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:

  1. Use the Late Payment Legislation to recover interest and compensation
  2. 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:-

3.2 Non-UK Debtors

A UK creditor can usually claim Late Payment Interest and Compensation from a debtor outside the UK.

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 AmountCompensation
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:

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:-

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 :

29 October 2013