And then some

Do you remember the Late Payment of Commercial Debts (Interest) Act 1998? It enables businesses to claim interest on the late payment of commercial debts. You may recall that, in order to mitigate the effects of the act, it was introduced in three phases. The final phase, permitting any commercial trader to claim interest from any other, came into effect on 7 August 2002. This event seems to have passed many people by – in fact, it appears that the take-up of late payment interest charging has been quite poor to date.

By way of a reminder, the act implies a term into all contracts for the supply of goods and services. This term says that any "qualifying debt" created by the contract carries simple interest in accordance with the terms of the act. Consumer credit agreements and contracts such as mortgages do not fall within its scope. The "qualifying debt" is any debt created by virtue of a contractual obligation. Interim and final certificates and applications for payment under most construction contracts would fall within this description. The interest rate fixed by the act is 8% over the Bank of England's base rate.

Importantly, the act will not apply if there is already a "substantial contractual remedy for late payment of the debt". Any contractual provisions relating to payment of interest for late settlement of debts will be considered substantial, unless either the remedy is insufficient to compensate the supplier for late payment, or it would not be "fair and reasonable" to allow the remedy to be relied on in, rather than that under the act. It seems likely that, as this legislation becomes more widely used, the courts will find themselves having to construe this aspect of the act on a regular basis.

For some time now, the standard form building and engineering contracts used by the industry have incorporated provisions dealing with payment of interest in the event of the late settlement of commercial debts, on the basis that this would provide a "substantial contractual remedy".

To the best of my knowledge, these alternative arrangements have yet to be tested in court, but the fact that we have heard nothing in this regard indicates that perhaps most parties consider them to be reasonable. There are other implications to consider. For example, how should adjudicators view this legislation? It is common to make a claim for interest in a referral to an adjudicator, and I have argued in the past (Building, 12 April 2002, pages 48-49) that the adjudicator has the power to award interest under the Scheme for Construction Contracts, even if the underlying contract does not say anything specific about interest at all. Clearly, now that the 1998 act is fully in force, the adjudicator will also be able to award interest if claimed by the parties under the terms of the act. The period for making a claim for late payment interest is six years from the invoice date. It is therefore possible that adjudicators will now have a wide discretion to award interest on the basis of the statutory right, in addition to anything the contract says and any latitude afforded by the Scheme.

Should the adjudicator go further? What would happen if neither party had claimed any right to interest? Under such circumstances, it is perfectly arguable that the adjudicator should still consider whether interest should be awarded. Provided the debt is a qualifying debt within the meaning of the act, the referring party has a statutory right to interest. In such circumstances, should not the adjudicator consider the parties' statutory rights even if these are not explicitly cited in the referral? The Scheme, for example, is silent on this point.

Another point to consider is whether the adjudicator should, if the relevant contract has interest provisions in it, consider whether those interest provisions are a "sufficient remedy" for the purposes of the act. The reason for introducing the "sufficient remedy" test is, of course, to deal with attempts in contracts to impose a wholly inadequate remedy for late payment of interest. Will adjudicators now have to consider this as part of their review of the interest award? It will be interesting to see how the courts deal with the act and more interesting to see how it is approached by adjudicators.