From time to time, there is a public outcry when our friends in Brussels pass laws which we as a member state are forced to follow, requiring us to change our existing domestic legislation. I am not interested in debating the rights or wrongs of this principle. That is a matter for our bright people in Westminster and Brussels - human beings far more intelligent than I. I would, however like to look at one piece of EU-sponsored change to UK legislation which is threatening to send shock waves through our business community as people become aware of its ramifications. What I am referring to is the recovery of statutory interest and fixed sums by way of “compensation” where businesses (including public authorities) fail to pay their debts on time.
I am not going to attempt to cure the condition of insomnia by giving you a line-by-line analysis of the new legislation but I do want to start with a principle of law which states that, unless a statute (act of parliament) says that you may opt out of its provisions, it is not possible for you to exclude the impact of a statute from any contract you are minded to enter. This Act is not one of the type where you can opt out of its provisions. You have to comply with the legislation and that is that.
Here is some more basic law. Prior to 16 March 2013, if a commercial contract failed to provide an adequate remedy in the case of late payment, a creditor was entitled to charge interest at a rate of 8% per annum above the base rate of the Bank of England.
In addition to charging interest, a fixed sum was also chargeable by a creditor as compensation as follows:
For debts up £1,000 - fixed compensation of £40
For debts of more than £1,000 but less than £10,000 - fixed compensation of £70
For debts in excess of £10,000 - fixed compensation of £100
It is in the area of compensation that we have now had a sea change. Under the new legislation for contracts entered into after 16 March 2013, the fixed sums of compensation are still payable but crucially the following new provision appears in the new legislation:
“If the reasonable costs of the supplier in recovering the debt are not met by the fixed sum, the supplier shall also be entitled to a sum equivalent to the difference between the fixed sum and those costs”
It does not take a rocket scientist to work out that the original fixed sums were woefully inadequate to cover the legal costs, court fees and so on that would be incurred by a creditor in pursuing a reluctant payer. So we now have statutory confirmation that the costs incurred in pursuing and collecting an unpaid debt, even if the debt is disputed, are payable by the debtor.
So how is that going to affect business? Well the impact on different businesses in different sectors is going to vary but take construction as an example. Until now, it was settled law that a party to a construction contract, who had to adjudicate in order to obtain a decision that payment of a disputed debt was due and payable, would have to meet its own costs in the adjudication unless both parties conferred power on the adjudicator to deal with the recovery of inter-party costs.
A referring party to an adjudication could have claimed statutory interest and the fixed compensation limits set out above and, if the adjudicator was so minded, decide that interest and one of the fixed sums was payable by the responding party. That was the limit of the adjudicator’s powers.
This has now all changed. Referring parties claiming an entitlement to statutory interest under The Late Payment of Commercial Debt Regulations 2013 or The Late Payment of Commercial Debts (Scotland) Regulations 2013 are now routinely requesting adjudicators to decide that responding parties should pay the referring party’s costs in the adjudication.
But does this mean that a responding party defending action in an adjudication can also recover its costs from the referring party if it is successful in its defence? Well, unless there has been agreement to this effect under the contract, the answer under the statute is still ‘no’. But I promise you that this conundrum has adjudicators scratching their heads up and down the country because, at first glance, it appears to be one-sided and unfair.
I am sure that when the drafters of the above legislation set out to comply with the European Directive they did so without seeing the consequences we are now having to live with. The cat has now been set amongst the pigeons and we will have to wait and see how the courts of England and Wales and Scotland will deal with the consequences in due course.