Business suppliers have an established statutory right to claim interest on outstanding payments under commercial contracts. Some important changes to the law have been introduced by The Late Payment of Commercial Debts Regulations 2013. The new regulations apply to most commercial contracts for the supply of goods or services, made on or after 16 March 2013. The exclusions are consumer credit agreements and contracts operating as mortgages or charges
What has changed?
Business suppliers have an established statutory right to claim interest on outstanding payments under commercial contracts. Some important changes to the law have been introduced by The Late Payment of Commercial Debts Regulations 2013.
The new regulations apply to most commercial contracts for the supply of goods or services, made on or after 16 March 2013. The exclusions are consumer credit agreements and contracts operating as mortgages or charges.
The time allowed for payment before interest is added now depends on whether your contract is with a private business or a public authority.
If your customer is another business and you have not agreed a payment period, the maximum time permitted is 30 calendar days after the latest of the following:
- your invoice being received by your customer;
- your goods being received or your services performed; or
- conformity with the contract being confirmed under a verification period.
An agreed extended payment period should now usually be limited to 60 days. The new regulations only permit a period in excess of 60 days if you expressly agree to an extension that would not be ‘grossly unfair’ to you.
Where your customer is a public authority, the maximum payment period is 30 days after the latest of the events listed above. However, unlike private businesses, public authorities are not entitled to extend the period beyond 30 days.
The interest rate
If your customer has not paid you by the end of the payment period, you may claim interest at the statutory rate on the outstanding debt. This is currently eight per cent above the Bank of England base rate, calculated from the day after the payment deadline. Your customer may only reduce the interest rate if you agree and the contract provides another substantial remedy to compensate you.
Whether an alternative remedy is deemed sufficient will depend on the circumstances. These will include standard industry practices and the contract terms for payment and interest. A remedy found to be unacceptable will be invalid and you may claim statutory interest instead.
Public authority customers have no choice in the matter and must automatically pay interest at the statutory rate on commercial debts.
The verification period
Any verification or acceptance period, for your customer to establish the conformity of your goods or services, should now be restricted to 30 days unless you agree otherwise. A longer time must not be ‘grossly unfair’ to you.
What is ‘grossly unfair’?
In determining whether an extended period is ‘grossly unfair’, all the circumstances will be considered, such as:
- changes to normal practices;
- the presence of good faith and fair dealing;
- your goods or services; and
- your customer’s objective reasons for the extension.
Your right to claim costs
Prior to the new regulations, you could charge the following fixed costs when claiming outstanding payments:
£40 for debts under £1,000;
£70 for debts of between £1,000 and £10,000; and
£100 for debts of £10,000 or more.
In addition, you may now claim the difference between the fixed rate and your actual reasonable costs of debt recovery such as your solicitor’s costs.
What to do next
It is essential to review the payment, verification and other terms in your contracts and business documentation. Potential claims by or against your business should be identified as part of your credit control and cash flow considerations. Remember that debts can be claimed several years after becoming due.
A solicitor will advise on your business contracts and legal rights under the old or new rules and help you deal with claims for debts, interest and costs.
For more information contact Graeme Weir
Topics: Debt Collection and Recovery