I have previously written on the issue of what a “substantial remedy” is under the Late Payment of Commercial Debts (Interest) Act 1998. This is important because unless a contract provides for a substantial remedy in the event of late payment then the Act imposes a rate of 8% above base rate.
Until recently there were no cases dealing with this issue and therefore some debate as to what rate of interest would constitute a substantial remedy. The case of Yuanda (UK) Co Ltd v WW Gear Construction Limited 2010 provides some useful guidance on this point.
Mr Justice Edwards-Stuart was of the opinion that the rate stated in the JCT Trade Contract (being 5% over base rate) should be regarded as a substantial remedy notwithstanding that it fell below the 8% stipulated within the Act. He went on to say that a rate of 3 or 4 % may also be substantial if specifically negotiated by the parties, although as he was not required to decide such a point he would not do so. However, in the present case a rate of 0.5% above base rate had been enforced upon Yuanda without any negotiation and it was beyond doubt that such a rate did not provide a substantial remedy.
The message from this case is quite clear. If a party seeks to obtain an advantage by amending the standard forms of contract so to provide a lower rate of interest then he runs the risk of falling foul of the Act and a higher rate being imposed upon the late payer. Where a party is making a claim for late payment and a rate of interest lower than that provided for in the standard forms is used then it would be well worth arguing that the rate falls foul of the Act and therefore a rate of 8% above base rate should apply.
