Category: Payment

The Construction Act (The amendments)

Previous postings of Heina v Beck & Enforcement of Adjudication Decisions as a result of Brown v Complete Building Solutions have primarily revolved around two pieces of Primary Legislation, these being The Housing Grants, Construction and Regeneration Act 1996 and the Local Democracy, Economic Development and Construction Act 2009. In effect the 2009 act has been primarily an updating of the previous legislation to clarify where over time the law has been seen to be deficient. We should therefore look at the material changes that took place.

 As these two pieces of legislation, where they apply to construction activities first define what would be a Construction Contract in accordance with the legislation. While it is not prescriptive and allows some legal interpretation, broadly a construction contract is defined as “all design and construction contracts, including professional appointments, are likely to be construction contracts as long as they relate to construction operations.

This leads to the further question of, “What are “construction operations?””

Again this has been left to some interpretation but includes a wide range of construction operations and most common forms of engineering operation, such as civil engineering projects.

Some engineering projects such as mining, nuclear and power generation as well as contracts with residential occupiers are expressly excluded.

Let’s now consider the major changes of the 2009 Act

The major changes took effect with after amendments were made to The Scheme for Construction Contracts in 2011 and apply to contracts entered into after this.

The table below explains the key changes that were made to the 1996 Act:

CHANGE POINTS TO NOTE

 

 

Contracts in writing no longer required

Section 107 of the 1996 Act will be repealed.

The payment and adjudication provisions of the 1996 Act will now apply to all construction contracts, whether written, oral or a mixture of both.

The parties will still have to have a written adjudication clause in their contract that complies with section 108 of the 1996 Act. If they do not, the Scheme will apply.

Adjudication may be used more widely but it is likely that more time will be taken up in future adjudications arguing about what the terms of the contract are.

Ability to award costs restricted

Parties will not be able to agree in advance who will pay the costs of Adjudication.

The adjudicator also cannot be given the power to award legal costs.

 

 

 

Under the new section 108A, only two types of costs agreement will be effective:

1) An agreement in writing in the construction contract which gives the adjudicator power to split liability for the adjudicator’s own fees and expenses between the parties; and

2) An agreement on costs made in writing between the parties after the notice of adjudication is served.

 

New slip rule

Under new section 108(3A), construction contracts will have to contain a provision in writing allowing the adjudicator to correct clerical or typographical errors in his decision, arising by accident or omission.

 

The Act is silent on how long an adjudicator will have to make corrections. Parties would be wise to agree a timescale in their contract.

Notably, the Adjudicator will be permitted but not compelled to make corrections and his ability to do so will be limited. He is unlikely to be able to correct factual or reasoning errors or errors of judgement.

Pay when certified clauses banned

‘Pay when certified’ clauses will be banned under new section 110(1A), except where the construction contract is an agreement for someone else to carry out construction operations and payment is conditional on that other person performing their obligations.

 

 

 

 

The exception to section 110(1A) will mean that management contracts will not be outlawed.

Equivalent project relief clauses in Public / Private Partnership contracts, which normally contain conditional payment arrangements, may have to be redrafted.

Payers may try to find other mechanisms to minimise the effect of this, such as by inserting a longer payment period into the subcontract than the period in the main contract.

‘Pay when paid’ provisions will still be ineffective under section 113, except where there is an upstream insolvency.

Due date can’t be determined by notice

Under new section 110(1D), making the due date dependent on the payer giving a payment notice will be banned.

This is not an adequate mechanism for determining when payments become due.

If there is such a clause in the contract, it will be ineffective and the Scheme will apply.

New payment notices

The payment notice provisions of the 1996 Act will be replaced.

Under new section 110A, a payment notice will have to be given not later than five days after the payment due date.

The construction contract may provide for the payer (person paying), the payee (person receiving payment) or another specified person to give this notice.

The payment notice must be issued, even where the amount due is thought to be zero.

