Interest, Compensation And Legal Costs
Credit control costs you money. Debt Collection can cost you money. Court action costs you money.
But there are steps you can take to minimise these costs. We explain how in this briefing paper.
The Main Options
The two most effective steps you can take are to:
- Use the Late Payment Legislation to recover interest and compensation
- Provide in your contract for payment of your collection costs
There are also several other useful terms that can be included e.g. payment to be made without any deduction, cancellation of credit periods, right to suspend work/supplies, retention of title etc. See paragraph 5 below.
Remember : you must make sure your contracts are entered into correctly. If you are in doubt please consult your solicitors.
Here are the topics that we cover in this Briefing paper :
1. Contractual Interest
2. Statutory Interest
3. Late Payment Interest & Compensation
3.1 When you can claim
3.2 Non-UK debtors
3.3 Interest & Compensation
3.3.1 Interest
3.3.2 Compensation
3.4 Inform your customers
3.5 Don’t delay
3.6 Changing your terms of business
3.7 Making your claim
3.8 Case Studies
3.9 EU Directive
4. Contractual costs
5. Additional clauses
1. Contractual Interest
You could include a term in your contract for on overdue invoices. This used to be the smart thing to do but it isn’t any longer if the late payment legislation applies.
If you do have a term for contractual interest, the interest rate must not be too high. It must compensate you for the delay in being paid rather than penalise the debtor for paying late. In the past, the court has accepted 10% over base as an acceptable rate and that is a reasonable rule of thumb.
2. Statutory Interest
Your choice should normally be between charging contractual interest or using the late payment legislation. However, if you don’t claim either, the court can award you interest anyway. You are allowed to claim interest at 8% to start with and that is the rate you will get if you get judgment in default.
However, if the case goes to a hearing, the court is more likely to award interest at around 2% over base on the basis that this compensates you for not having the money earlier.
3. Late Payment Interest And Compensation
The late payment legislation is the most interesting and perhaps the most dramatic of your remedies.
The Late Payment Of Commercial Debts (Interest) Act 1998 had two purposes. Firstly, to compensate creditors for the late payment of debts. Secondly, to deter late payment. It is generally recognised that it has failed to change the late payment culture but there’s no reason why you can’t use it to change the payment culture of your customers!
3.1 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)
3.2 Non-UK Debtors
A UK creditor can usually claim Late Payment Interest and Compensation from a debtor outside the UK.
- The Late Payment Act applies where the law of the contract is English. The law of the contract may be English either under normal rules or because the contract says so.
- The Act does not apply if the parties have chosen English law as the law of the contract but there is no “significant connection” between the contract and the UK.
- “Significant connection” is not defined by the Act. However, a contract is likely to have a “significant connection” with the UK if one of the parties is in the UK or the contract is to be performed in the UK.
- Remember, if you are in England and the debtor is outside the UK, you can’t always take proceedings in England. This is the case even where English law applies to the contract and you are claiming under the Late Payment Act. You need a clause giving the English courts jurisdiction to guarantee that you can take proceedings in England.
- The Act can apply to a contract where the parties have chosen a foreign law. In this situation the Act would apply if the law of the contract would have been English apart from the choice and the contract has no significant connection with any other country. This seems to limit the Act’s application to English parties choosing a foreign law for a contract to be performed in England.
- The Late Payment Act is the UK implementation of a European directive. If the law of the contract is not English, and the Act does not apply, then the creditor will be able to recover whatever late payment interest and compensation is allowed by the law of the contract.
3.3 Interest and compensation
Both interest and compensation can be claimed.
3.3.1 Interest
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.
3.3.2 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.
The compensation you can claim is:-
| Invoice Amount | Compensation |
| Up to £999.99 | £40 |
| £1000 – £9,999.99 | £70 |
| Over £10,000.00 | £100 |
3.4 Inform Your Customers You Will Be Claiming
You do not need to take any formal steps to claim either Late Payment 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.
3.5 Don’t Delay
You have 6 years to claim compensation and interest. If you wait e.g. for several years before complaining about late payment and making a claim, you may be met by the argument that you have impliedly agreed to accept late payment.
To avoid this, you could include wording on your invoices and statements to the effect that late payment is not acceptable and that you will exercise you rights under the late payment 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.
3.6 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.
