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The main, relevant, legislation which governs the entitlement to interest and compensation is often referred to as “late payment legislation". This refers to the amended Late Payment of Commercial Debts (Interest) Act 1998, the Late Payment of Commercial Debts Regulations 2002 and the Late Payment of Commercial Debts Regulations 2013.

Where a contractual entitlement to interest does not exist, The “late payment legislation" fills the gap, as it implies a contractual term in business to business transactions, allowing interest to be claimed as a contractual right at 8% above base rate. There is also a right to claim compensation intended to help towards the administrative costs of recovery or reasonable recovery costs if the compensation does not cover the collection costs.

However, if your terms and conditions include a clause about the recoverability of interest and/or costs, the statutory legislation no longer applies and you will only be able to claim what your Terms of Business allow.

Where there is often a problem, is when your Terms of Business are not as good as the protection offered by the “late payment legislation".

A good example of this is a contract which says that in the event of late payment you can claim interest of 5% above the base rate (currently 0.5%) p.a. This will override the statutory provision in the “late payment legislation" which allows for interest of 8% above the base rate, meaning you would lose out on the additional interest. More importantly, you would not be entitled to claim any compensation or recovery costs to which you are entitled under the legislation.

Even if a company’s standard Terms of Business provides for the entitlement to interest, most businesses will not have considered whether a standard 8% clause, which is often provided, is appropriate for their particular circumstances.

The courts may allow claims for interest rates up to 30% per annum (subject to a test of reasonableness i.e. that the interest claimed is a genuine estimate of loss rather than a penalty) and contractual interest can also be compounded – this is not possible if statutory interest provisions are relied upon.

The only way to avoid getting caught out is to ensure you have properly drafted Terms of Business or contracts.

We recommend that you take time to review your Terms of Business and make sure they  meet your requirements and if not, take professional advice on any changes required.

For more information or for a free review of the payment terms contained in your Terms of Business please contact us.

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