Getting all the credit

If someone pays you late, it seems common sense that you should be able to charge interest. Common sense, yes, but common law, no. If at any time you have had cause to ask your lawyer whether you can recover interest as part of a claim for damages for breach of contract, the answer will almost certainly have been no.

Interest can be claimed under the Late Payment of Commercial Debts (Interest) Act, but if you are the wrong size of company, or are dealing with the wrong size of company, that may not apply to you. It can be claimed as an addition to a claim in court or arbitration, but not if the principal debt is paid before such proceedings begin. It can be claimed under several standard forms of contract, but of course standard forms do not apply to every job.

It seems crazy that interest cannot be claimed in every situation. It was just as crazy in 1893. The House of Lords thought about interest then, decided that it was unsatisfactory that claims for damages could not include interest on unpaid sums, and decided to leave the law as it was anyway.

Things moved forward a little in 1985. The House of Lords decided that a claim could be made for interest as special damages, but not as general damages. General damages covers the sort of losses that might generally be expected to arise as a result of a breach of contract, whereas special damages are those that could have been anticipated with the benefit of special knowledge.

Strangely, the fact that most people connected with the construction industry normally owe their bankers substantial sums on overdraft is not one that seems to have been brought to the court's attention. But if the contractor tells the employer that it is trading on overdraft and is paying its bank 3% above base, the employer will have special knowledge of the fact and could face a claim for interest on late payments even without any agreement to that effect in the contract.

In 1893 the Lords decided it was unsatisfactory that damages could not include interest – but left the law as it was anyway

Amec Process and Energy may have made history by persuading a judge to recognise reality. Amec was working as a subcontractor to Stork Engineers & Contractors. Amec alleged all sorts of breaches of contract, including the failure to operate the valuation, invoicing and payment provisions of the contract. That had led to a failure to properly ascertain Amec's entitlements under the contract, and hence proper payments had not been made. As Amec was claiming the sums it should have been paid in court proceedings, it was able to add a claim for interest. However, the statutory interest provisions only allowed simple interest, and Amec wanted the interest to be calculated on a compound basis.

Judge Thornton found that Stork had had access to Amec's funding arrangements. Stork had required that information under the contract, and therefore had the special knowledge necessary to enable Amec to claim special damages. The judge did not base his judgment simply on that special knowledge. He went on to say: "Stork would have been aware of Amec's funding arrangements since these are common to engineering contractors and, indeed, were likely to have been similar to its own funding arrangements."

This comes very close to saying: "Everyone knows that construction companies have overdrafts, and so everyone has the special knowledge required to make them liable to pay interest as damages." On that basis, Stork had to pay the interest, and it was calculated on the normal business arrangement of interest compounded at quarterly rests.