Late payment is an issue in every industry, but none more so than in the world of construction. Most construction contracts provide for interest to accrue on late payments, and there is parallel provision for late payment interest in statute, pursuant to the Late Payment of Commercial Debts (Interest) Act 1998 (the Act). However, many people do not know that this Act may even apply where there is an existing contractual interest rate stated in your contract.
The Act provides that, except where a contract provides a ‘substantial remedy’ for late payment, interest will accrue on qualifying debts at the statutory rate of 8% over the Bank of England Base rate, together with a fixed lump sum depending on the amount of the debt.
Many construction contracts provide for interest to accrue at a lower rate, for example the JCT 2024 standard rate is 5% over base, and although section 9 of the Act gives various factors that the court will consider when deciding whether or not a rate is substantial, that point has very rarely fallen to be decided by the court.
The recent case of A&V v J&B has given useful guidance on how the contractual and statutory regimes will interact. In this article we provide details of the case and highlight the key takeaway points for parties to construction contracts.
A&V was successful in a dispute with J&B, and subsequently sought interest on the sums awarded at the statutory rate. J&B however, said that the rate of 2% over base stated in the contract should apply, arguing it was a ‘substantial remedy’ and therefore it ousted the statutory rate.
Section 9(2) of the Act says that in determining the question, the court should consider all relevant circumstances prevailing ‘at the time the terms in question are agreed’. J&B accordingly argued that it was highly relevant that when the rate of 2% over base was agreed, the base rate had been below 1% for more than 10 years, and that it was therefore a substantial remedy, being in the region of four times the interest A&V could have earned on that money if it had been in its bank account.
J&B also made the point that where the court exercises its discretion to award interest under the Senior Courts Act 1981, it often makes awards of interest at rates between 1 and 3% over base. In that context, it would be difficult for the court to now say that 2% over base was not a ‘substantial remedy.
The court, however, was unconvinced by these arguments and found that 2% over base was not a substantial remedy for the purpose of the Act, and that the statutory rate of 8% over base should apply. The court has previously indicated that it considers that the JCT standard rate of 5% is a substantial remedy for the purpose of the Act , and that rates of 3-4% may be substantial. The court has also upheld a contractual rate of 3% over base as substantial.
These decisions all turn on the specific facts of the case, and are not universally applicable rules, but do give some indication of which way the court may go in future cases. In the particular case of A&V v J&B one part of the court’s reasoning that appears significant is that the interest clause was one-sided in that the 2% over base rate only applied to late payments made by J&B. However, insofar as there was any money due from A&V (whether on the basis of overpayment or damages or something else) the statutory rate would apply. The court referred to this as a ‘one-sided bet’. Taken in conjunction with J&B seeking 4% over base in interest on its own cross-claims, the court appears to have taken the view that even J&B didn’t consider the contractual interest rate substantial.
A further point of interest from the judgment is that the contractual interest provision contained the express provision that 'The Sub-Contractor acknowledges that such rate is a substantial remedy for late payment (as defined in the Late Payment of Commercial Debts (Interest) Act 1998).' Such ‘saving’ type provisions are commonly used in construction contracts, not only attached to interest clauses but also in respect of liquidated damages and similar.
J&B said that the effect of this clause was that it was not open to A&V to argue that the contractual rate was not substantial nor open to the court to look behind this provision.
The court disagreed, saying that the ‘saving’ provision merely reflected ‘competent drafting’ by J&B’s lawyers, rather than being evidence of what the parties had actually agreed.
This part of the decision is significant, as it would appear to conflict with the Supreme Court’s settled position on contractual interpretation in the Arnold v Britten case which provides that the terms of a contract must be given their plain and natural meaning. Whether this decision will be followed by future or higher courts remains to be seen, but we would expect to now see parties trying to avoid the effects of clauses of this type by reference to the A&V v J&B case.
This judgment is a useful reminder of three key points for parties to construction contracts.
Interest provisions are often treated something of an afterthought, but careful drafting can improve the commerciality of an agreement, which, in an industry of fine margins, may make all the difference. Contact our specialist construction team to find out more.
