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09th April 2013

Changes to late payment legislation

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The Late Payment of Commercial Debts Regulations 2013 came into force on 16 March 2013.

The Late Payment of Commercial Debts Regulations 2013 came into force on 16 March 2013. The Regulations implement changes required under European legislation and amend the Late Payment of Commercial Debts (Interest) Act 1998 which provides for statutory interest on debts under commercial contracts for the supply of goods and services. The changes will only apply to commercial contracts made on or after 16 March 2013. Very briefly, the key changes are as follows: 1. Payment periods. The changes effectively impose new maximum payment periods by providing that interest on outstanding payments starts to run after a certain period. a. Where the purchaser is a public authority, interest starts to run from 30 days after receipt of the goods or services or of the supplier’s invoice, whichever is later. b. In other cases, interest starts to run from 60 days after receipt of the goods or services or of the supplier’s invoice, unless the parties agree a longer payment period and that period is not “grossly unfair” to the supplier. 2. A 30 day extension to payment periods where there is an “acceptance or validation” procedure, i.e. where the purchaser is given time to verify that the goods or services conform with the contract before paying. The time limits are extended in those circumstances because the normal 30 or 60 day period only starts after the procedure is complete. However the changes impose a limit of 30 days on the period for purchasers to check the goods or services, unless the parties expressly agree a longer period and that is not grossly unfair to the supplier. 3. Recovery costs. In addition to the fixed charge which a supplier may claim as compensation for the cost of recovering a debt (£40, £70 or £100, depending on the size of the debt), the supplier now has a right to compensation for any additional reasonable costs of recovery. As has always been the case, the legislation just creates a right to claim interest and other sums and it is for the supplier to decide whether or not to exercise the rights. Similarly it will continue to be the case that the right to statutory interest will not apply in all cases; for instance, if the parties agree another contractual remedy for late payment which is regarded as a “substantial remedy”, the debt will not also automatically carry statutory interest. Arguably the changes could lead prompt payers to wait 60 days as opposed to encouraging late payers to pay more promptly! However the new right to additional recovery costs as well as the desultory fixed charge compensation fee may be helpful. The amendments are intended to make pursuing payment a simpler process across the EU, reduce the culture of paying late and make paying on time the norm. However, as the Government has acknowledged, “most supplier relationships are long-standing and resorting to legal action is therefore not a practical option except as a final alternative”, so the effect remains to be seen. In any case, suppliers should review their payment terms as soon as possible to make sure they have the desired effect in light of the new legislation. For further information, please contact Lorna Carter on 01223 461155 or click here to email Lorna.