LATE PAYMENT OF COMMERCIAL DEBTS (INTEREST)
Memorandum by the
Department of Trade and Industry
1. This memorandum gives
an account of the delegated powers proposed to be taken in the
Late Payment of Commercial Debts (Interest) Bill, which was introduced
into the House of Lords on 10 December 1997.
2. The Bill provides for
a right to interest, called "statutory interest", in
the event of late payment of certain commercial debts. Part I
of the Bill makes provision concerning the operation of the statutory
right - its precise nature as an implied term of the contract
(clause 1(1)), the contracts to which the right applies (clauses
2 and 3), the time at which interest starts to run (clause 4),
the rate of statutory interest (clause 5) and the circumstances
in which remission of the right may occur (clause 6).
3. Part II of the Bill
sets out the circumstances in which the parties are free to oust
or vary the provisions of the Bill. They are not at liberty to
provide for no interest in the event of late payment (clause 8(1))
unless there is a substantial remedy for late payment. Whether
or not a remedy is substantial is determined in accordance with
clause 9; if the remedy is insufficient to compensate the supplier
for late payment or for deterring late payment, the test is whether
it is fair or reasonable to allow the remedy to be relied upon
to oust or vary the Bill.
4. Part III contains certain
detailed provisions about the operation of the statutory right.
Clause 15 provides for a power to commence the operation of the
Bill by reference to appointed days. The power is exercisable
by reference to different descriptions of contract.
5. The Bill covers contracts
for the supply of goods or services (clause 2(1)), that is to
say, contracts for the sale or transfer of goods, contracts for
the hire of goods and contracts for the supply of services (clause
2(2)). Such a supply is covered where both the supplier (or creditor)
and purchaser (or debtor) are acting in the course of a business.
Accordingly, the Bill provides a right to interest in situations
of what is commonly called 'trade credit'.
6. Clause 2(3) sets out
contracts which are excepted, and 2(4) provides power to except
further contracts. Similarly, clause 3(2), (3) and (4) provides
that certain debts are to be excepted debts, and clause 3(5) gives
power to except further debts.
7. The term 'business'
is defined in clause 2(6) to include a profession and the activities
of any government department or local and public authority. Thus
the supply of goods and services to a wide range of public sector
bodies will be covered. Where those bodies supply goods and services,
such supplies will also be covered. However, the late payment
of sums due in the performance of statutory and governmental functions
will not attract statutory interest - since such activities do
not involve the provision of a service within the meaning of the
8. The Bill provides for
five powers to make delegated legislation -
(a) clause 2(4) - power
to except contracts by order;
(b) clause 3(5) - power
to except debts by order;
(c) clause 5 - power to
set the rate of statutory interest by order;
(d) clause 15(2) - power
to bring the Bill into force on appointed days; and
(e) clause 15(3) - power
to make regulations to provide for transitional, supplemental
or incidental provision in connection with the operation of the
Bill whilst it is not fully in force.
The Power to except Contracts
9. The powers referred
to in paragraphs 8(a) and (b) to except contracts and debts might
conveniently be discussed together; they are likely to be exercised
together. In most cases the proposed exception is likely to fall
within both powers; however, whether the exception can more properly
be described as the contract, or a particular type of debt due
under the contract, depends upon the legal nature of the exception
and how it arises - only one of the powers would be exercised
on respect of any single transaction. Where a contract involves
obligations to supply goods or services and other obligations,
the exception regarding the contract price referable to the goods
or services might more appropriately be drawn by reference to
a debt than to a contract. The dual power thus makes for more
10. These powers will enable
certain contracts and debts to be excepted for the time being.
It will therefore be possible to disapply the Bill to contracts
and debts to which it already applies, where injustice, hardship
or anomaly is apparent, and to withdraw exceptions where they
are no longer justifiable.
11. The exceptions of broad
principle have been set out on the face of the Bill. It is intended
to exercise the powers to except to provide for both -
(a) detailed exceptions
which are likely to be long term; and
(b) shorter term exceptions
where the reason for exception is likely to be temporary.
12. An example of the detailed
exceptions for which it is intended to provide relates to contracts
for hire. It is broadly intended to except the longer term contracts
under which an asset is hired out for its entire economic life,
since these are often a form of financing which serves the same
purpose as authorised credit, and the Bill is intended to provide
a remedy for late payment taking advantage of unauthorised credit.
However, the distinction between short term hire and longer term
hire is under review for the purposes of the Consumer Credit Act
1974 (consultation is in progress about amendment to that Act),
and it is intended to act consistently with the distinction for
that Act where appropriate.
