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New rules for interest on late payment for commercial contracts

25 March 2013   (0 Comments)
Posted by: Nelsons Solicitors
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Changes to the Late Payment of Commercial Debts (Interest) Act 1998 (the “Act”) made in response to the EU Late Payment Directive come into force on 16 March 2013.

The revised Act applies to commercial contracts (b2b contracts) for supplies of goods and services (other than consumer credit agreements or other securities contracts) made on or after 16 March 2013.  Different rules apply to public authority contracts.  

The revised Act effectively imposes payment periods for commercial contracts for goods and services.

If the contract is silent on the time for payment interest will start to run on outstanding payments from 30 days after the latest of:-

  1. the date the customer receives the supplier’s invoice; and

  2. the date the customer receives the goods or services; and

  3. verification or acceptance of the goods or services.

The supplier and the customer can agree a due date for payment of up to 60 days from the latest of the events listed in (i) – (iii) above.  The supplier and the customer can agree to extend the due date for payment beyond 60 days but this extension will only be valid if it is not “grossly unfair” to the supplier.

The test of “gross unfairness” is new to English law in this context and it may be some time before we have guidance from the courts on what this means.  When providing guidance on the concept of gross unfairness the amended Act states that all the circumstances of the case are to be taken into account including: -

  1. whether anything is a gross deviation from good commercial practice and contrary to good faith and fair dealing –(the concept of good faith is new to English law as well);

  2. the nature of the goods and services supplied; and

  3. whether the customer has an objective reason for requiring a change from the statutory provisions.

It will be interesting to see how the anticipated payment protection afforded by the changes to the Act is translated into reality by the courts, particularly in the context of large PLC customers seeking to use their purchasing power to impose extended payment periods and unilateral discounts on their suppliers.  In the meantime suppliers should be updating their standard terms to reflect the changes made to the Act as a starting position for their negotiations on payment terms with their customers.

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