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Late Payment Interest And Compensation: A Brief Guide

  • Thread starter Scottish Business Owner
  • Start date
Scottish Business Owner

Scottish Business Owner

New Member
Received this via email but thought I would share with everyone :)


On 16 March 2013, the Late Payment of Commercial Debts Regulations 2013 came into force, amending and extending the scope of the Late Payment of Commercial Debts (Interest) Act 1998.

The Act adds an implied term into qualifying contracts, giving a statutory right to claim interest and compensation arising from the late payment of commercial debts. The reasoning behind the introduction of the Regulations was to encourage prompt payment of invoices, with the particular intention of assisting the cash flow of smaller suppliers. The Regulations seek to achieve this by making a number of changes to the Act.

What contracts does the Act apply to?

The Act applies to business-to-business contracts made after 7 August 2002 for the supply of goods and/or services for monetary consideration. The Act does not apply if the contract is not business-to-business. In addition, the following types of contract are expressly excluded for the purposes of the Act:

  • a consumer credit agreement; or
  • a contract intended to operate by way of mortgage, pledge, charge or other security.
Can Parties 'Opt out' of the Act?

It is possible for the contracting parties to opt out of the Act in the contract and agree a contractual remedy for the late payment of a commercial debt. However, this remedy must be suitably 'substantial' in order for the Act to not apply. Where the contract is silent in this regard, the Act will apply.

What was the position before March 2013?

Assuming the Act applied, a business would have had a statutory right to claim interest at the rate of 8% over the Bank of England base rate for the late payment of commercial debts.

Such statutory interest was to be calculated from the day after the agreed date for payment of the debt. If there was no agreed date, statutory interest would start to run after 30 days from the later of either:

  • the date that the supplier performed its obligation; or
  • the date the customer received the invoice.
What about Compensation?

On top of this claim for statutory interest, a supplier could also claim compensation for the cost of recovering a debt in the form of a fixed sum as follows:

  • £40 for a debt less than £1000;
  • £70 for a debt between £1000 and £10,000; and
  • £100 for a debt of £10,000 or more.
What is the position after March 2013?

Payment periods

The Regulations have amended the period and dates from which statutory interest will start to run. The Regulations have created a differentiation in the time periods for calculation of statutory interest between a public authority as customer and other businesses as customer.

Public authorities

Where a public authority is the customer, statutory interest will start to run on outstanding payments after 30 days from the later of:

  • receipt of the supplier's invoice;
  • receipt of the goods or services; or
  • verification and acceptance of the goods or services.
Other businesses

For other businesses, where a payment period has not been agreed in the contract, statutory interest will start to run on outstanding payments after 30 days from the later of:

  • receipt of the supplier's invoice;
  • receipt of the goods or services; or
  • verification and acceptance of the goods or services.
As was the position before the Regulations, where the payment period is specified in the contract, statutory interest will start to run from that date.

How else do the Regulations help?

The Regulations have introduced an amendment whereby if that agreed payment period is longer than 60 days after any of the events listed previously, statutory interest will begin to run from the date 60 days after the latest of the events above, in spite of the express contractual term. The only way to circumvent this would be to prove that the longer payment period as agreed between the parties is not grossly unfair to the supplier.

How is 'Grossly Unfair' defined?

The definition of the term 'grossly unfair' in the Regulations is very broad:

'In determining...whether something is grossly unfair, all circumstances of the case shall be considered; and for that purpose, the circumstances of the case include, in particular:

  • anything that is a gross deviation from good commercial practice and contrary to good faith and fair dealing;
  • the nature of the goods or services in question; and
  • whether the purchaser has any objective reason to deviate...'.
Compensation for costs of recovering a debt

The fixed sum compensation amounts stated above have been retained by the Regulations.

However, the Regulations have introduced a further 'level' of compensation. A supplier may now claim as compensation any further reasonable costs which are incurred in recovering the debt which are not met by the fixed sum. Any attempt to exclude or limit the level of the top-up compensation will be subject to the reasonableness test set out in the Unfair Contract Terms Act 1977. So this means the cost of instructing your lawyer to recover the debt will be recoverable, but only if they are reasonable.

Any other points?

  • The Interest Rate remains 8% over base rate.
  • If the contract expressly provides a substantial contractual remedy for late payment, the Act and Regulations will not apply.
  • The Regulations only apply to contracts made on or after 16 March 2013. The Regulations do not apply retrospectively.
  • It would be advisable for businesses to review their payment terms to check that they do not exceed the maximum 60 day period (30 days for public authorities).

As always a selection of articles relating to debt recovery and credit control can be found
If you have any questions on the above then please do contact Stephen Cowan using the contact details below: Contact: Stephen CowanManaging Partner
Yuill + Kyle

Debt recovery + Credit control Lawyers, Scotland
E: [email protected] W: T: 0141 331 2332
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