13. An example of the shorter
term exceptions is mobile telephones. Certain networks impose
'penal' conditions (both contractual and technical) on users who
change networks before minimum subscription periods have expired.
An additional right to interest for the service provider would
further disturb the balance of rights and obligations, and thus
an initial exception is required. The industry concerned is working
towards satisfactory self-regulation and thus the need for the
exception is likely to disappear.
14. It is not considered
necessary to make transitional provision in relation to such exceptions,
since any exception will only apply to contracts made on or after
the date when the exception takes effect. It is intended to exercise
this power in anticipation of the Bill's coming into force, pursuant
to section 13 of the Interpretation Act 1978. The orders will
be subject to annulment by resolution of either House (clause
2(5)(b) and 3(6)(b)).
Power to set the rate
of Statutory Interest
15. The power referred
to in paragraph 8(c) above, to set the rate of statutory interest,
may be exercised either by prescribing a formula or the rate itself.
The rate may (but need not) be set with a view to protecting suppliers
whose financial position makes them particularly vulnerable if
they are paid late, and deterring the late payment of qualifying
debts. The rate will be fixed at the end of the day before the
date on which interest starts to accrue.
16. It is intended to set
the rate by reference to a formula. Under the present arrangements
for carrying out economic and monetary policy, the Bank of England's
Monetary Policy Committee (MPC) sets its base rate (being the
rate at or around which it will undertake certain dealings with
the clearing banks) by announcement. It is intended to set a formula
by reference to this base rate plus a factor which is likely to
be in the region of 7 to 8 per cent, initially.
17. However, the arrangements
for carrying out economic and monetary policy change from time
to time as do other circumstances, which might necessitate the
adoption of another formula or even a fixed rate. The power is
wide enough to ensure that an appropriate rate can always be set.
It may be necessary to exercise the power very quickly in certain
circumstances. Again, there will be an anticipatory exercise of
this power. The order is required to be laid before Parliament
after being made (clause 5(3)).
18. With regard to the
matters to which regard may be had, the rate of base rate plus
7 to 8 per cent is considered to be the level necessary to protect
the smallest and weakest businesses who are most vulnerable in
the event of late payment. This is the rate at which such businesses
can borrow without additional security and represents the cost
of late payment to these most vulnerable businesses.
19. Such a rate will provide
an element of deterrence both generally and where the creditor,
not being amongst the more vulnerable businesses, can borrow at
a lower rate. Moreover, it is expected that a draft EU directive
will be proposed which is likely to set the rate of interest at
a deterrent level. For the reasons given in this and the preceding
paragraph, it is considered necessary to refer expressly to the
protection of vulnerable creditors and deterrence if the power
is to be clearly wide enough to set the rate at a level which
achieves those purposes.
Commencement and Transitional
20. Paragraphs 8(d) and
(e) above refer to the powers to bring the Bill into force by
order on appointed days (clause 15(2), and to make transitional,
supplemental and incidental provision by regulations (clause 15(3)).
It is intended that the Bill should be brought into force in phases,
as follows -
||large businesses and public sector
||all debtors covered
||all creditors covered
||all debtors covered
It is intended to introduce
the second phase approximately 2 years after the first phase,
and the third phase approximately 2 years after the second phase,
although this proposed timetable is subject to prevailing factors
arising such as the extent to which the payment culture changes
during the initial phases and the position of small businesses
generally as regards credit management skill.
21. It will thus be necessary
to define, in the first commencement order, small and large businesses,
and the public sector. It is proposed to draw the line between
small and large businesses by providing that if the business has
50 or fewer persons employed in it on the relevant date, then
it will be considered small. Other businesses will be considered
large, as will the small members of large groups of companies.
Clause 15(2) gives power to appoint different days for different
descriptions of contract, which may be specified by reference
to any feature of the contract (including the parties).
22. In the normal course
of events, if the creditor had to bring proceedings to enforce
the right to interest, he would have to prove all the material
facts, including facts relating to his own size and the debtor's
size. It is proposed to achieve the result that a party will be
required to prove facts relating to his own size. The power to
make regulations to make provision for transitional, supplemental
and incidental provision, considered necessary or expedient in
connection with the operation of the bill whilst it is not fully
in force, is intended to cover inter alia this matter and any
other matters of proof, procedure or evidence which may need to
be addressed whilst the distinction between small and large businesses
remains relevant during phasing in.
16 December 1997