What is Statutory Interest for Late Payment?

A customer’s failure to pay their invoices on time can lead to serious cash flow problems for your business. This risk has become increasingly prevalent due to companies’ economic difficulties in the current economic climate. To help mitigate these risks, the law allows businesses to charge statutory interest for late payment in certain circumstances. This article will explore the right to statutory interest for late payments and how it can benefit your business.

When is Statutory Interest Relevant?

If customers pay late, your business can charge them interest for late payments. Often, businesses stipulate an interest payment clause in their commercial contracts. An interest payment clause, in effect, requires your customers to pay interest on the amount owed. This is provided your customers make the repayment later than the pre-agreed time period.

Including interest clauses in a contract can be a good way to prompt customers to pay on time. If customers can clearly see that they will be charged interest if they pay late, they are more likely to settle their invoices when due to avoid further charges.

However, not all commercial contracts set out an interest for late payments clause. In this case, businesses may be able to rely on the right to claim statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998 (The Act).

The Act adds an implied term into specific business contracts for the supply of goods and services, giving businesses the right to claim interest and reasonable sums for recovering debt.

What is the Statutory Right to Charge Interest?

Your business can claim interest under a business-to-business agreement under the Act if the relevant contract falls under the Act’s scope.

At present, the rate of interest you can claim is 8% plus the Bank of England’s base rate. It is also possible to claim for certain debt recovery costs.

Can I Rely on the Statutory Right to Claim Interest?

If your contract is silent on interest charges, you may be able to rely on The Act to claim interest. This depends upon whether your contract falls within the scope of the Act.

The Act implies an interest term for late payments if there is a contract:

• for the supply of goods and or services, or both;
• in a business-to-business context; or
• where there is no interest clause that gives a substantial alternative remedy.

When Does Statutory Interest Start to Accumulate?

The Act contains various provisions about when statutory interest begins to run.

For contracts that were entered into on or after 14 May 2013, the start date for interest depends on whether the contract specifies a payment date. If the contract specifies a payment date, interest will usually run the next day after the agreed payment period.

In the event no payment date is agreed, interest is payable 30 days from the later of:

• the supplier delivering the goods or services;
• the invoice being given; or
• any acceptance procedure around checking the goods or services being completed.

If the parties agree on a payment date, the payment date usually has to be within 30 days for public authorities or 60 days for business transactions.

Some types of contracts are excluded and do not benefit from the protection of the Act—for example, mortgage, pledge, charge or other security documents.

Therefore, you will need to review the criteria under the Act to check if you can claim interest for late payment under it. Note that the Act will also not allow you to charge interest to consumer customers.

You cannot rely on the Act to claim interest if your contract with your customer includes an interest clause setting out a different rate, which provides a substantial (i.e. fair and reasonable) remedy for late payment.

If you are unsure whether your business can claim interest under the Act for your contracts, you should seek legal advice from an experienced commercial lawyer. The provisions of the Act are not straightforward and whether any contract falls within the protection of the Act will need to be considered on a case-by-case basis.

How Can Statutory Interest Help Your Business?

Where the Act applies to your contract and your contract does not include an interest clause, the statutory right to claim interest can be very helpful.

Claiming statutory interest can help you recoup costs you may have incurred because customers are paying late. By charging additional costs, you may be able to recover losses suffered because of customers failing to pay on time.

Should You Include an Interest Clause in Your Contract?

Whilst statutory interest is a helpful legal right for businesses, it may not help you in all circumstances. For example, you cannot claim interest from customers under the Act if your contract is excluded from its scope. Therefore, an interest clause in your contract can give you peace of mind that you will have the right to charge interest.

You will also have more flexibility when drafting your own contractual interest clause. For example, statutory interest is for simple interest only, whilst an express clause may allow your business to charge compound interest.

Further, an interest clause in a contract can be much more effective in practice. If customers can see, in black and white, that interest will be payable, they will be much more likely to pay you on time.

Interest clauses in a contract can also be an effective debt recovery mechanism. If a customer misses their invoice payment date, you can point out the interest clause in your signed contract and remind them that interest is accruing. This can be an effective prompt to push customers to settle the invoices they owe.

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Key Takeaways

Statutory interest is a legal right allowing businesses to claim interest for late payments in certain circumstances. The right can be very beneficial, especially if your customer agreement does not include an interest clause. However, the right to claim statutory interest does not apply in all circumstances. Should you wish to rely on this right, you must carefully consider the criteria under the Act and check whether your business is entitled to claim interest under the particular contract.

If you would like to know if your business can charge statutory interest on your customers’ late payments, contact our experienced corporate lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.