To be valid, the notice must state the sum that the person giving the notice considers to be due (or to have been due at the payment date) and the basis on which that sum is calculated.

Where a specified person gives the notice, it may state the sum that either the specified person or the payer considers to be due.

If the payer fails to serve a valid payment notice but the payee has already submitted an application for payment, the amount set out in the application will become due. Payers should therefore be careful to serve their payment notices on time.

New payment default notices

Under section 110B, where the payer (or a specified person) is supposed to but has failed to issue a valid payment notice, the payee may serve a ‘payment default notice’.

Where a valid payment default notice is given, the final date for payment of the notified sum will be postponed by the number of days that it took the payee to issue the payment default notice after the payer failed to issue the payment notice.

The payment default notice must state the sum that the payee considers to be due and the basis on which it is calculated.

Payment default notices should be served promptly, to minimise any delay to the final date for payment and to ensure that suspension rights can be exercised if payment is not made.

A payment default notice cannot be served if the contract provides for the payee to serve the payment notice.

Withholding notices replaced by “pay less” notices

The withholding notice provisions of the 1996 Act are to be replaced.

Under new section 111, the notified sum (the amount specified in a valid payment notice or payment default notice) must be paid on or before the final date for payment, unless the payer (or a specified person) serves a valid ‘pay less notice’.

Money can still be withheld without a ‘pay less notice’, if the payee becomes insolvent after the period for issuing the notice has expired.

A “Pay Less otice” must state the payer’s intention to pay less than the notified sum. It must be served not later than the prescribed period before the final date for payment.

It must specify the sum that the payer considers to be due on the date the notice is served (even if that is zero) and the basis on which that is calculated.

A ‘pay less notice’ cannot be served before a payment notice or a payment default notice has been served.

 

Enhanced rights on suspension

Where the payee is entitled to suspend performance under section 112 of the 1996 Act, their rights will be enhanced.

The payee will:

1) be able to suspend their obligations in whole or in part;

2) be entitled to be paid the reasonable costs and expenses associated with the suspension; and

3) be entitled to an extension of time which includes time required to remobilise.

Enhanced compensation rights may encourage parties to use this remedy.

Suspension may now be seen as an even more effective way of securing payment.

 

 

 

 

 

 

In the next post we will have a look at these changes in more detail and what should be included to ensure compliance with and protection from changes from that seek to dilute the effectiveness of the changes.

 

Claiming Late Payment Interest and Compensation

The Late Payment of Commercial Debts (Interest) Act 1998 has two purposes, these being:

  • To compensate creditors for the late payment of debts,
  • To deter late payment.

The Act and the Statutory Instrument, Late Payment of Commercial Debts Regulations 2002 (LPCDR) only applies to the commercial supply of goods and services and specifically where a provision for interest is not contained in your standard Terms and Conditions of Business.

In brief, for invoices that are not paid on time, it enables you to claim interest, compensation and (for orders placed after 16 March 2013) your reasonable costs of collecting the debt where these exceed the compensation. Interest can be claimed at 8% over base together with compensation at the rate of between £40 and £100 per invoice based on the following invoice value thresholds:

Invoice Amount Compensation
Up to £999.99 £40 per invoice
£1000 – £9,999.99 £70 per invoice
Over £10,000.00 £100 per invoice

 The provision where you can claim your reasonable costs only applies where your Terms and Conditions of business are silent on interest. However as an Act of Parliament, the right to claim interest and compensation are automatic, subject to the following rules:

  • You have supplied goods and services
  • Your buyer bought the goods and services for business purposes
  • The contract is not a consumer credit agreement

 The basic rules of what you can claim

 Where no rate of interest has been stated in the Terms and Conditions of business, you can claim interest at 8% above the Bank of England Base Rate as it stood at the previous 31st December or 30th June.

