It’s all in the contract – late payments come under the spotlight

The Government has vowed to step up its efforts to wipe out late payments to small businesses with a new pledge to pay most of its own small suppliers within five days and a call for evidence on how best to tackle the problem in the private sector.

While the time it takes to pay suppliers across the UK has improved by 14 per cent, with payments taking on average 42 days in 2018 compared to 49 days in 2016, Government data reveals that the average large business in the UK pays 32 per cent of their invoices later than stipulated in their agreed terms with suppliers.
Tens of thousands of small businesses collapse every year because of late payments, and many more cannot invest, grow or employ more staff because they have not received money owed.

The government has proposed that large businesses appoint a board member to be responsible for making sure invoices are paid on time, but whether this will have any impact on the payments culture across the UK is yet to be seen.

How having a clear business contract helps

Any business contract should always include payment details which explain in detail how payments are to be made, for example, whether you want payment half up front and the other half in instalments. Whenever possible, list dates, requirements and methods of payment (cash, check, credit). Contract disputes often centre on money, so you’ll want to be as specific as possible. Because a business contract is so critical to protecting your business interests it’s essential to invest in professional legal advice when drafting it to ensure it is enforceable.

What the law says about late payments

If you suffer from late payments, the law is on your side. Regulations give you the power to charge interest and claim compensation if invoices are not paid on time. Under the terms of the Late Payment of Commercial Debt Regulations 2013, you have the right to charge interest and statutory fixed costs on any invoice paid outside the contractually agreed payment terms.

When is a payment classed as late?

Under normal circumstances, you will have agreed with your customer when payment should be made. The maximum contractual payment period that can be agreed is 60 days. The law says that, in the absence of agreed terms between the supplier, i.e. the contractor, and their customer, the payment terms are assumed to be 30 days from invoice. It is possible to treat late payment as a breach of contract, but generally speaking one or two late payments is unlikely to constitute a significant breach.

What interest can you charge on late commercial payments?

Interest can be charged on an overdue payment from the day after the last day that it should have been paid. You can charge ‘statutory interest’ – this is 8% plus the Bank of England base rate for business to business transactions. You cannot claim statutory interest if there’s a different rate of interest in a contract. Send a new invoice if you decide to add interest to the money you’re owed.

You can also claim debt recovery costs on late commercial payments in addition to claiming interest. The amount you can charge depends on the amount of debt and these are set by late payment legislation. These charges start from £40 for up to £999.99 worth of debt.

What if they don’t pay?

You can make a statutory demand, which is often created by a solicitor, to ask for payment of a debt from an individual or company. When the debtor receives the demand, they have 21 days to either pay the debt or reach an agreement to pay. You cannot use a statutory demand if the debt is over six years old.

Other options can include professional mediation or to make a court claim by applying to a county court, often known as ‘the small claims court’. There are also ways of taking further action against a debtor to enforce a county court judgment, but these can only be used if the debtor does not repay the debt as the court ordered. Each method of enforcement requires you to make an application to court and provide certain details about the debtor (sometimes on oath).

Terminating a contract

It is possible to treat late payment as a breach of contract, but generally speaking one or two late payments is unlikely to constitute a significant breach. This is again, where a well drafted business contract can help, as they should set out a clear process of how and when you can terminate, otherwise termination without a right to do so could result in an expensive claim being made against you. However, not all contract terms allow you to terminate when breached and are afforded differing status in law. It is sensible to take legal advice.

If you would like further advice about drafting a business contract, recovering your business debts or are interested in a review of your company contracts contact our commercial legal team Carolyn Brooksbank (cjb@hibberts.com) or Keith Cutler (kc@hibberts.com) for an appointment on 01270 215117.

This blog is not meant to be taken as official legal advice and we recommend you always seek professional legal advice if you have questions about your specific situation.