3.7 Making Your Claim
As soon as a payment is overdue you can, if you wish, claim compensation and, in due course, interest. The following is the sort of information it would be helpful to show when claiming interest and compensation:-
- How much interest and compensation is owed
- What it is owed for i.e. give the invoice number for the principal debt
- To whom payment should be made
- By what date
- To what address and
- By what method
However, it is not necessary to have told your customer about the compensation or interest to be able to claim them in the Letter before Action (LBA) or in legal proceedings.
You can claim interest and compensation in your LBAs. We call LBAs that include interest and compensation Late Payment Demands (LPDs). If you want Lovetts to claim interest and compensation in your letter before action, then you must give instructions to us via our web site. This is because we need precise details of each invoice to calculate the right interest and compensation. You just enter the debtors details and the breakdown of the debt on CaseManager, our client web site. We then process your instructions electronically.
If you are entitled to late payment interest and compensation, you will need to let us know (for example, our Action Report forms enable you to do this). We will then claim them for you when starting proceedings.
3.8 Case Studies
Claims for late payment interest and particularly compensation can be dramatic. They illustrate the dangers of falling out with a supplier!
Claim For Over £60,000 Against One Customer
A client traded with a customer for over 6 years. They then fell out. Our client went back over the previous 6 years and calculated late payment interest and compensation. The claim of over £60,000 was entirely made up of late payment interest and compensation, with the compensation being by far the largest part of the claim.
Claim For Over £50,000
As illustrated above, there is nothing to stop a creditor at the end of a trading relationship going back and claiming interest and compensation. One client dealt with slow paying, mainly public sector, customers. In each case, our client waited until they had been paid under the contracts and then claimed late payment interest and compensation of around £50,000 for 190 contracts.
Compensation And Interest Adds £15,000
In another case, a client claimed just over £50,000 for unpaid/late paid retentions. Late payment interest and compensation added a further £15,000 to the claim.
Compensation Can Add Dramatically To Small Invoices
Another client supplied motor parts and issued many invoices for relatively small amounts. In one case, it claimed £2800 for about 50 small unpaid invoices. Late payment compensation added over £1950 to that claim.
3.9 EU Directive
The EU is disappointed that existing legislation has not changed the culture of late payment. In 2011 a new Directive was passed and is due to come into effect in the UK in 2013. It is largely based on existing UK legislation. The main effects in the UK look as if they will be the right to recover reasonable collection costs (so you may not need a term in your contract) and an attempt to make 30 days the normal credit period with a long stop of 60 days. Credit periods over 60 days will normally be regarded as unreasonable.
4. Contractual Costs
You can include a term in your contracts providing that the costs you incur in chasing debts are payable on an indemnity basis.
The clause we suggest covers:
Legal fees
b. Commission payable to a debt collection agency
c. Your own administrative costs, normally time spent by your staff, in recovering a debt
If you are a client of Lovetts, and would like us to propose a clause to cover such costs, we will readily do so free of charge. Please contact our Marketing team on 01483 557849
Costs Are In The Court’s Discretion
A contractual term for payment of your costs will improve your negotiating position and, if a case goes to trial, the likelihood of recovering more of your costs. However, we cannot guarantee the court will award you costs, especially in Small Claims Track cases. Costs are in the court’s discretion and some judges are reluctant to award more than the Small Claims Track fixed costs, even where there is a contractual clause. The arguments surrounding this topic are surprisingly complex and in some cases it may even be necessary to start a second action for your costs.
Claiming A Set, Contractual Amount
One possibility for clients who have a lot of small claims is to agree fixed charges to cover part or even all of the costs. These would be payable before the action starts either on the letter before action or when instructions to start proceedings are given. The fixed amounts then form part of the claim and may make it easier for a judge to decide that they are recoverable.
Administrative Costs
To claim your own administrative costs, you will need to keep good records of the time spent by staff. You would normally recover their time at their salary rate but it might also be possible to try and claim a proportion of overheads attributable to them and the work they’ve done.
5. Additional Clauses
In addition to the above you could also consider terms to cover:
a. the right to stop work if any payment is late
b. the right to charge for all work done even if not completed or invoiced
c. cancelling credit periods so you could sue on all invoices delivered at one time whether or not the credit period had expired
d. all payments to be due without any deductions
e. arbitration at your option (which you could use if in any case it looked a quicker less expensive option)
f. a clause relating to the Late Payment etc Act 1998 and also extending the interest payable beyond judgment
Online Resources
You can find a useful Government guide at :
http://www.bis.gov.uk/policies/enterprise-and-business-support/access-to-finance/payment-terms