Interest can be claimed on invoices not paid within the credit period but that have subsequently been paid with the interest claim starting with the date the invoice should have been paid and ending with the date it was actually paid. To this is added the Compensation amount as stated in the table above, which is dependent on the value of the invoice.

In the event your cost of the collection of the debt exceeds the statutory compensation you may claim for this additional cost as well. While this has not been defined ort fully tested in the courts it would appear that you can claim for the credit control procedures of your business as well as claiming any costs incurred with Debt Collection Agencies or lawyers.

It is likely that in small claims track cases the courts will view reasonable legal costs as being the equivalent of the limited fixed costs which are allowed. It is generally believed you will have more chance of getting a reasonable level of costs if you have a contractual clause allowing you to recover indemnity costs.

As part of our Contractual Advice service Ansell Murray Limited can assist in ensuring this clause is correctly drafted in standard Terms and Conditions of business.

It is important to remember that where you have stated your Terms and Conditions of business within existing customers orders these contracts will continue to be governed by these Terms and Conditions.

To ensure your business is able to claim fully in line with Late Payment legislation you should:

  • update all documents on which your Terms and Conditions appear.
  • circulate your customers with the revised Terms and Conditions.
  • advise your customers when the revised Terms and Conditions will come into effect for future contracts.

Often the prescribed rate of interest in a Contract is stated as a low amount (often as low as 2%) Occasionally your customer’s terms of business may be incorporated into the contract and provide for. In this event, the court may take the view that the interest rate is not substantial enough and that the Late Payment legislation applies. In that case you would be able to claim interest, compensation and costs under the Act, rather than just the low rate in the contract.

Interest and Compensation can be claimed for up to 6 years after the late payment occurred.

 

Henia Investments Inc v Beck Interiors Ltd

In the last post we looked at three basic documents that are a consequence of the Payment Mechanism, these being:

• The Interim Application for Payment (AfP)

• The Payment Notice

• The Payless Notice

How important these relatively straight forward contract requirements are has been highlighted in a court case that has recently been concluded in the Technology and Construction Court (TCC) between Henia Investments Inc v Beck Interiors Ltd [2015] EWHC 2433 (TCC). In particular it has given some legal position in relation to the three documents, but in particular the AfP and Payless Notice.

Background to the case

Henia Investments Incorporated (Henia) entered into a Joint Contract Tribunal (JCT) Standard Building Contract without Quantities 2011 (as amended) with Beck Interiors Limited (Beck) to undertake an extensive Fit Out to a property in Kensington, London.

The Payment Mechanism was intended to reflect The Housing Grants, Construction and Regeneration Act [1996], as amended by The Local Democracy, Economic Development and Construction Act [2009] where the interim AfP due date was the 29th of each month with interim AfP’s to be made no later than 7 days before the due date. Therefore Beck could apply between the 22nd and 29th of each month. The Contract Administrator was required to issue an Interim Payment Notice no later than 5 days after the due date, this being usually the 3rd or 4th of the following month, save February where it would be due on the 5th March. The final date for payment was 28 days after the due date and any Payless Notice were to be issued no later than 3 days before the final date, therefore on or before the 26th of the next month following the AfP.

What led to the Dispute

The dispute centred round AfP’s and if legally delivered and the consequence thereof. Although it should be noted that the presiding judge, Mr Justice Akenhead noted that the parties “have not followed with any precision the contractual requirements”. This is perhaps a masterpiece of understatement as this case could be a case study in how not to administer a Contract.

The dispute centres on Interim AfP Number 18, due on 29th April 2015 and AfP Number 19, which was due to be submitted on 29th May 2015.

Beck lodged their Interim AfP Number 18 for the sum of £2,943,098.95 six (6) days late. Crucially this was for works completed to 30th April 2015. On 6th May 2015 the Contract Administrator issued a Payment Notice to Beck detailing the sum a payable as £226,248,98. This payment Notice where it related to AfP number 18 was issued one (1) day late, although effectively the Contract Administrator could not issue a Payment Notice in time as the AfP was delivered after he was compelled contractually to provide his Payment Notice. Although the Contract Administator could have issed a Payment Notice in time, in all probability showing £0 due in period.

