Tesco Could Face Claims Amounting To Over £60m From Suppliers

Lovetts, the commercial debt recovery law firm is warning major businesses who have consistently paid their suppliers late that they could be liable for compensation claims amounting to millions of pounds. The warning comes as the Groceries Code Adjudicator launches an investigation into Tesco and its payment practices to its suppliers, and the government announces plans to bring in tough new laws and bulk up existing codes of practice to tackle the issues of late payment

Lovetts has calculated that businesses that consistently pay their suppliers late, in particular large businesses with a significant number of suppliers such as Tesco, could face compensation claims amounting to over £60 million* should their agreements be subject to the Late Payment of Commercial Debts (Interest) Act 1998. The Late Payment act allows any business paid late to claim interest for the period the debt was overdue, plus compensation. The entitlement to claim interest and compensation remains for six years on each and every invoice paid late, unless clear assent is proven against the claimant.

Michael Higgins, Operations Director of Lovetts said: “Any business that has consistently paid their suppliers late is liable for compensation claims, regardless of whether they still work with that supplier or not. A number of our clients are utilising the act to take on late payers, past and present, the majority of which have recovered significant sums to compensate them for the administrative and legal costs they have incurred. There is no reason why other companies can’t do the same”

In some cases, big businesses have been known to use their influence over suppliers to specifically exclude the Late Payment Act from supplier contracts meaning they can impose grossly unfair payment terms and remedies for payment delays that are inadequate in compensating the supplier.

However, Michael Higgins states “We are starting to see bad practices being exposed. With SME’s fighting back and the government backing tougher measures in relation to late payment, the tide is turning on late payers.”

 *Calculation back dating as far as 6 years– A business with 3500 suppliers and trade creditors of 5.831bn. Assume trade creditors/cost of sales * 365 days equals payment at 35 days on average per creditor. Assuming 30 days terms this means on average suppliers pay 5 days late.

To work out the amount of interest, take 5.831bn * 8% (statutory interest), divide by 365 and multiply by 5 (average number of days late). This gives a figure of £6.4m in interest.

For compensation assume every supplier has been paid late and every supplier invoices monthly, then £100 (average compensation value) * 3500 (number of suppliers) * 12 (months) = £4.2m= £10.6m in interest and compensation for one year. Multiply by 6 for total potential figure as claims can be made dating back six years.

Massive payout due to firms, for late payments going back 6 years

Today, the Institute of Directors has said that large businesses risk regulation by failing to pay their bills on time. James Sproule, chief economist at the IoD said: “If large businesses continue to behave in this way, they are inviting regulation. Politicians are already discussing maximum payment terms and charging fines or interest for late payment. In an election year, corporate behaviour will be under intense scrutiny. Now is a good time for businesses to go beyond the letter of the law and embrace its spirit.”

Charles Wilson, CEO of Lovetts, the commercial debt recovery law firm has said in response:

“We fully support the IoD’s comments and any moves to stamp out the payment delays culture in the UK. But we need to help businesses understand that there is already legislation in place that entitles them to claim interest and compensation for any invoice that was paid late going back 6 years, by customers both past and present*.

“Any SME that has stopped working for a customer that was a persistent late payer over the past 6 years would do well to look back at their invoices. We did just that for one business and claimed £41,000 in late payment and interest.”

In another case Lovetts had a client who dealt with a number of slow paying public sector organisations. When the client’s contract with each public sector organisation came to an end the client would put in a claim for interest and compensation on all the invoices paid late over the life of the contract. The client ended up collecting around £50,000.

“The law has been in place since 1998 and was this Government adopted an EU directive in 2013 to allow reasonable costs for recovering the debt to be added” continues Charles Wilson. “If every business started using the legislation we have already got, it would send a clear message to big businesses that delayed payments will no longer be tolerated. It will also provide a wake-up call to the chief late payment culprits whose auditors might then report a contingent liability for compensation claims in their Annual Accounts.

