More and more businesses are including clauses in their Terms & Conditions to allow them to claim interest or costs from their debtors for late payment. However there is a significant risk that if these clauses are not drafted properly you could end up losing out on your entitlement to these costs.
The main piece of legislation that is relevant here is the Late Payment of Commercial Debts (Interest) Act 1998. This was the result of an EU Directive requiring all member states to put into law measures to discourage payment delays and provide a way for creditors to be compensated by the debtor in the event. We've written a more detailed article about the Late Payment Act which you may also want to read.
The key thing to note is that this law provides a 'default' statutory position for interest, compensation and costs which automatically applies to all contracts unless the contract contains other provisions. What this means is that if you don't have anything in your contract about late payment then the protection of the LPA applies by default.
What's The Main Danger?
Where this can go wrong is if your contract or T&Cs has clauses that are not as good as the protections of the Act. The fact you have clauses in your Terms will mean the statutory clauses in the Act no longer apply and you will only be able to claim what your clauses say you can.
A good example of this is a contract which says that in the event of payment delays you can claim interest of 5% p.a. This will override the statutory provision in the Late Payment Act which allows for interest of 8% above base p.a., meaning you would lose out on the additional interest. More importantly, you would not be entitled to claim any compensation, or recovery and legal costs under the legislation - by having a contractual interest clause in your Terms, the LPA no longer applies.
What Other Dangers Are There?
If you have a contractual interest rate that is very high then a Judge may refuse to award you interest on the basis that interest is supposed to compensate you for loss and not be a penalty against the debtor. There is no fixed rule on this, but in general a rate of 10% above base would be the most we would recommend.
How Can I Avoid These Traps?
The only way to avoid getting caught out is to ensure you have suitable clauses in your Terms of Business or contracts. Here are your options:
• Not mentioning interest, costs or compensation at all so the default provisions of the LPA apply
• Specifically saying that the provisions of the LPA apply but not giving details, so the default provisions still apply
• Detailing the interest, compensation and costs you will be claiming and ensuring these details match, or better, those in the LPA (and subsequent amendments/regulations)
Seek Proper Advice!
We would always recommend that you get professional advice on drafting such clauses as a single mistake can cost you thousands of pounds in lost compensation or costs. At Lovetts we will review the payment terms in your Terms of Business free for clients.
If this article has made you question your business terms then contact us on 01483 457500 and make sure you're not missing out due to poor terms!