Beck failed to produce and lodge their Interim AfP Number 19 (due on or before 29th May 2015). Despite this the Contract Administrator issued a Payment Notice to Beck on 4th June 2015 at 00:03, therefore 3 minutes later than when it was due, although in reality one (1) late, detailing the sum a payable as £18,893,953.

Henia issued a Payless Notice within the agreed contractual timescale on 17 June 2015. This was based on Payment Notice Number 19, of which part of the computation was the deduction for Liquidated & Ascertained Damages (LAD’s) of £373,751.05. This Payless Notice stated that Becks entitlement in relation to AfP number 19 was £0.

It was Beck position that the AfP lodged six (6) days late was a valid Interim AfP relating to the next Valuation Date of 29th May 2015 and that as the Contract Administrators Payment Notice was late (effectively by 3 minutes) the sum claimed in this AfP was now due. Beck argued further that the Payless Notice issued by Heina on 17th June 2015 was invalid. Their challenge to its validity was on the grounds that in a Payless Notice, Henia could only apply cross-claims, such as LAD’s but otherwise not challenge the Contract Administrator’s valuation.

In Part 8 proceedings commenced by Heina (Part 8 – Alternative Procedures for Claims is explained in greater detail at this link: http://www.justice.gov.uk/courts/procedure-rules/civil/rules/part08 ) Judge Akenhead had three very clear and distinct arguments to consider. These being:

• Was Beck’s Interim AfP Number 18 valid

• Was Henia’s Payless Notice valid

• Would the failure by the Contract Administrator to make a Determination in respect of an Extension of Time (EoT) claim by Beck prevent Henia from claiming LAD’s

While these were the three primary points to be considered, the essential element was the timing of these documents in relation to the Payment Mechanism within the Contract.

Judgment

Beck’s Interim AfP’s

The Contract enabled Beck to lodge an AfP on or before the 29th of each month stating the sum it considered would become due for payment. The works would be valued from the 30th of the previous month to the 29th of the current month, under normal circumstances. Beck’s Interim AfP Number 18 stated the sums applied for were “Valued to 30/04/2015”. The Contract was clear and unambiguous that an AfP on a valuation of the works could only happen on either 29 April or 29 May. 30 April was therefore not an option.

Judge Akenhead therefore rules that Beck’s Interim AfP was invalid. However he was silent with regards the timing of Becks AfP being six (6) days late.

In effect on this issue four points can be made to summarise the position that was decided by Judge Akenhead, these being:

1. The relevant AfP date of 29th April 2015, which would have been the 18th relevant due date under the Contract.

2. Nothing in the AfP dated to 30th April 2015 suggested the works were valued to 29th May 2015. The AfP stated the works were valued up to 30th April 2015 meaning that if was a valuation to the 29th May 2015 AfP date, Beck were not anticipating doing any work of value during May 2015. This was not plausible.

3. There was no indication in the AfP dated 30th April 2015 to suggest the 29th April 2015 AfP date had been missed and this AfP related to the 29th May 2015.

4. The AfP dated 30th April 2015 in substance, form and intent not an Interim AfP relating to the 29th May 2015 AfP date.

Henia’s Payless Notice

Due to the finding in relation to the validity of Beck’s Interim AfP, the dispute over Henia’s Payless Notice was rendered irrelevant. As the Contract Payment Mechanism had not been followed, it meant that there was no valid Interim AfP or indeed Payment Notices and both had been issued late. As a consequence no interim payment became due to Beck.

Judge Akenhead did however go on to consider the parties’ arguments in relation to the Payless Notice.

If Beck’s Interim AfP Number 18 was valid then Henia would have been compelled by the Act to pay the sum applied for, as there was no valid Payment Notice, which was effectively the subject of Henia’s Payless Notice.