“We estimate that some of the big brands who pay invoices late every month, and have done so for the past 6 years, could be facing claims amounting to several million pounds.

“So why isn’t this legislation being used more widely? Fundamentally firms are too fearful of upsetting their customers by making a claim. We would urge respected organisations such as the IoD and the FSB representing the UK’s SME sector to help firms unite in claiming compensation from their ex and current customers. More legislation or regulation isn’t necessarily going to work, instead, businesses must be encouraged to use the regulation already in place to hit late payers where it hurts – in the pocket.”

*The Late Payment act allows any business paid late to claim interest for the period the debt was overdue, plus compensation. This entitlement to interest and compensation remains for six years on each and every invoice paid late, unless clear assent is proven against the claimant. 

This case study shows how by using the Claim the Unclaimed service provided by Lovetts, which uses the Late Payment of Commercial Debts (Interest) Act 1998 to recover historic interest and compensation, one client was able to recover over £41,000 in interest and compensation on past late paid invoices over the last six years. 

Our client, a provider of physiotherapy services to a variety of medical and rehabilitation service providers faced a constant problem of their invoices repeatedly being paid late. This caused cash flow issues and meant staff had to spend a significant amount of time and effort chasing their customers for payment. Eventually in a number of cases our client had to cease working with their customer due to their persistent poor payment practices.

The Solution

Many businesses are aware of the Late Payment Act, which allows creditors to claim interest and compensation on invoices which are not paid to terms. However few businesses are aware that the legislation applies retrospectively, allowing claims to be made for any invoice paid late in the past six years (five years in Scotland).

Our client simply had to send a spreadsheet with a list of invoices paid late and Lovetts calculated the compensation and interest due.

Lovetts then wrote to the client’s past debtors to inform them of their ongoing requirement to pay statutory compensation for the past late paid invoices under the Late Payment legislation and request immediate payment.

The Benefit

Our client has now received payment of over £41,000 by claiming interest and compensation in number of cases. In 90% of cases this was achieved without the need to resort to legal action. Furthermore all new customers are now clearly warned on every invoice paid late will result in compensation and interest becoming due and that the only way to avoid this is to pay on time.

What Was The Cost?

The client used the services of Lovetts UK prelegal team who operate on a no collection no fee basis meaning there was virtually no risk to the client. Payment was taken as a percentage of any interest or compensation successfully collected for the client.

Find Out More?

Do you have past clients who were persistent late payers? If so then you could be entitled to significant sums under the Late Payment Act. Speak to us today and we can help you analyse your purchase ledger to see what you may be entitled to claim. And in most cases we will be able to do this on a no collection, no fee commission basis, meaning it won’t cost you a penny win or lose!

Beware! You can only claim interest and compensation if your Terms of Business allow for this. Don’t lose out – read our handy guide on the pitfalls of poorly drafted Terms of Business and make sure you aren’t making the same mistakes.

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A UK creditor can usually claim Late Payment Interest and Compensation from a debtor outside the UK, provided one of the following applies:

• The law of the contract is English either under normal rules or because the contract says so.
• One of the parties is in the UK or the contract is to be performed in the UK, and there is a clause in the contract giving the English courts jurisdiction

If the law of the contract is under a country within the European Union then it may be possible to claim under that country’s own implementation of the European Late Payment Directive 2000/35/EC.

What Can I Claim In Different Countries?

Broadly speaking, the EU Directive sets out the following minimum criteria on what you can claim:

• Interest at 8% above the appropriate reference rate (usually either the official interest rate for that country or the ECB interest rate for countries inside the Eurozone)
• Compensation of at least €40 (individual member states are allowed to specify higher levels of compensation)
• Any reasonable costs of recovery above the statutory compensation (such as solicitors fees, legal costs, etc)

If you want to find out more the European Commission has a website dedicated to the Late Payment Directive.

