Late Payment of Invoices (2002)

A User’s Guide to late payment legislation – The Late Payment of Commercial Debts (Interest) Act 1998, as amended and supplemented by the Late Payment of Commercial Debts Regulations 2002

Understanding the legislation

Your rights and how the changes to the late payment legislation will affect them

Before 7 August 2002

ALL small businesses can use the rights given to them by the Late Payment of Commercial Debts (Interest) Act 1998 (as per the table below) to claim interest retrospectively. Section 3 Do I have to claim immediately? provides further guidance about claiming retrospectively.

The table below provides a brief summary of how the legislation worked prior to 7 August 2002.

The earliest date from which a commercial contract can create a claim for interest under the late payment legislation.  
From 1 November 1998 Small businesses can claim statutory interest for late payment from large businesses and most of the public sector.
From 1 November 2000 In addition to the above, small businesses can charge other small businesses statutory interest for late payment.

Definition

A small business for these purposes has 50 or fewer employees.

Guidance

If you are seeking advice on late payment that has arisen from sales agreed before 7 August 2002, you should consult the user’s guide referred to above.

From 7 August 2002

All businesses, irrespective of size, and public sector bodies can claim statutory interest for the late payment of commercial debts. In addition to this the entitlements identified in the introduction will be available. This user’s guide explains how the late payment legislation in England and Wales will work from 7 August 2002.

Definitions in the new Late payment legislation

What is a public sector body?

A public sector body is any Government Department, Government Agency, Non-Departmental Public Body, and local or public authority.

What is a representative body?

A “representative body” is an organisation established to represent the collective interests of small and medium-sized enterprises In general or in a particular sector or geographical area.

How is a SME (small and medium-sized enterprise) defined*?

An SME has:

fewer than 250 employees; and

either has a turnover of less than EUR 40 million
or an annual balance sheet total not exceeding EUR 27 million;
and is independent.

Section 6 provides the full definition of an SME for the purposes of this legislation.

Guidance:

To convert your turnover or annual balance sheet figures into a EURO equivalent, you need to use the reference rate that is published annually by the European Commission, and which can be found in the “Official Journal of the European Communities”.

Jurisdiction

The explanation of the late payment legislation set out in this document refers exclusively to England and Wales.

In Northern Ireland and Scotland, the late payment legislation is very similar, however due to differences in legal proceedings and the impact of devolution, it is essential that businesses and the public sector in either Northern Ireland or Scotland seek appropriate guidance there. We will seek to work closely with the devolved Governments to ensure that the approach to the interest rate and other entitlements is co-ordinated and consistent.

Appropriate authorities in Northern Ireland or Scotland can be contacted at:

Northern Ireland

The Registrar of Companies
64 Chichester Street
Belfast
BT1 4JX

Scotland

Business Environment and Consumer Affairs Branch
Enterprise and Industry Division
Scottish Executive Enterprise and Lifelong Learning Department
4th Floor
Meridian Court
5 Cadogan Street
GLASGOW
G2 6AT

All the rights set out in this document should be available throughout the European Union from 7 August 2002. However there may be differences in how these rights are provided. For example, with regard to the right to be able to claim interest for late payment, countries that are within the Euro zone will use the European Central Bank base rate and they will probably add to this 7% and not the 8% uplift that the legislation here provides.

Guidance:

Businesses involved in commercial contracts with businesses and/or a public sector body not domiciled in England, Wales, Northern Ireland or Scotland, should make sure that they know what their rights are under the late payment legislation of the Jurisdiction to which the contract would be subject if a dispute were to arise.

Any commercial contract made under the law of another member of the European Union, will have access to entitlements resulting from late payment legislation, which are similar to those identified in this document.

How you do business

Is the legislation the only way I can remedy late payment?

No. A supplier and purchaser can make their own arrangements for a remedy to late payment. This is known as contractual interest. If they do make their own arrangements for contractual interest, the late payment legislation will not apply. However, if they do not make arrangements, the remedies for late payment provided by the late payment legislation will apply.

To prevent purchasers abusing the right to agree their own arrangements with the supplier, any such contractual remedy for late payment must be “substantial” otherwise it will be void and the debtor will be unable to rely on It. It will be struck down by the courts and the terms of the late payment legislation will apply to the contract.

Any contract terms are void if they –

  • confer a contractual right to interest that is not a substantial remedy for late payment of the debt, or
  • vary the right to statutory interest so as to provide for a right to statutory interest that is not a substantial remedy for late payment of the debt,

unless the overall remedy for late payment of the debt is a substantial remedy.

How will the courts know whether a remedy is substantial or not?

In determining whether a remedy is substantial or not, the courts will consider all the circumstances, including the rate of interest that applies to late payments and the length of credit periods. Purchasers should not negotiate longer credit periods to avoid the possibility of late payment.

Where a credit period is considered to be excessive, the courts may strike it down and replace it with the 30 days default period provided by the late payment legislation.

It will be for the supplier to show that a remedy is not substantial (although the purchaser may have to provide evidence that it is fair and reasonable in the circumstances). The court will then have to judge whether, in all the circumstances (including what is usual for that sector of business), the remedy meets the criteria of a “substantial remedy” set out above. The court will take into account such factors as whether there was equality of bargaining position between the parties and whether standard terms have been imposed.

Examples of contract terms which a court might declare void, to the extent that they relate to late payment because they result in there being no substantial remedy for late payment, might include:

  • a credit period that is significantly different from custom and practice in that industry;
  • a credit period that is significantly different from other supply contracts operated by the purchaser;
  • an interest rate on late payment, significantly lower than the statutory rate, that fails to act as a deterrent to the purchaser paying late because it is lower than the purchaser’s theoretical (or actual) cost of agreed borrowing;
  • an interest rate on late payment, significantly lower than the statutory rate, that fails to recompense the supplier for being kept from their money, because it is below the supplier’s theoretical (or actual) cost of agreed borrowing;
  • an interest rate on late payment, significantly lower than the rate used in other supply contracts operated by the purchaser or than is normal in that sector of the economy;
  • a contract term that has the effect of reducing the amount of interest that can be claimed, such that the compensation for late payment is insufficient to recompense the supplier or to act as a deterrent to late payment;
  • excessive information requirements that must be fulfilled under the contract before any credit period might start.

Whether the purchaser had given any benefit in return for the term In question would be relevant. However, it must be stressed that the courts will look at the issue of a substantial remedy for late payment on a case-by-case basis.

Guidance:

The above list is not intended to be exhaustive and might not necessarily apply in every case.

How does the Late payment legislation affect existing custom and practice?

The late payment legislation does not replace existing custom and practice. If the parties have undertaken business on the basis of usual industry practice (for example, payment at the end of the month following the date of the invoice), then this practice will probably still apply. However, if any remedy for late payment is not “substantial”, the terms of the late payment legislation will apply.

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