Beck argued that a Payless Notice only allowed Henia to pay less than the sum in the Payment Notice (or Interim AfP) on the basis of counter or cross claims, in this case LAD’s.

Henia countered this argument and claimed that in addition to any cross claims, it was also entitled to state its own valuation of the works in its Payless Notice. This valuation was based on the late Payment Notice Number 19, which contained their claim for LAD’s and this claim outweighed this, hence Henia’s view that no sums were due to Beck.

Judge Akenhead sided with Henia and held the contract compelled Henia to serve a Payless Notice if it intended to “pay less than the sums stated as due.” Further no explicit wording in the Contract implied this was restricted to cross-claims.

Contract Administrators failure to Determine the EoT

Judge Akenhead found that any failure by the Contract Administrator to Determine the EoT provisions would not give rise to a Condition Precedent debarring Henia from claiming LAD’s and any potential short term unfairness to Beck could be resolved through the Contracts dispute resolution mechanism. He stressed this finding was obiter where prior to judgment being handed down, in an Adjudication commenced by Beck, the Adjudicator had found that no valid application for an extension of time had been submitted.

The Judgement in Summary

The judgment in Henia vs Beck found that a “Pay Less Notice can not only raise deductions specifically permitted by the Contract and legitimate set-offs but also deploy the Employer’s own valuation of the Works.”

Employers will welcome this outcome as it has blurred the lines between a Payment Notice and a Payless Notice and at what stage each one could arguably serve as the other.

What is the general implication of this ruling?

This judgment confirms the principle that The Housing Grants, Construction and Regeneration Act [1996] and it’s amendments in The Local Democracy, Economic Development and Construction Act [2009] where the Employer is not barred from challenging an amount previously certified by the Contract Administrator and undertaking its own valuation. However this will obviously need to be specific to the terms of the Contract.

Further where a Contract has a clear and unambiguous date for the lodging of an Interim AfP doubt will arise if the sequence is not followed.

Payment Certificate & Payless Notice (Are they important?)

In a typical construction contract that last longer than 45 days in overall duration, in accordance with Section 109 of The Housing Grants, Construction and Regeneration Act [1996] there will be stage payments made.

The parties to the contract are free to agree the amounts of the payment and a mechanism to calculate this and the intervals or circumstances under which they become due. As a fallback position if the contract is silent on this mechanism then the supplementary provisions to the Act contained in The Scheme for Construction Contracts Regulations [1998] As Amended in 2011 will apply.

If we assume that the contract is between an Employer and a Contractor and is using an un-amended Joint Contract Tribunal (JCT) Standard Building Contract.

The Payment Mechanism under this contract will be:

  • An interim Application for Payment (AfP) Date will be determined. e.g. Final Friday of each calendar month, Final Day of Each month, Every Second Friday after the Base Date etc
  • The Due Date for payment is 14 days after agreed date for the submission of the AfP
  • Within 5 days of receipt of the AfP the Contract Administrator is to issue to the Contractor a Payment Certificate stating the sum that the Employers intends to pay to the Contractor
  • Where this sum was less than the sum applied for in the AfP, the Contract Administrator must issue a Payless Notice (Notice of Withholding) where it to set out the grounds for the withholding of sums that have been subject to the AfP. This Payless Notice must be issued no more than 5 days before the Final Date for Payment.
  • In the event no Payless Notice is issued then the Contractor can expect to receive the sum that has been certified in the Payment Certificate on or before the Due Date.
  • In the event payment is not made or the incorrect sum is paid, then the payment can be deemed late and interest and the penalty fee under the Late Payment of Commercial Debt Regulations [2002] As amended may be claimed

If we look briefly what the three main elements of this Payment Mechanism:

Interim Application for Payment

This is a document prepared by the Contractor setting out in such detail as required by the Employers Requirements or as agreed the sum being applied for and any supporting details.

