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

What does late payment legislation provide?

From 7 August 2002 the late payment legislation will provide all businesses and the public sector with 4 entitlements:

  • the right to claim interest for late payment;
  • the right to claim reasonable debt recovery costs, unless the supplier has acted unreasonably;
  • the right to challenge contractual terms that do not provide a substantial remedy against late payment; and
  • the right for “representative bodies” to challenge contractual terms that are grossly unfair on behalf of SMEs.

The first part of this section will address the right to interest and reasonable compensation for debt recovery costs. The second part will deal with contract terms.

Don’t I risk antagonising my customers if I use the legislation?

Using the legislation Is your statutory right and is not designed to jeopardise existing customer relationships. Rather than seeking to encourage claims for interest and/or debt recovery compensation, the legislation’s primary aim is to deter companies from paying their bills late. By treating the legislation as an integral part of your payment terms, customers will become educated to the fact that this is part of the way that you like to do business.

Part 1 – Late payment interest and reasonable debt recovery costs

When can I claim either or both of them?

Claim(s) can be made once a payment is deemed late. Remember that if your contract makes provision for late payment interest, the statutory right to interest and the right to reasonable debt recovery costs will not apply. You may wish to contract for reasonable recovery costs to cover the event of late payment or if you are litigating you may be able to recover from the court some of the costs and disbursements incurred or some of your reasonably foreseeable losses flowing from the late payment.

When is a payment late ?

Where there is an agreed credit period, and the supplier has agreed, either in writing or orally, a credit period with the purchaser, the payment is late if it is made after the last day of the credit period.

If no credit period has been agreed, then the Act sets a default period of 30 days after which interest can run. This default period does not constitute a statutory credit period. Where no credit period is agreed in a contract, the principal debt will still become due from the moment the goods are delivered or the service performed.

The 30-day default period starts running from the later of the actions:

  • the delivery of the goods or the performance of the service by the supplier; or
  • the day on which the purchaser has notice of the amount of the debt.
  • A payment is late once the agreed credit period or the default period has expired.

What happens if the contract requires advance payment(s)?

There are several ways in which a contract can require payment(s) to be made before the goods are delivered or the service is performed. The Act does not give a right to interest unless at least some of the goods have been delivered or part of the service performed unless contractually agreed. If the parties wish to agree otherwise, they will need to make provision in the contract for a substantial remedy instead of statutory interest.

Some contracts stipulate that the whole contract price should be paid before the goods are delivered or the service is performed. If payment has not been made before the goods are delivered or the service is performed, then statutory interest starts to run from the day after the day on which all the goods are delivered or the whole service is performed.

Other contracts stipulate that payment should be made by instalments in relation to a delivery of any part of the goods or performance of any part of the service. Where payment of such an instalment is made late then statutory interest runs on the instalment from the day after the day on which the part of the goods are delivered or the part of the service is performed.

Finally, where an advance payment forms part of the contract price, but is not related to the delivery of some of the goods or performance of part of the service, then statutory interest runs from the day after the day on which all the goods are delivered or the whole service is performed.

What happens if there is no agreed credit period but the purchaser usually pays at the end of the month following the month in which the invoice is received?

Some purchasers and suppliers have a long?standing relationship ‘in which this kind of payment arrangement has become standard practice. In these cases, the credit period is considered to end on the last day of the month following the month in which the invoice is received. Interest starts to run on the next day.

Where either:

  • the purchaser is dealing with a new supplier; or
  • there is any other reason to doubt whether this kind of arrangement can be regarded as established practice between the supplier and purchaser

the purchaser should ensure that there is an agreed credit period – otherwise the default period of 30 days might apply.

How do I make a claim for interest and/or reasonable debt recovery costs?

When the payment is late, a supplier should inform the purchaser that he or she is claiming interest on the late payment under the late payment legislation. It may be helpful to indicate the daily rate of interest that will be claimed, although it is not necessary to do so. The amount of compensation for debt recovery costs available is determined by a table, which the supplier can refer to.

For the purpose of claiming interest and/or compensation for debt recovery costs notification can be oral, but it is better to put it in writing, as this makes it easier to prove that notice has been given. It is necessary to provide all the information that should be carried on a standard invoice:

  • how much is owed (it may be helpful to provide the total amount of interest owed at the date of the invoice for interest, and, if the principal has not been paid, the rate at which the interest will continue to accrue);
  • the amount owed, and what it is owed for (stating which principal debt it relates to, quoting the original number of the invoice that requested payment of the principal debt);
  • to whom payment should be made;
  • by what date;
  • to what address; and
  • by what method the payment should be made (e.g. cheque, electronic transfer etc).

How should I inform purchasers that they will be charged interest and/or reasonable debt recovery costs if they pay late?

Rather than using it as a last resort when faced with an overdue invoice, the late payment legislation is designed to be a deterrent against late payment, and to be used as part of standard business practices and credit management techniques. In much the same way as a supplier reminds purchasers that payment is due within a specified time limit, the supplier should also remind them that interest and compensation for debt recovery costs will be charged on overdue invoices using the entitlements provided by the late payment legislation.

In addition to informing purchasers verbally of their right to charge interest and/or claim compensation for debt recovery costs as part of standard payment terms, suppliers should state clearly on all written communications, credit application forms, order confirmations, invoices and all contracts:

“We understand and will exercise our statutory right to claim interest and compensation for debt recovery costs under the late payment legislation if we are not paid according to agreed credit terms.”

Do I have to charge interest and/or debt recovery costs to all late payers?

No. It is not compulsory to use the late payment legislation. A supplier is free to decide whether or not to make a claim for interest or compensation for debt recovery costs.

Part 2 – Void (grossly unfair) contractual terms

What are void (grossly unfair) contractual terms?

Void (grossly unfair) contractual terms undermine the purpose of the late payment legislation. For example, they might seek to deny the supplier their right to reasonable compensation for debt recovery costs and/or remove or minimise the supplier’s right to statutory interest for late payment. For example, the customer might try to impose unilaterally a reduction in the rate of interest to be charged for late payment and/or increase the length of the credit period.

Guidance:

See How you do business

What can you do?

Any business or the public sector is entitled to go to court and challenge such terms and conditions.

See How you do business

Representative bodies officially recognised as, or having a legitimate interest in representing SMEs may go to court on behalf of the SME(s) and challenge as grossly unfair contractual terms which purchasers wish to rely upon. If the party that makes the challenge is successful, the Court will strike down as void the offending term(s) and the provisions of the late payment legislation will apply instead.

Representation in court

Small and medium-sized enterprises (SMEs) can ask a representative body to go to court on their behalf. Such a body might represent SMEs as a whole or cover a particular sector or geographical area.

Funding

There is no specific funding available to support challenges in court against grossly unfair contractual terms. Any representative bodies going to court are subject to normal costs rules and litigation liabilities.

Can an independent representative body challenge void (grossly unfair) commercial contract terms and conditions without having been requested to by at least 1 SME?

Yes. As long as the representative body has a demonstrable, relevant link with the SME(s) and has been set up specifically to act in the interests of SMEs as a whole or for a particular sector or geographical area.

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