REUTERS | Navesh Chitrakar

Should there be a time limit for claiming statutory interest?

“Dear, dear. I shall be too late.”

(The White Rabbit, in Lewis Carroll’s Alice’s Adventures Under Ground.)

Two weeks ago, I wrote about an interesting argument on the relationship between the “final date for payment” under a construction contract and a claim for statutory interest. This week, I look at delays in bringing a claim for statutory interest…

No separate time limit

There is no time limit for bringing a statutory interest claim under the Late Payment of Commercial Debts (Interest) Act 1998, other than the normal six year limitation period. So imagine the following scenario…

The scenario – the contractor

A contractor carries out miscellaneous maintenance jobs for an employer under a framework agreement lasting five years. As each job is completed, and the contractor carries out hundreds each month, he invoices the employer, who eventually pays. But the employer’s payments are always late, often many months late. For understandable reasons, the contractor does not want to rock the boat by complaining, nor by claiming the statutory interest he is entitled to under the Late Payment Act 1998.

Then, after five years, everything changes. The employer brings the contract to an end. Now the contractor has nothing to lose, so he produces a schedule setting out precisely how late each of the several thousand invoices was paid and claims statutory interest due (at 8% above base rate) under the Late Payment Act 1998.

There is nothing to stop the contractor bringing the claim (provided it is within the six year limitation period). He is also entitled to refer it to an adjudicator and so, that too is what he chooses to do.

The scenario – the employer

Not only is the employer surprised by the claim, it feels it is wholly unjust. It accepts that there have been some delays in its accounting system, such that cheques were not always issued as promptly as they should have been, but it points to the fact that over a period of five years the contractor had never complained about the timing of the payments.

Had the problem been brought to the employer’s attention early on it would, it said, have taken steps to speed up the subsequent payments.

In such circumstances, is there any relief available to the paying party?

Or does the paying party have to pay the interest claimed at 8% over base?

A little known section of the Late Payment Act 1998 may assist the late payer. It gives the court (or an arbitrator or adjudicator) discretion to reduce the statutory rate of interest, or the period to which it applies, if the conduct of the supplier so warrants:

5. Remission of statutory interest

(1) This section applies where, by reason of any conduct of the supplier, the interests of justice require that statutory interest should be remitted in whole or part in respect of a period for which it would otherwise run in relation to a qualifying debt.

(2) If the interests of justice require that the supplier should receive no statutory interest for a period, statutory interest shall not run for that period.

(3) If the interests of justice require that a supplier should receive statutory interest at a reduced rate for a period, statutory interest shall run at such rate as meets the justice of the case for that period.

(4) Remission of statutory interest under this section may be required-

(a) by reason of conduct at any time (whether before or after the time at which the debt is created); and

(b) for the whole period for which statutory interest would otherwise run for one or more parts of that period.

(5) In this section ‘conduct’ includes any act or omission.”

The application of the section has been considered by the courts on two occasions.

Banham Marshalls v Lincolnshire

First, in Banham Marshalls Services v Lincolnshire City Council, Eady J had to consider the effect of:

  • A two year delay in the claimant bringing its claim for the principal debt; and
  • The fact that there was a genuine dispute as to whether all or part of the debt was due.

The judge decided to exercise the section 5 discretion and:

  • Limited the period when statutory interest applied; and
  • Reduced it to “the usual rate” (1% or 2% over base) for the remainder of the time.

Ruttle Pant Hire v Secretary of State

More recently, in Ruttle Plant Hire Limited v Secretary of State over Environment, Food & Rural Affairs, the Court of Appeal had to decide whether to remit the statutory interest where the supplier had:

  • Invoiced for incorrect amounts; and
  • The paying party had delayed payment until the correct amounts were ascertained.

Jacob LJ held that there should be no remission in respect of sums which, from the paying party’s point of view, were clearly payable. There should only be remission in respect of sums where the supplier had created or allowed uncertainty.

How do the two decisions work together in practice?

The difficulty in applying the two reported decisions is that they were concerned with situations where the delay by the supplier was in bringing a claim for the principal debt. As a result, the paying party did not know there was a debt to discharge, or how much the debt was, and it could be said that it is unjust for the supplier to recover the high rate of statutory interest during such a period.

In an interest-only claim, the delay may be of no consequence: given that the debts had previously been discharged, the high rate of statutory interest is no longer running. On the face of it, the supplier should be allowed to recover the full amount. But what about the employer’s contention, in my scenario, that the contractor simply stock-piled the claims, remaining silent in the meantime, with the result that many more late payments occurred? Should the statutory interest at 8% over base be allowed, or is this conduct which warrants all or some of the interest being remitted?

The courts have yet to tell us but, in my view, a contractor who fails to complain about late payment should get no more than normal interest (1% or 2% over base).

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