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Debt Recovery and reasonable costs

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As the economy deteriorates, we see an increasing number of enquiries about Payment Debts Interest and recovery costs

Although an invoice is relevant to the issue of debt recovery, of at least equal importance is the underlying contract.

The contract is critical to understanding the method of debt recovery and the interest, costs, and compensation that can be claimed.

Unreasonable debt recovery costs cannot be claimed from the debtor. If a creditor agrees to pay a fee for debt recovery, then it will want to ensure that such fee can be recovered from the debtor.  

MJD Solicitors consider the issue of  Late Payment Debts Interest and recovery costs.

The Late Payment of Commercial Debts (Interest) Act 1998

To the extent that your contract does not contain a “substantial contractual remedy for the late payment” then The Late Payment of Commercial Debts (Interest) Act 1998 (“Interest Act”) applies. We refer to government guidance here.

The Interest Act enables a creditor to claim interest at 8% above the prevailing base rate, together with compensation between £40 and £100 on each invoice and reasonable costs of debt recovery.

What is a “substantial contractual remedy for the late payment”? It depends on many factors. Many of the standard construction contracts provide for interest at a rate of 5% over base rate. That is frequently amended to 2% over base rate by bespoke amendments.

Typically, in court actions where interest was claimed at 8% on damages pursuant to the court’s discretion to award interest, when base rates were near zero, in our experience the court was allowing interest at rates of between 2 – 3 %. Possibly a rate of 2% above base rate is a substantial remedy, but we suggest it is open to challenge. 

In the case of Yuanda (UK) Co Ltd v WW Gear Construction Limited 2010 Mr Justice Edwards-Stuart was of the opinion that 3 or 4 % may also be substantial if specifically negotiated by the parties, but would not decide the point. 

I would suggest that 5%, as in the JCT Contracts almost certainly is a substantial remedy.

What about Reasonable costs?

The Interest Act was amended by The Late Payment of Commercial Debts Regulations 2013 that came into force on the 16 March 2013 (the “Regulations”).

Perhaps the most important amendment of the Regulations was that in addition to the compensation referred to above, the creditor can also claim any other reasonable costs of recovery.

In a post that we wrote in 2013, we considered the amendments under the Interest Act and the Regulations. This post can be read here.

We also gave our opinion on Debt Recovery and reasonable costs. We think it is worth repeating part of what we said:

What is a reasonable cost of recovery? We would expect it to include reasonable solicitors’ costs, reasonable being the operative word. We have seen debt recovery agents charging thousands of pounds to try to recover a debt when a solicitor would charge no more than £100; we doubt this would be reasonable!

We are not aware of any publicised judgments where the issue of Debt Recovery and reasonable costs is considered. However, we can advise that when we have been in court, we have witnessed judges being reluctant to allow much more than £250 for these “reasonable costs”.

To be clear. We are not talking about pre-action correspondence when there is a substantive dispute. We are discussing situations where there is no legitimate reason for the invoice not being paid. We are talking about the reasonable costs of writing a few letters.

Why discuss Late Payment Debts Interest and recovery costs?

Simply because in the last 6 months we have been asked by numerous persons whether the 15% commission charged by many debt collection agencies is a reasonable cost of recovery. Our answer has invariably been “no”.

Take an example of an invoice of £50,000 that has not been paid. Possibly it has just been overlooked. Possibly there has been a query on the invoice. Is a fee of £7,500 really a reasonable cost for writing a few letters or making a few phone calls?

The argument for the debt collector is that its client, the creditor, has agreed to pay a fee of 15% and therefore it is reasonable. The argument against this is just because a creditor has agreed such terms does not make the fee reasonable.

What should suppliers do?

With interest rates much higher than they have been since the financial crash of 2008, and with the practice of debtors using the Interest Act to reclaim excessive debt collection fees, what can be done?

  • The claims for unreasonable costs can be defended. This may result in small claims litigation where the creditor seeks to claim unreasonable costs. Any small claims litigation can be defended at a minimal risk and cost. In my opinion, a district judge would not allow a creditor to reclaim costs that are so unreasonable.
  • Contract out of The Late Payment of Commercial Debts (Interest) Act 1998. Ensure that your terms and conditions contain a substantial remedy so that the interest a debtor is exposed to is minimised and the excessive claims made for debt recovery costs do not get the opportunity to accrue.

To discuss debt collection or contractual amendments contact MJD Solicitors, Brentwood, Essex on 01277 280760

This article is for information purposes, does not constitute legal advice and should not be relied upon. For terms and conditions of this article please read here.


MJD Solicitors | Matthew Dillon

Matthew Dillon

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