Sunday, 2 June 2013

Right to Claim Statutory Interest After 60 Days after 16 March 2013

Under the Regulations, statutory interest will begin to accrue 60 days (or 30 days where the paying party is a public authority) after whichever is the latest of:

1.     the day the payee performs the obligations to which payment relates;

2.     the day the payee submits a claim for payment; or

3.     the day the payer verifies or accepts goods or services provided (where the contract includes a verification or acceptance procedure).

The effect of the Regulations is therefore to impose a limit on how long a payment period can be before statutory interest begins to accrue. On a strict reading of the Regulations, it appears that if the contract has a payment period of longer than 60 days, the payment period will still stand but the payee has a right to claim interest after the 60 day period has expired, even if that is before the agreed contractual payment date.

However, the guidance on the Regulations issued by the government explains things differently. The guidance states “businesses must pay their invoices within 60 days”, but the Regulations, on a strict interpretation, do not say this. The Regulations say that statutory interest will start to accrue after 60 days. Businesses therefore do not have to pay invoices within 60 days if they do not wish to do so, but they may face a claim for statutory interest after the 60 day period applicable under the Regulations has expired.

In theory, it could therefore be costly to have payment periods of longer than 60 days. However, payers may not need to worry unduly about reducing their payment periods to 60 days or less because there are two important exceptions to the rule.

First, the 60 day rule appears, on a strict interpretation of the drafting of the Regulations and the Act, only to apply in cases where statutory interest applies i.e. not in cases where there is a contractual “substantial remedy” for late payment. Arguably, this means where there is a substantial contractual interest rate, the 60 day rule will not apply. However, given the wide range of remedies for late payment now available under the Act and the Regulations, it may be that payees can now argue that an interest rate alone does not constitute a “substantial remedy” and that contracts must provide more generous remedies in order to exclude the Act and the Regulations.

Secondly, the Regulations say that the 60 day rule does not apply in cases where the contracting parties have “expressly agreed” a payment period longer than 60 days and that period is not “grossly unfair”. The Regulations state that, in determining whether something is “grossly unfair”, all the circumstances should be considered. Specifically, anything that is a “gross deviation from good commercial practice and contrary to good faith and fair dealing” may be grossly unfair. It is not clear what is meant by “expressly agreed” or whether standard terms and conditions can give rise to an “express” agreement.

Ref Source: Hawkswell Kilvington