More and more businesses are including clauses in their Terms & Conditions to allow them to claim interest or costs from their debtors for late payment. However there is a significant risk that if these clauses are not drafted properly you could end up losing out on your entitlement to these costs.

The Law

The main piece of legislation that is relevant here is the Late Payment of Commercial Debts (Interest) Act 1998. This was the result of an EU Directive requiring all member states to put into law measures to discourage payment delays and provide a way for creditors to be compensated by the debtor in the event. We’ve written a more detailed article about the Late Payment Act which you may also want to read.

The key thing to note is that this law provides a ‘default’ statutory position for interest, compensation and costs which automatically applies to all contracts unless the contract contains other provisions. What this means is that if you don’t have anything in your contract about late payment then the protection of the LPA applies by default.

What’s The Main Danger?

Where this can go wrong is if your contract or T&Cs has clauses that are not as good as the protections of the Act. The fact you have clauses in your Terms will mean the statutory clauses in the Act no longer apply and you will only be able to claim what your clauses say you can.

A good example of this is a contract which says that in the event of payment delays you can claim interest of 5% p.a. This will override the statutory provision in the Late Payment Act which allows for interest of 8% above base p.a., meaning you would lose out on the additional interest. More importantly, you would not be entitled to claim any compensation, or recovery and legal costs under the legislation – by having a contractual interest clause in your Terms, the LPA no longer applies.

What Other Dangers Are There?

If you have a contractual interest rate that is very high then a Judge may refuse to award you interest on the basis that interest is supposed to compensate you for loss and not be a penalty against the debtor. There is no fixed rule on this, but in general a rate of 10% above base would be the most we would recommend.

How Can I Avoid These Traps? 

The only way to avoid getting caught out is to ensure you have suitable clauses in your Terms of Business or contracts. Here are your options:

•  Not mentioning interest, costs or compensation at all so the default provisions of the LPA apply

•  Specifically saying that the provisions of the LPA apply but not giving details, so the default provisions still apply

•  Detailing the interest, compensation and costs you will be claiming and ensuring these details match, or better, those in the LPA (and subsequent amendments/regulations)

Seek Proper Advice!

We would always recommend that you get professional advice on drafting such clauses as a single mistake can cost you thousands of pounds in lost compensation or costs. At Lovetts we will review the payment terms in your Terms of Business free for clients.

If this article has made you question your business terms then contact us on 01483 457500 and make sure you’re not missing out due to poor terms!

In short, provided you are entitled to use the Late Payment of Commercial Debts legislation then YES. The legislation applies to any and all debts where the contract was formed within the last 6 years (regardless of whether the debt has subsequently been paid) and where you either have a clause in your contract stating that the Late Payment Act (LPA) applies, or you do not have a contractual clause to override the LPA. We assume that it is your own T&Cs that apply to the contract, not your customer’s which might exclude these provisions.

To illustrate this – let’s say you have invoiced a client on 30 days terms and the client subsequently pays you on day 40. Even though the client has paid the debt, you are entitled to interest for the period the debt was overdue, plus compensation as set out in the LPA. This entitlement to interest and compensation remains for six years on each and every debt paid late.

The potential claims you can bring may be worth thousands. We have successfully recovered tens of thousands under the legislation in this way.

How Do I Go About Claiming This Entitlement?

The first thing you need to do is work out what you can potentially claim. If you have a computerised account system this could be as simple as generating a list of all invoices either paid late or unpaid over the last six years. Make sure you include the due date, the date the invoice was paid and the amount of the invoice, as you will need this information to work out the correct amounts of interest and compensation.

Next you need to exclude any invoices which were paid late as a result of a genuine dispute. This legislation is only intended to apply where payment was made late for no valid reason, and you don’t want to be chasing customers where there was a legitimate reason for their payment delay.