For example if there is an item of equipment whose delivery to site for incorporation into the works is critical to the programme being able to be achieved, a Vesting Agreement may be entered into. Here the Employer will pay for the item of equipment even though it is not on site, but has been completed and is being stored off site. Of course this is the extreme case, whereas generally the interim AfP will be for works completed on a percentage basis and any materials that are on site but have not been incorporated into the works.

Where there is mutual trust and goodwill that exists between the parties this can even take the form where the Contractor and Contractors Representative meet on site on the date of the AfP or just before and effectively agree the sum that will be applied for. This will generally make the Payless Notice unnecessary as the Payment Certificate will be to the sum applied for..

Payment Certificate

Following receipt by the Contract Administrator of the Contractor’s AfP; if this has not been effectively agreed prior to the submission of the AfP; then the application will be assessed and a Payment Certificate issued of the sum that is intended to be paid.

Where the sum being certified is the same as the AfP, then in the event of no deductions being made there will be no further requirement, other than for the Employer to make payment of the sum due by the Final Date for Payment.

Payless Notice

Where the Contractor has made application for a sum and the Contract Administrator does not agree that the sum applied for is due, a Payless Notice will be prepared and issued. There are strict timeframes in the Contract for the issue of this Payless Notice.

The Payless Notice has to specify the amounts that are proposed to be withheld and / or deducted and the grounds attributable to each sum that is being withheld. It follows that each ground has to have a legal basis under the Contract. Where the sum withheld is as a result of progress on site, or lack of it as the case may be this can be quite subjective, unless pre agreed milestones have been agreed by the parties.

 

I suppose the thought now is, “Why write about some mundane, mechanical, well known elements of the contract and payment mechanism?

The reason is that recently at the Technology and Construction Court (TCC) a case has recently concluded where these three processes were not followed as required by the contract. It could be said the entire process should be a case study in how NOT to administer a contract.

In the next post will look at this case at the TCC and its implication for all the parties to a Contract.

 

The Payment Mechanism

In an earlier post we examined Late Payment and the remedies that are available when a Payment is made after the Final Date upon which it was due to be paid.

In some contracts this is straight forward as it can be clearly stated, such as 14 days from the date of invoice etc.

Construction Contracts and indeed any contract that made regular payments based on progress made or value earned and applied for through an Interim Application for Payment (AfP) can be more complex as they need to be in accordance with a number of documents in ensuring the Payment Mechanism is in accordance with current legislation, regulation and statutory instrument. Further where a standard form of contract is used, the terms and conditions in this contract need to be considered, to ensure they are not in conflict with the Acts and Statutory Instruments.

You can at times end up having tyo ensure that you are in accordance with the requirements of 5 separate Documents. These being:

  • The Housing Grants, Construction and Regeneration Act [1996]
  • Local Democracy, Economic Development and Construction Act [2009]
  • The Scheme for Construction Contracts (England and Wales) [1998]
  • The Scheme for Construction Contracts (Amendment) (England) [2011]
  • The contract that is going to be used e.g. Joint Contract Tribunal (JCT), New Engineering Contract (NEC)

In Scotland both The Housing Grants, Construction and Regeneration Act [1996] and Local Democracy, Economic Development and Construction Act [2009] applied. However Scotland had their own Statutory Instrument, The Scheme for Construction Contracts (Scotland) [1998]. Initially the proposed amendments  were laid before the Scottish Parliament for approval. However the amendments subsequently become law through the 2011 amendments coming into force as a United Kingdom Statutory Instrument. The draft regulation in relation to Scotland can be viewed at this link,  http://www.legislation.gov.uk/sdsi/2011/9780111014431/pdfs/sdsi_9780111014431_en.pdf

As can therefore be seen ensuring a Payment Mechanism is legal and workable can be something of a minefield, particularly when the contracts begins to run late invoking Liquidated & Ascertained Damages (LAD’s) or Extension of Time (EoT).

