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Is the legislation the only way I can remedy late payment?

No. A supplier and purchaser can make their own arrangements for a remedy to late payment. This is known as contractual interest. If they do make their own arrangements for contractual interest, the late payment legislation will not apply. However, if they do not make arrangements, the remedies for late payment provided by the late payment legislation will apply.

To prevent purchasers abusing the right to agree their own arrangements with the supplier, any such contractual remedy for late payment must be "substantial" otherwise it will be void and the debtor will be unable to rely on it. It will be struck down by the courts and the terms of the late payment legislation will apply to the contract.  

Any contract terms are void if they –
(a) confer a contractual right to interest that is not a substantial remedy for late payment of the debt, or
(b) vary the right to statutory interest so as to provide for a right to statutory interest that is not a substantial remedy for late payment of the debt unless the overall remedy for late payment of the debt is a substantial remedy.

How will the courts know whether a remedy is substantial or not?

In determining whether a remedy is substantial or not, the courts will consider all the circumstances, including the rate of interest that applies to late payments and the length of credit periods. Purchasers should not negotiate longer credit periods to avoid the possibility of late payment.

Where a credit period is considered to be excessive, the courts may strike it down and replace it with the 30 days default period provided by the late payment legislation.

It will be for the supplier to show that a remedy is not substantial (although the purchaser may have to provide evidence that it is fair and reasonable in the circumstances). The court will then have to judge whether, in all the circumstances (including what is usual for that sector of business), the remedy meets the criteria of a "substantial remedy" set out above. The court will take into account such factors as whether there was equality of bargaining position between the parties and whether standard terms have been imposed.  

Examples of contract terms which a court might declare void, to the extent that they relate to late payment because they result in there being no substantial remedy for late payment, might include:

  • a credit period that is significantly different from custom and practice in that industry;
  • a credit period that is significantly different from other supply contracts operated by the purchaser;
  • an interest rate on late payment, significantly lower than the statutory rate, that fails to act as a deterrent to the purchaser paying late because it is lower than the purchaser's theoretical (or actual) cost of agreed borrowing;
  • an interest rate on late payment, significantly lower than the statutory rate, that fails to recompense the supplier for being kept from their money, because it is below the supplier's theoretical (or actual) cost of agreed borrowing;
  • an interest rate on late payment, significantly lower than the rate used in other supply contracts operated by the purchaser or than is normal in that sector of the economy;
  • a contract term that has the effect of reducing the amount of interest that can be claimed, such that the compensation for late payment is insufficient to recompense the supplier or to act as a deterrent to late payment;
  • excessive information requirements that must be fulfilled under the contract before any credit period might start.

Whether the purchaser had given any benefit in return for the term in question would be relevant. However, it must be stressed that the courts will look at the issue of a substantial remedy for late payment on a case-by-case basis.

 

Guidance:

The above list is not intended to be exhaustive and might not necessarily apply in every case.

How does the late payment legislation affect existing custom and practice?

The late payment legislation does not replace existing custom and practice. If the parties have undertaken business on the basis of usual industry practice (for example, payment at the end of the month following the date of the invoice), then this practice will probably still apply. However, if any remedy for late payment is not "substantial", the terms of the late payment legislation will apply.

 
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