REUTERS | Ronen Zvulun

Time to test the late payments regime?

According to Building, the Specialist Engineering Contractors Group says that there has been a sharp rise in contractors reporting that public and private sector clients have been pushing back payments.

It may be that somebody will now test compliance with the Late Payment of Commercial Debts (Interest) Act 1998, which (in theory) provides qualifying creditors with a statutory right to claim interest at 8% above base, unless the contract provides an alternative “substantial remedy” in respect of any late payment. (For more information on the Act, see PLC Construction’s Practice note.)

We don’t really know what the courts would regard as “substantial” for construction contracts, as the point has not yet been directly tested.

My experience is that, when the 1998 Act came into force, people started by writing in 2% above base, got a bit worried by speculation that this was not enough, and then started putting 4% or 5% above base.  The 2005 editions of the JCT contracts provide for 5% above base rate.

Are people using 5%?  Do we think this is enough? Too much?

In Ruttle Plant Hire Ltd v Secretary of State for Environment, Food and Rural Affairs (No. 3) Mr Justice Coulson found that 2% above base was an appropriate interest rate – but this is not a decision on whether that is a substantial enough contractual rate to oust the 1998 Act’s provisions.  However, the case is still interesting in this context as it looks at what happens if no rate is specified.  It does not automatically follow that the base plus 8% will apply.

A reminder – section 9 of the Act says that:

(1) A remedy for the late payment of the debt shall be regarded as a substantial remedy unless—

(a) the remedy is insufficient either for the purpose of compensating the supplier for late payment or for deterring late payment; and

(b) it would not be fair or reasonable to allow the remedy to be relied on to oust or (as the case may be) to vary the right to statutory interest that would otherwise apply in relation to the debt.

(2) In determining whether a remedy is not a substantial remedy, regard shall be had to all the relevant circumstances at the time the terms in question are agreed.

(3) In determining whether subsection (1)(b) applies, regard shall be had (without prejudice to the generality of subsection (2)) to the following matters—

(a) the benefits of commercial certainty;

(b) the strength of the bargaining positions of the parties relative to each other;

(c) whether the term was imposed by one party to the detriment of the other (whether by the use of standard terms or otherwise); and

(d) whether the supplier received an inducement to agree to the term.

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