Next time we will examine the Payment Certificate and Payless Notice.

Late Payment

Recently in the news it has been reported how the United Kingdom’s supermarkets have been squeezing their suppliers by paying them later than their contractual payment period. Yet in reality there is already a remedy in place as a result of the Late Payment of Commercial Debts (Interest) Act 1998, Late Payment of Commercial Debts Regulations 2002 (LPCDR).

The Late Payment of Commercial Debts (Interest) Act 1998 and LPCDR 2002 (revised in 2013) give businesses the statutory right to claim interest on late payments from other businesses. This includes sole traders (Acting as a business), partnerships, Limited Liability Companies, Limited Companies and Public Limited Companies and public sector organisations, such as the National Health Service.

Of course the reality is that often it is not “good business sense” to claim this entitlement, but it is a remedy that is available to companies, as late payment can cause serious cash flow issues, particularly for smaller concerns and in some instances could lead to an insolvency event, although this would be an extreme case and would require some aligning of events that usually wouldn’t happen.

The Original Act was implemented in 3 stages, these being:
1.  The Act came into effect on 1st November 1998 and allowed small businesses, (50 employees or less) the right to claim interest for late payment from large businesses, (over 50 employees) and public sector organisations.

2.  From the 1st November 2000 small businesses have also been able to claim statutory interest from other small businesses.

3.  With effect from 1st November 2002, all businesses, including public sector organisations have been entitled to claim interest from any other business or organisation, (including small businesses).

How would we define a late payment to align with both the Act and the Regulations:

A late payment is where the agreed credit period given by the supplier to the purchaser has expired. If no credit period has been specified, the Act specifies a default period of 30 days after which the penalty fee and interest will accrue.

How the 30 day period is calculated will depend on the circumstances, as this Act has to align the whole economy to a set time period and following are a few examples of how the timing is calculated.

The 30 day period runs from either the delivery of the goods or the performance of the service, or the day the purchaser receives notice of the debt.

However, if a contract between the parties specifies that there is no credit period the main debt will be due as soon as the goods are delivered or the service has been performed.

If payment is made in advance of goods being delivered or the service being provided, effectively a deposit or retainer, then the Act states that the right to claim interest only begins from when part of the goods are delivered or part of the service is performed.

However, if the contract between the parties states that the whole sum is paid in advance; the statutory interest period runs from the day after the goods are delivered or the service performed. Although in practical terms this would be difficult to calculate as effectively the monies have changed hands before the service commences.

Where payment is to be made by instalments, the statutory interest runs from the day after an instalment is due.

If there is no specified credit period, but previous practice has been that payment is made 30 days after the end of the month that the invoice is received; then interest will begin to accrue on the day after the 30 days has elapsed. If there is no specified credit period or previous practice, the default credit period is 30 days.

As can be seen by these examples, there are a number of different timings to take into account, but it is best practice to:

• Agree the credit terms in advance in writing and where possible have them included into the contract between the parties

• Have details of the Due Date for Payment on any invoice.

It is also good practice if a business intends to use the Act to enforce payment to the agreed terms that they state this on all invoices and letters seeking payment, such as in the example below:

[Company Name / Trading Name] reserve the right to claim statutory interest at 8% above the Bank of England base rate in force on the date the debt becomes overdue and at any subsequent rate where the base rate changes and the debt remains unpaid in accordance with the Late Payment of Commercial Debts (Interest) Act 1998 as amended and supplemented by the Late Payment of Commercial Debts Regulations 2002.”

2013 Amendments to the Regulations

As is normal good practice legislation is reviewed and updated from time to time to allow it to be up to date with current norms. In 2013 the LPCDR were amended and the following provisions were included in the amended Regulations:

1. Where a debt is owed the creditor can force the debtor to pay interest plus the reasonable costs incurred by the creditor in recovering the money owed if the debtor fails to pay for goods and/or services on time.

