On 16 March 2013, new regulations came into force in relation to the Late Payment of Commercial Debts (Interest) Act to incorporate a recent EU Directive.
The new regulations introduce a maximum payment period of 30 days into commercial contracts with public authorities and a default payment period of 60 days into business to business commercial contracts. Although business to business contracts
may agree to periods longer than 60 days, the arrangement cannot be "grossly unfair" to the supplier. If such a provision is grossly unfair the relevant terms are unenforceable and replaced by the statutory provisions, whereby interest is due at 8% above
base rate on sums still overdue after a 60 day period.
The 2013 Regulations apply to contracts entered into from 16 March 2013 onwards and do not act retrospectively. The Act introduces the following concepts:
a) Payment Periods
b) Acceptance Processes
c) Concept of Gross Unfairness
d) Recovery of Costs
For business to business contracts, the new default payment period is 60 days, and for business to public authority contracts the period is 30 days; after these periods interest will become due on all sums owing. If a contract is silent
then these default periods apply and only where it is not grossly unfair may longer periods be agreed.
Both periods will run from the latest of either:
a) The date the invoice is received; or
b) The date the goods or services are received; or
c) Acceptance of the goods or services where provided for in the contract.
Where contracts allow for the purchaser to test goods and verify their acceptance, the period for verification is capped at 30 days. In effect this means that where contracts are subject to point (c) above payment would not be due in a business
to business contract until after 90 days.
Akin to payment periods parties may agree to a longer acceptance period provided it is not "grossly unfair" to the supplier.
Concept of Gross Unfairness
Section 2(5) of the 2013 Regulations contains a wide definition of the term "grossly unfair" stating:
"In determining…whether something is grossly unfair, all circumstances of the case shall be considered; and…in particular… (a) anything that is a gross deviation from good commercial practice and contrary to good faith and fair dealing,
(b) the nature of the goods or services in question, and (c) whether the purchaser has any objective reason to deviate from the result which is provided for by subsection (3B) or (5C)."
"Gross unfairness" is new to English law, in particular with reference to "good faith"; however, this is a common concept in most EU jurisdictions. So whilst English courts will, within reason, apply this concept they will not, as of yet,
accept an implied term of good faith in all contracts.
Recovery of Costs
The Act already provided suppliers with the ability to charge a fixed sum of compensation for overdue debts in addition to interest, this amount varying dependent on the sums due; however, the new regulations extend this to allow a supplier
to recover reasonable costs in recovering the debt so long as they are proportionate to the compensation available.
So, although commercial parties may still negotiate payment and acceptance periods which are longer than the default ones provided for by the regulations, they may find that a court will find them unenforceable. If unenforceable, the default
periods will apply and suppliers will be entitled to claim interest at 8% above base rate from 60 (or 90 including an acceptance period) days after the debt became due.
Should you have any concerns regarding your existing contracts, or seek guidance and advice in relation to drafting new commercial contracts please contact Stephen Foster, Head of Corporate at
firstname.lastname@example.org or by telephoning 0161 833 9211.
The information and opinions contained in this article are not intended to be comprehensive or to provide legal advice. No responsibility for article’s accuracy or correctness is assumed by Berg or any of its partners or employees. Professional
legal advice should be obtained before taking, or refraining from taking, any action as a result of the contents of this article.