Base motives

Another nail has just been driven into the coffin of Britain's bad payers. Pretty well all commercial contracts entered into from 7 August are subject to a penal rate of interest for not paying on the nail. The third and final phase of the Late Payment of Commercial Debts (Interest) Act 1998 has been implemented by the minister for small businesses at the DTI. In short, if the cheque arrives late, there is a statutory right to claim a rate of interest 8% above the official Bank of England rate. That official dealing rate is published daily in the Financial Times.

Parliament decided to ease our business community into this idea of a penalty for late payers. So, on 1 November 1998, it was only big businesses and public sector bodies that were targeted. If a big enterprise paid a little enterprise late, the interest was base plus 8%. The idea was to make it unattractive to use the other chap as a bank that can't say no. If it were cheaper to borrow from a real bank, big businesses would go there instead.

Then, on 1 November 2000, a small business – meaning those of 50 employees or fewer – who paid another small business late was liable for the penalty. By the way, "small business" means everything from limited company to partnership and sole trader. Then on 7 August 2002, it was decided to allow any size business to claim penalty interest from any slow payer, regardless of size. So, if a small builder is late paying its big builders merchant, there is a right to clip the little builder round the ear for base rate plus.

Prior to this statutory right to penal interest, it was possible to claim interest if the contract expressly provided for it. So, if the small print contained an interest-on-late-accounts clause, there was an ordinary breach of contract if cash was paid beyond the date for payment. The other way to get interest was to sue the debtor in litigation or arbitration because judges and arbitrators have a statutory power to charge interest on sums awarded. But nobody had the right to award penal rates of interest.

The 7 August order includes a little bonus.

So, if a small builder is late paying its big builders merchant, the merchant has the right to clip it around the ear for base rate plus 8%

It recognises that base rate plus 8% might sometimes not be enough to persuade late payers when modest sums are overdue. So, the government put a little sting in the tail of their order. As well as the debt attracting base plus 8%, there is a fixed sum to be paid to the supplier on top. If the debt was less than £1000, another £40 is added; a debt of £1000 to £10,000, another £70 is added; if the debt is more than £10,000, another £100 is added. I must confess to pondering where the minister got her powers to introduce this little bit of extra fun. Apparently, it is buried in the European Communities Act 1972, which seemingly talks about "combating late payments in commercial transactions".

The only point to identify now is how the late payer will attempt to wriggle out of paying interest. It will start by hoping its supplier will agree a date for payment some months after the supply is made. The legislation has not barred the right for two consenting adults to agree a long period of credit.

The worry of course is that there is no real consent to long lines of credit when the small print is small enough to squeeze past the other bloke. The act does say, however, that if no express period is laid down, the date for payment is 30 days from the day on which the obligation of the supplier is performed. In the case of building contracts, the payment provisions in the Scheme for Construction Contracts apply, so construction work triggers interest very early.

The other wangle that might be tried is to have an express provision that agrees a lower penalty than the base rate plus 8% – but not so low as to no longer be a penalty. This ought to alert the supplier to what is likely to happen next: a customer who wants to negotiate for late payment interest has no interest in paying on time.