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Does size matter? When it comes to unpaid debt it does

Legal Matters

I looked recently (aj 13.5.99) at the payment provisions of the Housing Grants Act, introduced to challenge the dominance of the non-payer and redress the balance in favour of the underpaid. It seems that this ancient practice has acquired the modern label of 'the late payment culture' and, with it, an air of respectability. In its attempts to reverse the trend, the government first imposed a payment regime for construction contracts. Now it has now turned its attention to late payment in commerce generally. The Late Payment of Commercial Debts (Interest) Act 1998 introduces a statutory right to interest on commercial debts. As such it does, to coin a phrase, exactly what it says on the tin.

Hitherto, claiming interest on unpaid debts was complicated by difficulties in ascertaining whether any contractual provisions applied, deciding the date from which interest was to be calculated and which of the numerous court rates applied. Whichever you opted for, be it the commercial rate, the investment rate, or whatever, the Courts could not compound it. (Incidentally, by contrast, arbitrators do have the power to award compound interest under S.49 of the Arbitration Act. This unexpected advantage is thought by some to tip the scales in favour of arbitration for those claimants who have the option.)

The Late Payments Act is intended to clarify matters and improve the outlook for creditors. It introduces a statutory right to interest on debts of any size incurred under contracts for the supply of goods or services where both parties are acting in the course of business. Thus building contracts and sub-contracts, professional engagements and contracts for the supply of materials will be covered. Much like the inter-relation between the Housing Grants Act and its attendant Scheme, the Late Payments Act will provide a safety net for contracting parties who do not provide for interest on unpaid bills. The legislation envisages that modern commercial contracts will include a substantial remedy for late payment of debt.

Where no provision has been made or the arrangements are not 'fair and reasonable', if for example, the rates are unreasonably low or the period of credit excessively protracted, the Act steps in to impose statutory interest at an anticipated rate of 8 per cent above base, from (in order of preference) the agreed payment date, the date the service or obligation was performed or the date when notice of the debt was given. A lower rate can be agreed, such as the current JCT rate of 5 per cent above base, provided it amounts to a 'substantial remedy' as required by the Act. Businesses are unlikely to sue for the relatively small sums of interest generated on invoices paid a few months late. If they are forced to sue for the principal sum, however, the statutory provisions may well generate a worthwhile bonus. The legislation is to be introduced in phases, front- end loaded in favour of smaller concerns.

The first phase will apply only to 'small business' and money owed to them by 'large enterprises'. Later phases, to follow at intervals of two years, will apply first to debts owed to small businesses by companies of any size and finally to late payments between businesses of all sizes. For present purposes, a small business is one that employs under 50 full- time employees. Many building companies, particularly sub-contractors, will fall within this definition. Professional practices, including architects are also included. With faultless legal logic, any business larger than 'small' will qualify as 'large' under the Act. So you see, when it comes to interest on unpaid debts, size really does matter.

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