The Late Payment of Commercial Debts (Amendment) Regulations 2018 came into force on 26 February 2018, and apply to contracts made on or after that date.

What are the Regulations and when do they apply?

They amend the Late Payment of Commercial Debts Regulations 2002, which in turn amend the Late Payment of Commercial Debts (Interest) Act 1998 (the ‘Act’). The Act has two purposes – to deter late payment and to compensate creditors for the late payment of debts.

The Act and Regulations apply to contracts for the supply of goods or services where both parties are acting in the course of business (subject to some exceptions). It allows creditors to claim interest, a fixed sum of compensation and, in some circumstances, the reasonable costs of collecting the debt.

The Regulations seek to tackle late payment in commercial transaction deals by imposing a rate of 8% above base rate per annum on overdue payments that relate to goods and services.

What do the 2018 Regulations do?

They substitute the original Regulation 3 for a new provision that allows representative bodies to challenge grossly unfair contractual terms and practices in, or in relation to, contracts to which the Regulations apply.

The Regulations do not provide a definition for ‘grossly unfair’, current cases addressing this point are few and far between. The Government has explained, if it is easier for disputes relating to unfair payment terms and practices reach court, the courts may have more opportunities to determine what terms and practices are ‘grossly unfair’. The intent appears to be to allow for more case law, which will ultimately result in more clarity for businesses.

The Regulations also expand the ability of representative bodies to challenge contract terms on behalf of any sized business with the intention of seeking to address the power imbalance between SMEs and larger companies (who may have more influence when entering into contracts). Representative bodies are organisations established to represent the collective interests of any enterprise, either in general or in a specified sector or location. Any business can approach representative bodies for assistance, those bodies have discretion and flexibility whether to take on a case or not.

What are implications of the Regulations?

The Regulations will make it more likely that any unfair payment terms included in such contracts, will result in a challenge. This is particularly true given the fact they allow any business to approach a representative body where they consider that a contract they have entered into, may contain grossly unfair contractual terms and practices.

Further information

If you have any questions or queries about the Regulations or require advice relating to unpaid commercial debts, please contact Ramjeet Authi or Amy Callahan-Page or call 0121 214 7400.

Contract management pitfalls – payment
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In the second part of our series on contract management pitfalls, we look at the risks and opportunities presented by payment mechanisms in construction contracts.