The Late Payment of Commercial Debts Regulations 2013 come into force on 16 March 2013, affecting commercial contracts for the supply of goods or services entered into after that date.
In particular, the regulations aim to encourage a more supplier-friendly approach to payment terms.
The existing regime
Under the Late Payment of Commercial Debt (Interest) Act 1998 (the Act), parties to relevant contracts are entitled to recover interest on any amounts owing to them that remain outstanding for certain specified periods of time. This can be summarised as follows:
- where the parties have not agreed a payment period for invoices, a 30-day period is permitted after receipt of the goods or services and/or invoice for the goods or services (whichever is later) following which the creditor is entitled to recover interest
- where the parties have agreed a payment period for invoices, interest is not recoverable until after that agreed period has expired
As such, debtors are currently free to agree lengthy payment terms with creditors during which interest would not be recoverable on the amount due.
What the regulations say
From 16 March 2013, the regulations will amend the Act so that any commercial contracts for the sale of goods or services will be subject to the certain new provisions on payment:
Where the parties have not agreed a payment period for invoices, the default position is that interest will accrue on any amounts outstanding for longer than 30 days from the later of:
- receipt of the supplier's goods/services
- receipt of the supplier's invoice
- verification/acceptance of the goods/services (provided the contract or any relevant statute includes a right of verification/acceptance)
Where the parties have agreed a payment period for invoices, interest will accrue from the expiry of such agreed period provided it does not exceed certain predefined limits. These limits are:
- for public authorities, the limit is set at the default 30-day limit above
- for businesses, the limit is greater - businesses can still agree payment terms of any length, but in the event that such terms are more than 30 days over the default limit mentioned above (i.e. a total of 60 days) businesses will need to be able to demonstrate that such period is not 'grossly unfair' to the supplier
Any payment terms in breach of these limits will result in interest accruing from the expiration of the 30-day statutory limit irrespective of the agreed payment terms.
What this means
The effects of the regulations are:
- supplier payment terms after 16 March 2013 should be within the new limits
- any payment terms in excess of these limits may result in the creditor being entitled to recover interest and charges from the expiration of the relevant limit
Interest and charges will be recoverable at the following rates:
- interest will be at the statutory rate of 8% above the Bank of England Base Rate or such other rate agreed between the parties (provided that such rate is a substantial contractual remedy)
- fixed charges will range between £40-£100 depending on the amount of the outstanding debt and creditors are also entitled to recover any other reasonable recovery costs incurred
While the regulations do allow for longer periods provided they are not grossly unfair, it unclear how the term 'grossly unfair' will be interpreted by the courts, and there is limited guidance on this at present.
In the meantime, each case is likely to be taken on its merits.
What to do
As a result of the regulations, and to avoid claims for interest and charges, businesses should:
- review their approach to supplier payment terms
- amend any internal policies and/or procedures on payment runs as appropriate
- amend any internal standard terms and conditions of purchase as appropriate
If you have any queries or concerns in relation to the issues raised in this article, please contact Simon McArdle.