The majority of standard form building contracts provide for interest to be paid by the employer in the event that payment is not made in a timely manner. The JCT 2005 contracts provide that interest should be paid at the rate of 5% above base rate although it has been common practice for such provisions to be amended to provide for interest at a rate of one or two percent above base rate. With the rate typically awarded by the court and arbital tribunals on any judgement award being 8% and funding costs prior to the credit crunch typically being a couple of percentage points above base rate, contractors often found it difficult to secure rights to higher rates of interest in the event of non payment.
There have always been Employers who habitually paid late and who use the supply chain as a source of cheap credit. Indeed in my experience the supply chain can came to treat late payment as the norm thus providing the employer with a line of free credit. Contracting with the public sector does not necessarily provide more favourable terms and it is interesting to note that many contracts let under the government’s private finance initiative frequently limit the contractual rate of interest to 2% over base and occasionally go as far as providing the public sector with a period of time where no interest for late payment is due.
Since August 2002 The Late Payment of Commercial Debts (Interest) Act 1998 (the “Act”) has applied to all commercial contracts entered into after this date and essentially provides creditors with a statutory right to claim interest at 8% above base rate, unless the contract provides an alternative “substantial remedy” in respect of any late payment. The Act further provides for the creditor to claim an additional fixed sum to compensate it in respect of costs that it would have incurred in recovering the debt which for debts over £10,000 is fixed at £100. It is worth noting that on large debts that were paid considerably late the Act can provide for significant additional sums to be paid by way of interest and its application is a useful tool in securing additional sums in contractual negotiations.
Perhaps surprisingly there is little in the way of useful authority as to what constitutes a “substantial remedy” but anything less than the 5% prescribed in the JCT is doubtful to constitute a “substantial remedy”. Further, it is argued by many that a rate of 5% above base rate is not a sufficient remedy and the Act should therefore displace the contractual provisions: given the current financial climate and costs of borrowing there is some sound logic to such an argument.
It is worth noting that interest can be claimed even on those invoices which have been discharged where no separate claim for interest has been made (save where an amount was received in full and final settlement) although, of course, a commercial view will need to be taken on whether or not this is viable.
It is also worth taking note of the recent decision in Ruttle Plant Hire Ltd v Secretary of State for Environment, Food and Rural Affairs [2009] EWCA 97 where the Court of Appeal considered whether interest under the Act was payable where initial applications for payment were overvalued. The Contractor argued that interest was due from the date of invoice whereas the Employer argued that it was only due from the date of the Final Account. The Court of Appeal agreed with the Contractor saying that the initial invoices contained sufficient information for the Employer to assess the true value of the claim and therefore interest was due in accordance with the Act from the due date.
With the increased cost of funding late payment, contractors and suppliers should be looking to enforce their contractual and statutory rights to recover interest in the event of late payment.
