Late payment of commercial debts - are you aware of the changes?

The Late Payment of Commercial Debt Regulations 2013 ("the Regulations") came into force on 16 March 2013 however there appear to be a number of businesses that remain unaware of the changes.

These changes apply to contracts for the supply of commercial goods and service that are entered into on or after 16 March 2013. They do not apply to contracts entered into before this date.

Payment periods and interest start dates

The rules relating to payment periods and the date on which interest will begin to run differ depending on whether the goods and services are purchased by a public authority or a business.

In both situations interest will begin to run from 30 days after the latest of the following events:

  • Receiving the supplier's invoice;
  • Receiving the goods or services;
  • Verification or acceptance of the goods or services (where such a procedure is provided for by statute or within the contract).

However, there are differing provisions in respect of extensions to this period:

  • Public authority contracts
    Where a public authority purchases goods or services no agreement can be made between the parties to extend the date for payment and/or the date from which interest will begin to run beyond the 30 days set out above.

    It is however possible for the parties to agree a period of less than 30 days for payment (from which interest will begin to run).
  • Business contracts
    Where a business purchases goods or services, if the contract does not provide for a time for payment, the parties can agree to extend the due date for payment to up to 60 days (from the latest of the above events).

    In addition, provided it is not considered to be "grossly unfair" to the supplier, the parties can agree to further extend the due date for payment beyond the 60 days.

    If an extension of time for payment is agreed, interest will start to accrue from the earlier of the agreed due date for payment and the expiry of the 60 day limit.

What is "grossly unfair"?

In order for this to be determined all of the circumstances of the case are taken into account. In particular:

  • Whether anything is a gross deviation from good commercial practice and contrary to good faith dealing.
  • The nature of the goods and services supplied.
  • Whether the purchaser has an objective reason for requiring a change from the statutory provisions.

If the parties to a business contract agree an extension of time for payment beyond 60 days which is considered to be "grossly unfair" the agreed date for payment will still be valid (even if this is beyond 60 days) however interest will begin to run from 60 days. This will therefore need to be borne in mind when calculating statutory interest under the Late Payment Act 1998.

Is it possible to contract out of the new rules?

Yes. Where parties agree an express term of the contract, providing a substantial remedy for late payment this is effective to exclude statutory interest under the Late Payment Act 1998.

Recovery of costs

In addition to the fixed charge that a supplier is entitled to claim by way of compensation for the cost of recovering a debt (£40, £70 or £100, depending on the size of the debt), the supplier is also entitled to claim any other reasonable costs of recovery. For example the costs incurred in appointing a lawyer.

If a party attempts to exclude this right it must be reasonable in accordance with the unfair contract terms legislation. This applies regardless of whether the contract is in a standard form or is a negotiated agreement.

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