Finally you need to send a Late Payment Demand to the debtor setting out what you are claiming and why. Check first that your staff have not expressly allowed the customer to pay late! It is likely that you will get debtors querying why you are chasing them for interest and compensation on a debt they have already paid, so you may wish to clearly state in the Letter that you are not chasing the invoice itself, but that you are chasing the compensation and interest that you are entitled to by law. Even with this it is likely you will get a number of queries from your debtors, so do ensure your accounts department staff are briefed on what you are doing and why.

What If The Debtors Don’t Pay?

You are entitled to these sums by law, so if the debtor has not raised a valid reason for not paying (e.g there was a dispute with the original invoice, or the contract was formed more than six years ago) then you are perfectly entitled to pursue the debt through the County Court as with any other debt. However do bear in mind that if the sums in question are small it may not be cost-effective to sue in the Court. Lovetts is happy to offer advice on this to our clients.

Are There Any Risks To This Strategy?

The main risks are commercial, not legal. Obviously, if you are still doing business with your debtor this course of action is likely to disrupt the business relationship. Secondly, you need to have expressed to your customer your dissatisfaction with their payment of your invoices late. If you give indications that you’re happy with their payment delays, then you’re unlikely to be able to rely on the legislation in court.

Another risk is that the debtor may be more willing to fight paying such a debt. If they refuse to pay then it may be neccessary to pursue payment through the courts, and as such you would need to take a business decision on whether it is cost-effective to pursue. However if the debtor’s argument boils down to “it’s not fair for you to chase me for this” then legally they are unlikely to have a leg to stand on.

What Can I Do To Reduce These Risks?

Although you are not required to, it would make good sense to warn customers up front that you reserve your right to claim under the Late Payment legislation at any time. Some formal sentences on your invoices, statements or email footers should be sufficient.

If you have a client who persistently pays late but you do not wish to potentially damage your business relationship with the client by claiming interest and compensation at this time, then you may want to write to the client at regular intervals reminding them that they continue to be liable for past and future Late Payment liabilities, even those you have not chosen to exercise at this point in time. You can include this in your dunning letters sent by credit control. This is a valuable chasing tactic for credit controllers to get paid on time.

How Much Could I Get?

This really depends on the size and value of your overdue ledger. In one case Lovetts acted for a client who had a falling out with a customer who was a persistent late payer. The client went back through the previous six year’s invoices and was able to claim £60,000 in interest and compensation from the former customer.

In another case Lovetts had a client who dealt with a number of slow paying public sector organisations. When the client’s contract with each public sector organisation came to an end the client would put in a claim for interest and compensation on all the invoices paid late over the life of the contract. The client ended up collecting around £50,000 from 190 such contracts.

Act Now.

If you think you could be entitled to claim these charges from your former customers then get in touch with us! We can help you review your Terms of Business to make sure you are entitled to claim interest and compensation, and that this applies to specific contracts. We can also give you advice on how best to extract and analyse the appropriate data from your accounts systems and help you work out how much you could be entitled to claim. Just give us a ring on 01483 457500 to get started.

The Late Payment Of Commercial Debts (Interest) Act 1998 had two purposes. Firstly, to compensate creditors for delayed payments. Secondly, to deter late payment. It is generally recognised that it has failed to change the payment delays culture but there’s no reason why you can’t use it to change the culture of your customers.

However there are a few things you should do to maximise the effectiveness of the legislation and therefore reduce your costs. 

Know When You Can Claim

You can claim Late Payment Interest and Compensation if: 

• You have supplied goods and/or services
• Your buyer bought for business purposes
• The contract is not a consumer credit agreement
• The contract does not contain a provision for interest on overdue invoices (or any other substantial remedy for non payment)

Make Sure You Calculate Interest Correctly

You can claim interest at 8% over Bank of England Base Rate (at the previous 31st December or 30th June).You can claim interest on invoices that were not paid within the credit period but have since been paid. Interest can be claimed for the period starting with the date the invoice should have been paid and ending with the date it was actually paid. You have up to 6 years to claim the interest. 