2. Businesses have 60 days to pay, though the parties can agree a longer period to pay, as long as it is not grossly unfair to the creditor.

3. Public authorities or bodies have 30 days to pay, (unlike business-to-business transactions there is no option to negotiate a longer period).

4. Creditors are entitled to a Fixed Penalty Charge from the debtor, which has three tiers. Additional reasonable costs incurred, (this may include legal advice and action) can also be claimed. The three tiers are as follows:

• Debt owed up to £999.99 – £40 charge

• Debt owed £1000 – £9,999 – £70 charge

• Debt owed £10,000 or more – £100 charge

5. The new Regulations only apply to contracts concluded after 16th March 2013.

A further reason for the 2013 revisions to the Regulations was for these regulations to apply across Europe. It was also recognised that public bodies and authorities can be amongst the worst for late payment and their overall payment period is limited to 30 days as a consequence.

Some companies have also taken advantage of the revisions in trying to enforce 90 days as standard payment terms.

The rate of Interest

The interest rate under the Act is the Bank of England base rate of lending that applies during the period in which the debt falls due PLUS 8%.

For the purposes of calculating interest owed the base rate is fixed every 6 months. This is known as the “Reference Rate.” Therefore it is possible that the Reference Rate could change dependent on when a debt became due and the interest owed will need to be apportioned where the Reference Rate changes before the debt is paid in full.

Claiming Interest on overdue payments

The supplier can notify the purchaser orally that interest will be claimed although it is best practice to have the right to interest under LPCDR to be included in any contract or advised in writing. Where in writing this should include the following general points in relation to interest:

• The original invoice details
• The amount owed, including the total interest accrued at date of the letter.
• The continuing daily interest rate.
• Full name and address to whom payment should be made, if different to who was originally owed the monies
• Accepted method of payment.
Interest is calculated on a simple interest basis and the following formula can be used to calculate the sum due:

=(Total Amount Due x BaseRate + Penalty Interst rate) / No of Days in a Year)) x No of Days Late

If we assume a debt of £1,000 has been due for 30 days at the time of writing the demand, the sum due would be the following formula:

=(1000 x 8.5%)/365.25) x 30

This would mean the interest due was £6.98 and this would increase by 23 pence per day, every day the debt remains unpaid. Of course the Penalty Charge needs to be added to the sum due, which in this instance would be £70.

Contractual Interest or Compensation

It is possible to exclude the Act and LPCDR from applying where parties to a contract may agree a specific interest rate or compensation for late payment.

However, to avoid larger companies from abusing the position that their bargaining power brings any agreed interest rate or compensation for late payment must be “substantial.” If it is not based on the following two tests, the Act will apply instead.

Substantial means that:

• It will cover the supplier for losses incurred due to late payment or act as a deterrent.
• It is reasonable to let the contractual compensation replace the provisions of the Act.

Timing of Payments

Sole Traders and businesses in England & Wales, (or their receivers or liquidators) have 6 years from the time the debt became due to make a claim for interest. However If the purchaser disputes the original invoice or the interest charged the matter can like other disputes end up in the County Court. It is also possible for a supplier to transfer the debt to a third party although the supplier should inform the purchaser in writing that the debt has been transferred.

If, while the supplier is waiting for payment the base rate (Reference Rate) changes the amount of interest needs to be apportioned to take account of the change in the base rate. Further, if the purchaser pays only part of the debt owed; the part-payment will first go to reduce the amount of interest owed and then the principle sum that is owed.

In reality a business or commercial enterprise does not have to exercise the right to claim interest and many are concerned that this will risk their existing relationship. However, if you state at the time the contract is made that you will exercise your right to interest if payment is late, this may act as a deterrent of sorts. But then if paid late consistently, you must exercise the right

The question is often asked, “Is it right to claim interest and compensation for late payment?”

To which the simple answer is “is it right to fail to make payment in accordance with the terms and conditions that you have agreed?”