By virtue of the Late Payment of Commercial Debts (Interest) Act 1998, the supplier of goods and services has an implied statutory right to charge a specified level of interest on the late payment of debts arising under commercial contracts – and that’s not where the potential penalties end for the late payer.

The supplier also has the right to impose additional fixed charges and recover reasonable costs from the purchaser.

Below we examine the provisions of the 1998 Act more closely, and the consequences for the customer who is consistently late in paying.

What does the Act say?

The Late Payment Act 1998 makes specific legislative provision with respect to interest on the late payment of certain debts arising under commercial contracts for the supply of goods or services.

As such, save except where the contract provides for a more substantial remedy, the Act implies a term into commercial contracts allowing suppliers to charge interest of 8% per annum, plus the Bank of England base rate, on overdue invoices for business-to-business transactions.

In addition to the provision for statutory interest, the Act also allows for the recovery of a fixed sum, together with reasonable costs of recovering the debt. Here, the amount a supplier is permitted to charge the customer will depend on the value of the debt.

For debts of up to £999.99 this sum is set at £40, increasing to £70 for debts between £1,000 to £9,999.99, and £100 where the debt is in excess of £10,000.

What constitutes a late payment?

The provisions of the Late Payment Act 1998 will trigger only once a commercial payment is deemed late. This, however, will very much depend on the terms of any agreement, written or otherwise.

If a supplier and customer agree a payment date, typically this will be within 60 days. Whilst a longer period can be agreed, this must be deemed fair to both businesses.

In the absence of any agreement as to payment date, the law provides that payment will be late 30 days after the customer receives their invoice or, where later, the supplier delivers the goods or provides the service.

What is likely to happen in practice?

Notwithstanding the statutory rights of the supplier, in practice many goods and service providers elect not to exercise their right to charge interest and fixed debt recovery costs on each late commercial payment, not least because these penalties are likely to have a detrimental impact on their relationship with customers, many of whom they may wish to do repeat business with.

In theory, yes, a supplier does have the right to impose a fixed financial penalty, together with interest, on an unpaid commercial invoice, even if it is just a few days late. However, in practice, this is not conducive to maintaining a positive working relationship with their customers.

Needless to say, it also has the potential to cause significant reputational damage if word gets round that a particular supplier approaches the problem of late payments in such a draconian way.

In many cases, the mere existence of the statutory right may be sufficient to deter commercial customers from not paying their invoices on time. Moreover, in the event that a business-to-business relationship eventually comes to end, there is nothing to prevent the supplier from retrospectively imposing these charges on each and every late invoice that has historically accrued.

Even though the statutory limitation period for debts would prohibit a supplier from making a claim dating back more than six years, and even though a supplier can only charge the customer once for each late payment, the cumulative total of multiple small unpaid invoices over this period of time can still amount to a sizeable sum for a disgruntled supplier.

As such, commercial customers should be wary of consistently paying late, even where no action appears to have been taken at the time, otherwise risk being penalised in one single, and expensive, hit later down the line.

Legal disclaimer

The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.