Time and punishment: Interest on unfair debt

Paying penal interest rates has excited the Court of Appeal recently. I will tell you all about it in a moment. The whole idea, parliament’s idea, is to punish those who don’t pay their debts on time. Buy cement, bricks, bullets, then pay late, and the rule is that you must stump up a swingeing lump of interest on top. How much? Oh, a mere 8% on top of the bank rate. So, if I owe you £10,000 from a year ago, I have worked out that it costs me another £1,000 or thereabouts. Time and again adjudicators’ awards add cash on the end for interest.

Why has the Court of Appeal raised an eyebrow? Well, it had a look at the approach taken by one of our Technology and Construction Court judges and decided he hadn’t bashed the debtor with enough penal interest. Parliament insisted in the Late Payment of Commercial Contracts Interest Act that nobody in business will get away with a late payment without also coughing up a “substantial remedy” for their tardiness. More than that, the idea of the penalty rate is to be a deterrent. True, a contract such as JCT does not impose the 8%; the JCT committee landed on 5% over base. It might be too thin to be a deterrent. It is open to someone to run that argument in an adjudication one day.

Ruttle Plant Hire has had a whopper of a dispute with the government after swine fever then foot and mouth broke out. The cleaning and decontamination work was arranged, as you might expect, in a bit of a rush. Ruttle’s blokes were dashing hither and thither to defeat the viruses, all on a day-work rate of course. Then came the panic when the people in charge of the public purse balked at the bill. After that was sorted in court, the row began over the interest. The first judge said, disarmingly, that “the position on interest was a bit of a muddle”. One key point was why the judge would not award 8%. He gave only 2%.

Well now, it seems to be all about part of the act called “the remission of statutory interest”. I tell you this: I have decided hundreds of disputes and I have only seen this angle once before. Let me tell you about it. The word “remission” in this case means to diminish, or reduce. The idea, says the act, is that where the person owed money has contributed to the late payment “by reason of its conduct”, there will be remission in whole or part “in the interests of justice”. Seemingly, the job of the tribunal is to take on board any facts or circumstances involving the conduct, act or omission of the party owed money.

Credit: Simone Lia

We had to do it. Rudolph thought paying late was a reindeer game.

The first judge in Ruttle accepted the argument and reduced the rate to 2% over base. The three-judge Court of Appeal revised it all the way back up to 8%, mainly because they couldn’t plainly see any reason for a reduction. But if in you see iffy conduct in your dispute … well then!

The other interesting point is the date or circumstance when interest begins to run. You can’t ask for interest if it is your job to invoice or ask for money but don’t, nor if you invoice for too low an amount. That, said the Court of Appeal, would be “pushing the boat out too far”. Interest runs from or on the day after the relevant day for the debt to be paid. In construction, that date is known as “the final date for payment” as laid down in the contract, or if vague, or silent, as in the Scheme for Construction Contracts. And the interest is paid on “an ascertained debt” such as a fixed sum on an architect’s certificate. But if an invoice is wrong, that doesn’t relieve the payer from paying any interest on the right amount. Similarly, an “application for payment” from a subcontractor, which turns out to be too high, does not obliterate the right to interest. It stacks up on what turns out to be the right amount. An application for payment – and most invoices – is merely a sum that the supplier claims is the amount of the debt … it’s a provisional view.

The late payment legislation “ventures towards imposing penalties for socially damaging behaviour”, says the Law Commission report. Plainly, the Court of Appeal agrees. But for some, paying late is normal and fun, and if interest is also payable, well that’s too bad. What they don’t know is about the yellow paint. Late payers are soon to have their noses spray painted yellow. Bright and glowing and fun.