, please get in touch.
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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