Debt recovery
So far we have considered the basis on whichdamages
can be recovered for a breach of contract. It is worth
noting at this point that where one party performs his
part of the contract, e.g. by delivering goods, and the
other party refuses to pay, the claim is for payment of
the debtrather than an action for damages.
Late payment of bills has been a persistent prob-
lem for UK businesses, often causing serious cash flow
difficulties, particularly for small businesses. It is, of
course, possible to include a clause in a supply contract
providing for the payment of interest if payment is not
made by the due date. Alternatively, debts can be pursued
through the courts and the courts can award interest.
Neither course of action is appropriate for small busi-
nesses. The relatively weak bargaining position of small
businesses means that they are, in practice, unable to
insist on default clauses, while pursuing a debt through
the courts can be a costly and lengthy process, which a
small business can ill afford.
The Late Payment of Commercial Debts (Interest)
Act 1998 introduced a statutory right for businesses to
claim interest on the late payment of commercial debts.
The right was introduced in three stages:
■stage 1 (from 1 November 1998) – small businesses
have a statutory right to claim interest from large
businesses and the public sector;
■stage 2(from 1 November 2000) – the statutory right
is extended to allow small businesses to claim interest
from other small businesses;
■stage 3(from 1 November 2002) – all businesses and
the public sector can claim interest from all busi-
nesses and the public sector.
‘Small’ businesses are defined as businesses having no
more than 50 employees or their part-time equivalent. A
‘large’ business is a business with more than 50 full-time
employees or their part-time equivalent.
Businesses are encouraged to agree their own con-
tractual terms providing for contractual interest to be
payable if bills are paid late. However, the Act prevents
abuse of contractual interest, by requiring any con-
tractual remedy to be ‘substantial’. A remedy for late
payment will be ‘substantial’ if it is enough to com-
pensate the supplier for the cost of late payment and it
deters late payment and it is fair and reasonable, in all
the circumstances, to allow the contractual remedy to
replace the statutory right. In deciding whether a con-
tractual remedy is reasonable, the courts will consider all
the circumstances, including the rate of interest apply-
ing to late payments and the length of credit periods. If
the credit period is found to be excessive, the court can
strike it down and replace it with the 30-day statutory
default period.
If the parties do not agree to contractual interest for
late payment, the Act will apply. Payment will be classed
as late if it is made after the expiry of:
■the credit period agreed by the parties;
■the credit period determined by trade custom or
practice or a course of dealings between the parties;
■the statutory default credit period of 30 days from
delivery of the invoice or the goods or the service.
The rate of statutory interest is set by the Secretary
of State and is currently the UK base rate (as announced
by the Monetary Policy Committee of the Bank of
England) plus 8 per cent.
A Directive on Late Payment of Commercial Debts
(Directive 2000/35/EC), implemented by member states
by 8 August 2002, ensures a common approach to the
problem of late payment across the EU.
In a recent case the House of Lords held that at
common law the loss suffered as a result of late payment
is recoverable, subject to the usual rules relating to proof
of loss, remoteness and the duty to mitigate (Sempra
Metals LtdvInland Revenue Commissioners(2007)).
Both simple and compound interest can be awarded.Equitable remedies
The normal remedy for a breach of contract is an award
of damages at common law. There are some situations,
however, where damages would be neither adequate
nor appropriate. Equity developed other forms of relief
to ensure that justice is done. The more important of
these equitable remedies are specific performance and
injunction.Part 3Business transactions
258
limitation to the principle was suggested by Lord Reid
when he said that the rule would not apply if the injured
party has no legitimate interest in performing the con-
tract rather than claiming damages. This approach has
been accepted in subsequent cases (Clea Shipping
CorpnvBulk Oil International Ltd (The Alaskan Trader)
(No 2)(1984)).