If your business is owed money, you may be able to add any legal costs incurred in recovering commercial debts to the total payment, provided you haven’t inadvertently lost the right to do so.
The Late Payment of Commercial Debts (Interest) Act 1998 (the “Act”) provides substantial remedies to creditors whose debtors are acting in the course of business. Unfortunately however, we see many contracts and terms and conditions which inadvertently displace the Act, losing the right to those remedies.
The Late Payment of Commercial Debts (Interest) Act
The Act works by inserting implied terms into certain contracts, giving a creditor rights in the event of late payment of certain debts.
In particular, the Act gives the creditor rights to:
- Interest on late payments; and
- Reasonable costs incurred in recovering the debt. This is particularly useful when the debt is £10,000 or less, because legal costs are not usually recoverable on small claims.
There are exceptions, but the majority of straightforward contracts for the supply of goods and services will fall within the provisions of the Act.
What rights does the Act give me?
The Late Payment of Commercial Debts (Interest) Act gives a creditor the right to claim interest on late payments at a rate of 8% above base rate. It also gives the creditor the right to add their costs of recovery to the total debt. Particularly for larger debts that have been outstanding for some time, these can be significant sums.
Even for smaller debts, the right to recover legal costs reduces the costs risk of instructing a solicitor to assist you with recovery.
A word of warning
The Act only applies if the parties haven’t “contracted out” of it.
We frequently see this happening, inadvertently, because the creditor has inserted their own interest provisions into the terms and conditions. While this may seem sensible, in fact it can displace the protections afforded by the Act. In other words, you could be reducing the amount of interest recoverable, and removing your right to recover legal costs.
There are a number of other points to consider to ensure that your terms and conditions give you robust protections in the event of late or non-payment of debts.
Our specialist Commercial team is experienced in reviewing and drafting terms and conditions which avoid the pitfalls set out here, and many others.
Our dedicated Debt Recovery team provides a cost-effective, fixed fee service for uncontested debts. You can see our pricing and services here.
For any debts which become contested, our Commercial Dispute Resolution team has a wealth of experience in dealing with these types of claims.