23 May 2013

Late payment regulations: construction industry warned not to be caught out

The Late Payment of Commercial Debts Regulations 2013 are now in force and arguably set new time limits for the payment of invoices in certain business to business contracts and business to public authority contracts by specifying when interest may be payable. The aim of the Regulations is to encourage the prompt payment of invoices, and to protect businesses from the potentially fatal consequences of late payment. The Regulations apply to most businesses but here we focus on its implications for the construction industry where payment problems are still rife.

Summary of changes

The Regulations introduce a number of changes to the Late Payment of Commercial Debts (Interest) Act 1998:

• Where a public authority purchases goods or services, then interest on outstanding payments will run from 30 days of the supplier’s invoice being received, the receipt of the goods or services, or the acceptance or verification of the goods or services, whichever is the later.

• Where a business purchases goods or services, and the contract does not specify the time for payment, then interest will start to run from 30 days of the supplier’s invoice being received, the receipt of the goods or services, or the acceptance or verification of the goods or services, whichever is the later. The parties can, in fact, agree a due date for payment of up to 60 days and can go beyond that time limit, provided that the relevant period is agreed in writing and is not “grossly unfair”.

Statutory interest will continue to apply to late payment. This is currently at 8% above the Bank of England’s base rate. Further, the supplier can in addition claim a fixed charge for recovering the debt (£40, £70 or £100 depending upon the size of the debt), together with its “reasonable costs” of recovering the interest.

However, it is important to appreciate that the right to claim this high rate of interest and additional costs only arises if the contract does not provide a “substantial remedy” for late payment. Recently, it has been held that the standard rate in JCT contracts of 5% over base is a substantial remedy. In another case a rate of 0.5% was held to be inadequate and therefore the default rate of 8% over base applied.

Therefore, if you are the paying party, always ensure that you have a provision in your contract terms which provides for the payment of a reasonable rate of interest (i.e it provides a “substantial remedy”).

If you are the party seeking payment, you should check if there is a right to claim a reasonable rate of interest .If there is not, you can claim interest at 8% over base and the reasonable costs of recovering it. These costs could include debt recovery and legal fees. However, it is debatable whether this means that legal costs incurred in respect of an adjudication are recoverable under the Regulations: we expect that some parties will try to claim them in this way, and this is particularly relevant to adjudication where normally neither party can recover its legal costs.

These new Regulations generally apply to contracts entered into on or after 16 March 2013 , and in some instances to contracts entered into on or after 14 May 2013.

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About the Author
Andrew James, Partner, Head of Construction & Engineering Team
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