Posted: 17/10/2024
The generous rate of statutory interest under the Late Payment of Commercial Debts (Interest) Act 1998, at 8% above the base rate, is a valuable/penal legal remedy. It takes care to calculate correctly, and appears to have been misapplied in the recent Technology & Construction Court case of A&V Building Solution Limited v J&B Hopkins Limited [2024] EWHC 2295 (TCC).
It can be said that there are two types of basic interest provision: fixed and variable. A fixed rate provision applies the same rate of interest throughout. It might be expressed as follows: ‘A rate 5% per annum above the official bank rate of the Bank of England current at the date that a payment becomes overdue.’
A variable rate might be expressed as follows: ‘A rate 5% per annum above the official bank rate of the Bank of England from time to time.’
The effect of these provisions can be very variable at different times. When interest rates fall significantly, as they did in 2008/2009, claiming parties may benefit from a fixed rate. When rates increase significantly, however, as they did in 2023/2024, the paying party stands to benefit.
By way of reminder, the act applies to contracts for the supply of goods or services where the purchaser and supplier are each acting in the course of a business (subject to some exceptions). Where the act applies, it implies a term into the contract that interest is payable on ‘qualifying debts’. Qualifying debts are those ‘created by virtue of an obligation under a contract… to pay the whole or any part of the contract price…’. So, the act applies to payment of the price due under a contract.
A term will not be implied where a contract already contains provisions regarding late payment that constitute a ‘substantial remedy’ for late payment. Whether that is the case may be the subject of debate.
On the rate of interest under the act, section 4(2) states: ‘Statutory interest starts to run on the date after the relevant date for the debt, at the rate prevailing under section 6 at the end of the relevant day.’
Section 6(1) states:
‘The Secretary of State shall by order made with the consent of Treasury set the rate of statutory interest by prescribing –
(a) a formula for calculating the rate of statutory interest; or
(b) a rate of statutory interest.'
The Secretary of State has done so, most recently, through the Late Payment of Commercial Debts (Rate of Interest) (No 3) Order 2002. Paragraph 4 of the order states:
‘The rate of interest for the purposes of the Late Payment of Commercial Debts (Interest) Act 1998 shall be 8% per annum over the official dealing rate [Bank of England base rate] in force on 30th June (in respect of interest which starts to run between 1st July and 31st December) or the 31st December (in respect of interest which starts to run between 1st January and 30th June) immediately before the day on which statutory interest starts to run.’
The effect of the order is to apply the Bank of England base rate that was in force on either 30 June or 31 December immediately preceding the date on which the payment became overdue. This creates a ‘reference rate’ for all debts becoming overdue in a six-month period.
In most construction contracts, debts become overdue following the ‘final date for payment’. The reference rate will then be the one set on the preceding 30 June or 31 December. A common mistake is to apply the base rate in effect on the day when the debt becomes overdue, which may be different.
Section 4(2) reads: ‘…the rate prevailing under section 6 at the end of the relevant day’. ‘Prevailing’ means ‘existing at a particular time’ or ‘current’, which suggests not. There is also no reference to a subsequent change in the act.
In the 1990s, as part of the UK government’s Better Payment Practice Campaign, it established the website: www.payontime.co.uk. This contains a calculator that uses a fixed rate for each debt. Consistent with this, in the FAQs, it states: ‘There is no need to adjust your interest rate if the base rate moves - you use the one when the debt becomes overdue.’
There is also Court of Appeal authority for this: Crema v Cenkos Securities plc [2011] EWCA Civ 10, in which Lord Justice Aikens found:
‘3. …Mr Crema is therefore entitled to interest at the 1998 Act rate that prevailed as at 13 July 2008. I understand from Cenkos' submissions (para 4) that it accepts that the rate under the 1998 Act as from that date is, in total, 13%, viz 8% above the base rate of 5% that was current at the time.’
A similar approach was taken in the following cases:
More recently, however, in A&V v JB Hopkins, the TCC was asked to decide a final account following adjudication. The court found that a sum was payable to A&V in respect of the contract price. A&V (which was not represented) correctly claimed interest at a fixed rate, but incorrectly took the base rate at the time of the hearing, not when the debt became overdue.
The court found that: ‘76. The rate will be the statutory rate appropriate for the 1998 Act, namely 8% over the Bank of England base rate from time to time applicable. A&V's calculation takes a single rate throughout: this is inappropriate.’
Evidently, neither the unrepresented claimant nor the court took the correct approach. The correct approach would have been for interest to start running from the day after the final date for payment, so 6 May 2021, at the reference rate applying from 31 December 2020, namely, 8.1% (8% above a reference rate of 0.1%).
On 7 August 2024, the Bank of England reduced base rates from 5.25% to 5%. If that represents the beginning of a trend in the reduction of base rates, claiming parties ought now to be alive to the value of claiming interest correctly at the reference rate when the debt became overdue. Equally, paying parties ought to pay careful attention to the effect of the correct approach in the face of any claimant that does not adopt it.
Case law research for this article was provided by Tessa Donald, trainee solicitor in the construction advisory and dispute resolution team.
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