Interest Pays Dividends…!
We expect to pay interest on money borrowed and to receive it for money loaned. With the current record of low interest rates, the loss of interest on money paid late may seem relatively unimportant. This is not necessarily so.
The introduction of payment of interest for late payment into English Law has been a slow process. Payment of a sum later than provided by a Contract is a breach of that Contract and ordinarily damages would flow from that breach. However, the position historically was that interest was not payable as general damages for a failure to pay a sum of money 1.
Courts and Arbitrators have been given power by statutory provision 2 to award interest on the principal sums they awarded but this does not assist with regard to payments made late but before proceedings for their recovery were commenced.
Of course, if there is provision specifically within the Contract that interest will be paid for payment outside its agreed terms, and then interest can properly be claimed as a term of the Contract.
Provisions typically in the JCT forms of contract for reimbursement of "loss and expense" include for the reimbursement of the cost of financing as part of a loss and expense claim 3 . However, this merely allows for the reimbursement of interest paid or lost up to the time of the Contractor's loss and expense application and, in effect, as damages. This does not allow for the recovery of financing costs thereafter, including an inordinate period from certification or late payment of certificate. It is also limited to matters for which loss and expense can be claimed under the provisions of the contract.
In response to a European Union initiative to encourage the prompt payment of commercial debts, the Late Payment of Commercial Debts (Interest) Act 1998 was enacted by Parliament. This introduced provision for a remedy for late payment into commercial contracts not as damages, where an actual and direct loss has to be demonstrated, but as a term of that contract.
Although introduced progressively, the Act applies to all contracts for the supply of goods and services between parties acting in the course of business entered from 7th August 2002 4. All such contracts must provide a substantial remedy for late payment.
In default, a term is implied into all such contracts which provides that interest (termed "statutory interest") is to be paid at a rate of simple interest 8% above Bank Base Rate 5 , i.e. currently at a rather attractive 8½%, where paid later than provided for by the contract. That rate is set deliberately high in order to protect suppliers and especially to deter late payments 6. Anything written in the contract that attempts to avoid the Act’s provisions is void. Neither will the setting of a far lesser rate of interest avoid statutory interest being payable, unless it represents the "substantial remedy" required by the Act 7.
A further one-off sum of between £40 and £100, presumably for extra administration can also be claimed 8.
When does this interest run from? It runs from when the sum should have been paid under the contract, or if that has not been agreed and there are no default provisions, such as there exists for the carrying out of construction work 9 then from 30 days after the making of a demand for payment 10.
Whilst the making of a payment clearly stops interest running it does not prevent, when paid late, interest being claimed retrospectively. In fact, unless compromised perhaps by a formal final account agreement or the like, depending upon its wording, a claim f or interest can be made going back 6 years from when the right to make a claim occurred 11.
Accordingly, on the one hand a company needs to protect itself from paying penal amounts of interest to its subcontractors and suppliers by agreeing, in writing periods, for payment with which it is willing and able to comply. On the other hand, subcontractors and suppliers can earn a valuable revenue stream in these hard times by examining their client's payment history and claiming interest in accordance with the provisions of the Act.
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