The late payment of commercial debts

The Late Payment of Commercial Debts Act 1998 ("the Act") gives small businesses the right to claim statutory interest on late payment on contracts for the supply of goods or services. The Act was brought in to achieve two purposes: to provide compensation to small businesses when payments are late; and to improve cash flow by deterring late payment.

Implementation and application

The Act is encompassed in three phases, two of which have already been implemented. The third phase will be implemented in 2002.

The first phase came into force on 1st November 1998 and made it possible for small business suppliers to charge a statutory rate of interest, (8 percent over the official dealing rate per annum of the Bank of England), for late payment on contracts for the supply of goods or services with a large business purchaser.

For the purposes of the Act a small business is defined as one with 50 or fewer full-time employees on the date the contract was made, including partners and sole owners. Provision is made in the Act for the inclusion in this calculation of employees in associated businesses and part-time employees as fractions of full-timers. A large business is defined as a Public Authority or a business with over 50 full-time employees.

The second phase of the Act was brought into force on 1st November 2000. This enables small business suppliers to charge statutory interest where there is late payment on contracts for the supply of goods or services made after 1st November 2000 with a small business purchaser.

The third phase, when implemented next year, will enable any commercial firm to charge any other organisation statutory interest for late payment on contracts for the supply of goods or services.

At present, in order to determine whether any particular contract is subject to the Act, the average number of employees of the relevant organisation is computed over the period 1st April to 31st March preceding the date the contract was made. For example, for a contract made on 6th April 2001 the relevant time period would be 1st April 2000 to 31st March 2001.

The Act applies to any commercial contract for the supply of goods or services where the purchaser and supplier are both acting in the course of a business. Any contract (other than an excepted contract) between a small business supplier and a small or large business purchaser is subject to an implied term that any debt created by the commercial contract carries simple interest on a qualifying debt.

An excepted contract is either a consumer credit agreement; a contract intended to operate by way of mortgage or other security; or a contract of a description specified by an order made by the Secretary of State.

Operation of the Act

Whether statutory interest falls on a particular contract is determined by reference to the circumstances that existed when the contract was made and not to any subsequent change to those circumstances. Therefore, the operation of the Act is not affected by a change in the identity to the parties to the contract, nor where the right to be paid (whole or in part) has been passed to a person who is not the original creditor or original debtor.

Exclusion of statutory interest

Any contract term that purports to exclude the right to statutory interest is void unless there is a substantial contractual remedy for late payment of the debt. A substantial remedy is one that not only sufficiently compensates the supplier for late payment, but also is sufficient to deter late payment.

Relevant date for applying statutory interest

The date from which statutory interest starts to run is known as the 'relevant date'. Where the supplier and purchaser have agreed a date for payment, the relevant date is the day after the agreed date for payment.

Where the debt does not arise until after a triggering event or failure, the relevant date is day 30 of a 30-day period that commences on whichever is the later of the date on which the supplier performs its obligations or the date on which the purchaser receives notice of the amount of the debt or sum claimed.

For further information, please contact Alex Smith at [email protected] or on +44 (0) 20 7367 3480.