Late Payment Of Commercial Debts Regulations 2013

Wake Smith Solicitors 23 March 2013

The Late Payment of Commercial Debts Regulations 2013 (SI 2013/395) (Regulations) came into force on 16 March 2013 and implements the changes required by the Late Payment Directive (2011/7/EU). By the introduction of these Regulations the government has opted to amend the Late Payment of Commercial Debts (Interest) Act 1998 (1998 Act), rather than repeal and replace it. The Regulations apply to commercial contracts for the supply of goods and services (other than excepted contracts) made on or after 16 March 2013. The main changes to the 1998 Act are:

1. How business to business transactions and business to public authority transactions are treated:

Where a public authority purchases goods or services, interest will start to run onoutstanding payments from 30 days after the later of receipt of the supplier's invoice andreceipt (and acceptance) of the goods or services. It is possible for the parties to agree upona different start date, but that date cannot be more than 30 days.

Where a business purchases goods or services and the contract is silent on the date forpayment, interest will start to run on outstanding payments from 30 days after the later ofreceipt of the supplier's invoice and receipt (and acceptance) of the goods and services. It ispossible for the parties can agree a due date for payment provided that where the paymentperiod is longer than 60 days, the period must not be 'grossly unfair' to the supplier.

A gross unfairness test is a new concept to English law, and fortunately the Regulations do

give some guidance as to its application:

anything that is a gross deviation from good commercial practice and contrary to good faithand fair dealing;

the nature of the goods or services in question; and

whether the purchaser has any objective reason to deviate from the 60 day payment deadline.

There is no legal definition of 'good faith' in English contract law but guidance from the Office of Fair Trading states: "the requirement of 'good' faith embodies a general 'principle of fair and open dealing'. It means that a term should be expressed fully, clearly and legibly and that terms that might disadvantage the consumer should be given appropriate prominence". It will be interesting to see how the courts apply these new concepts.

2. The rate of interest remains unaltered under the Regulations. If the parties do not specify a contractual rate of interest, the default statutory rate is Bank of England base rate plus 8% (European Central Bank plus 8% in the Eurozone). The parties can, of course, exclude this statutory right to interest, but only if the contract provides for an alternative "substantial remedy" for late payments.

3. Where statutory interest applies to the contract, the Regulations provide that, as well as the fixed charge that a supplier may claim as compensation for the cost of recovering a debt (£40, £70 or £100, depending on the size of the debt), the supplier can also claim his other reasonable costs of recovery. Any attempt to exclude or limit this right of recovery will be subject to the reasonableness tests set out in the Unfair Contract Terms Act 1977.

As a result of the introduction of these new Regulations we suggest that you carry out a review of your standard contract documentation to:

Check that the payment periods are no longer than 60 days. If you consider that there arespecial circumstances rendering it more appropriate to have a longer period for payment,consideration should also be given as to whether additional wording to support theargument that the period is not "grossly unfair" should be included; and