Don’t Forget To Include Compensation

You can claim compensation for every invoice that was not paid within the credit period. You can claim compensation even if the invoice has now been paid. You have up to 6 years to claim. The compensation you can claim is:

Reasonable Costs

You can claim compensation whatever your collection costs are. However, if your reasonable costs of recovering the debt come to more than the compensation, you can claim this as well. This can include the cost to your business of your credit control procedures as well as any costs you may incur from instructing Debt Collection Agencies or lawyers. 

Tell Your Customers You Will Be Claiming

You do not need to take any formal steps to claim either interest or compensation. However, you may want to let your customers know you intend to rely on the legislation. This may encourage them to pay on time! You could put statements to this effect on your invoices, statements and in your terms of business. 

Don’t Delay

You have 6 years to claim compensation and interest. If you wait e.g. for several years before complaining about late payers and making a claim, you may be met by the argument that you have impliedly agreed to accept payment delays. To avoid this, you could include wording on your invoices and statements to the effect that overdue invoices are not acceptable and that you will exercise you rights under the legislation. Where you have an on-going relationship with a customer who always pays late, it would be sensible to write every at least every 12 – 18 months to draw attention to this and ask them to pay within the credit period. 

Changing Your Terms Of Business

You are not entitled to late payment interest and compensation if your terms of business already provide for interest on overdue invoices. You may want to change your terms of business and rely on the Late Payment legislation. If you do, make sure your customers know. You should: 

• update all documents on which your Terms and Conditions appear.
• circulate your customers with the revised Terms and Conditions.
• advise your customers when the revised Terms and Conditions will come into effect.
• make sure you can prove each customer has been told about the change in your Terms and Conditions.

 N.B. Existing contracts will continue to be governed by the Terms and Conditions which applied at the time they were entered into.

Average Debt Owed To Business Rises 

The current boom in UK business confidence could be short-lived if firms fail to keep an eye on cashflow warns Lovetts, the commercial debt litigation firm. In the third quarter of 2014, businesses saw the average debt owed to them rise by 17% on Q2 2014. However, rather than act on this dent to their cashflow, Lovetts found that businesses relaxed their attitude to chasing late payments allowing debtors an average of 12 days longer before threatening legal action with a Letter Before Action (LBA), compared to Q2.

 In addition, the time from the LBA being issued to a legal claim to recover the debt being made rose from 23 days to 28 days according to the latest late payment analysis from Lovetts suggesting businesses have been slower to recover the money owed to them.

Charles Wilson, CEO of Lovetts said: “All the economic indicators appear to be heading in the right direction and with more work on the books you can understand how businesses might be feeling more relaxed about cashflow.

“A word of caution though – as business starts to ramp up, there will be a demand for more resource which will impact business costs. If the cash isn’t coming in and customers start to take advantage of this relaxed attitude, the pressure on cashflow will increase. Now is not the take to be taking the eye off the ball. Businesses need to get a grip on the debts owed to them so that they are in good shape to capitalise on the improving economic landscape.”

Firms looking to grow in markets outside of the UK are being urged to take precautionary measures to reduce their risk of late payment and debt before agreeing to export goods overseas. The warning comes from Lovetts Plc, the commercial debt recovery legal firm which specialises in overseas debt recovery. Lovetts has seen the number of overseas debts it is chasing for clients increase five-fold in the past 12 months and has collected over half a million pounds from businesses overseas. 65% of debts referred to Lovetts International Debt Recovery Department receive payment.

While the increase in the number of debts being handled by Lovetts points to a much more active export market, encouraged by the UK Government and its ambitious target of £1trn in exports by 2020, the concern is that businesses are not taking the right steps to protect themselves at the out-set of the contract. With exports now slowing according to the latest Markit UK Manufacturing Purchasing Managers’ Index (PMI) due to the current sluggish growth in the eurozone and the strength of sterling against the euro, getting paid on time has become even more essential to UK exporters.

