REUTERS | Mike Blake

Recovering costs under late payment legislation

Have you ever been involved in negotiating a contract term that seemed eminently sensible, only to find that its application was rather more complex than initially supposed? Sometimes I feel that Parliamentary draftsmen must feel the same way, trying to draft legislation of general application against a backdrop of a huge existing body of law and varying commercial practices.

The amendments to the Late Payment of Commercial Debts (Interest) Act 1998, which are coming into force on 16 March 2013 under the Late Payment of Commercial Debt Regulations 2013, are a case in point.

The Act affects all construction contracts (except those that involve consumers, as defined in section 2). If the contract does not provide a substantial remedy for late payment, the Act implies a right to claim simple interest on overdue sums.

The latest amendments implement EC Directive 2011/7/EU, and are drafted in a manner that largely follows the original directive. Tucked away in the amendments is the new sub-section 5A(2A), which provides that the supplier is entitled to the greater of a fixed sum or “the reasonable costs of the supplier in recovering the debt”. This is implemented by means of a statutorily implied term and may be contracted out of, subject to UCTA reasonableness.

The implied term sounds fair and sensible. However, it starts to become more complicated when it comes to dispute resolution. If a party has a right to recover the reasonable costs in recovering the debt, one might assume that this would extend to the reasonable costs of litigation. So what, you might ask? We already have a system where the loser pays the winner’s costs, so what is the difference?

Costs in the dispute

Sadly, there are some key differences. Firstly, the costs of recovering a qualifying debt become a contractual entitlement and thus part of the damages, potentially ousting the court’s discretion to award costs. More significantly, the provision is decidedly one-sided, applying only to the supplier’s costs of recovering the debt; the purchaser has no reciprocal entitlement to its reasonable costs incurred in recovering damages.

If this same approach was applied to adjudication, you would be faced with the situation where sub-section 5A(2A) implies a term that would be prohibited by section 108A of the Construction Act 1996 (as amended by section 141 of the LDEDC Act 2009), which prohibits any contractual provision pre-dating the notice of intention to refer which “concerns the allocation as between those parties of costs relating to the adjudication of a dispute arising under the construction contract” (other than the adjudicator’s power to apportion his own fees).

It would therefore be extremely surprising if sub-section 5A(2A) were held to apply to party costs in litigation or adjudication. The recitals to the Directive support this position. While the operative provisions expressly state that the recoverable expenses should include the costs of instructing a lawyer or employing a debt collection agency, the guidance also states that “Compensation for the recovery costs should be determined without prejudice to national provisions according to which a national court may award compensation to the creditor…”.

This would support the argument that sub-section 5A(2A) is not intended to oust the court’s jurisdiction to award costs or, arguably, the provisions of section 108A.

Practical implications

While sub-section 5A(2A) may give a contractor an entitlement to the costs of preparing its claim prior to the contemplation of proceedings, some contractors may try to use the ambiguity in order to include the costs of preparing for adjudication as part of the damages claim. Adjudicators may find themselves in the invidious position of having to determine whether costs claimed under this head were incurred in contemplation of the adjudication or not, or whether they relate to the recovery of a qualifying debt.

For those drafting contracts, it might be wise to seek to expressly disapply subsection 5A(2A). Such a provision should be safe from an unreasonableness challenge if it follows the language of section 108A of the Construction Act 1996.

One thought on “Recovering costs under late payment legislation

  1. It’s interesting that complicated contracts can end in money loss. It makes sense that getting that lost money back would be important! That way you don’t have to worry about debt as much.

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