Charles Wilson, CEO of Lovetts said, “When the Government first announced its intention to get 100,000 more companies exporting by 2020, we highlighted our concern that businesses were not being offered advice on reducing the risks of trading overseas, in particular, non-payment of invoices and bad debt. These fears appear to have been realised. The Government’s ‘Business is Great’ website has only the barest of detail regarding payment practices and nothing regarding recovering debt from Non EU countries.

“We would therefore urge exporters to take heed of some simple steps based on our many years’ experience in recovering overseas debt.”

Lovetts Tips For Recovering Overseas Debt:

• Make sure you know who you are dealing with by checking the true identity of your client and ensuring they are creditworthy through a credit check. There is an increased risk when dealing with a customer not based in the UK.
• Agree which language will be used for the contract and subsequent communications
• Obtain acceptance of your Terms & Conditions in England & Wales. For overseas contracts this will ensure contract formation within home jurisdiction
• Make sure your paperwork is accurate and timely, leave no room for error
• Ensure you can prove delivery of goods or services
• Resolve any queries promptly
• Consider credit insurance cover

It’s also critical that businesses protect themselves against bad debt through a set of robust terms and conditions:

• Ensure your Terms and conditions allow you to charge overdue interest and compensation for late payment and that there is a significant connection with the UK
• Consider including a clause so that you can claim immediate payment on invoices not yet due
• Where you need third party assistance in recovering the debt make sure you can pass on the charges to the debtor
• Make sure your terms give you the right to suspend on-going shipments when default occurs
• Stipulate clearly that the law in England & Wales governs the contract. It’s also worth remembering that if businesses litigate, documents may need to be translated and personally served on the debtor.

Charles Wilson concludes: “While all this groundwork won’t protect businesses from the risk of late payment it will put creditors on firm ground for any legal representations necessary.”

Cassandra McCarthy joins the Commercial Litigation team

Lovetts Plc, the debt recovery law firm has seen demand for its subscription based legal advice service jump significantly in 2014 compared to 2013. With demand set to grow further as the recovery continues and as other law firms withdraw legal advice services for SMEs*, Lovetts has expanded its team of solicitors with the appointment of Cassandra McCarthy as a solicitor in the Commercial Litigation team. Reporting to Michael Higgins, Operations Director, Cassandra brings extensive commercial litigation knowledge to the team and will harness her expertise to get the best results for Lovetts’ clients. Lovetts offers unlimited advice agreements on disputed debts to allow businesses of all sizes, from micro SMEs to the FTSE 100, easy access to a solicitor without worrying about the clock ticking and fees increasing at the early advice-stage of a case.

Prior to joining Lovetts, Cassandra was Associate Solicitor of Commercial Disputes at Rawlison Butler LLP, and has also held the position of Solicitor in Civil & Commercial Litigation at Morrison’s Solicitors LLP. Cassandra has conducted proceedings for high profile clients with high value claims, where she was responsible for settlement negotiations and drafting settlement agreements.

Cassandra McCarthy comments, “This a great opportunity to join a law firm with a strong track record and a reputation for innovation and high levels of client service – but most importantly, one that is solely focused on recovering commercial debt. This field is really where I have focused my career to date and I look forward to achieving the right results for Lovetts’ growing client base.”

Michael Higgins, Operations Director adds, “Lovetts prides itself on delivering the very best service to all clients regardless of size – the demand is there as increasing numbers of clients are signing up to our legal advice service and Cassandra will play a key role in helping us to deliver this valuable service.

“Cassandra brings a variety and depth of experience in commercial disputes, making her a key addition to our already strong team. She also shares our focus on getting the best results, quickly and affordably. Cassandra understands the Lovetts ethos, which places service quality and client care at the heart of the business, driving our success and ongoing expansion.”

*http://www.legalfutures.co.uk/latest-news/riverview-stops-annual-contracts-small-businesses-focus-major-clients