Late payment of sums due under a construction contract is a breach of contract. The damages that flow from that breach should ordinarily be loss of interest and any costs of pursuing the late payment.
Contracts often contain terms that deal with late payment damages labelling them more politely as remedies and the law requires any such express provision to be clear in respect of interest and/or costs. If interest only is recoverable or both interest and costs are recoverable the contract terms must be clear.
For example, in the JCT suite of contracts typically simple interest at 5% over the Bank of England base rate is recoverable, costs are not. The payment of the interest alone is deemed to be a substantial remedy. It has been argued that 2%-3% is a substantial remedy.
Any legal or debt recovery costs, which can be a further cost of 10-15% of the debt, are often incurred in pursuit of overdue sums. In such an instance clearly the remedy of interest only is inadequate. The inclusion of an amended or new clause can be incorporated or one that incorporates the Late Payment of Commercial Debts (Interest) Act 1998 and the subsequent updates to the legislation including the Late Payment of Commercial Debts Regulations 2013 which allows simple interest at 8% above the Bank of England base rate plus all reasonable costs incurred in pursuit of the outstanding debt.
The main point and twist in the tale is that if no terms are agreed or included in the contract at all then the Late Payment Act is automatically implied and imported into the contract (Commercial Contracts only). I am sure as a Payee you will agree that 8% over base and your legal costs of pursuit are the best terms, so having no terms agreed on Late Payment is the best possible position. Conversely if you are the payer it would be wise to use an unamended JCT clause or amend the interest percentage to a lesser value than 5% so as to escape liability for legal costs when you pay late.
If there is another remedy other than the Late Payment Act written into the contract you will have to follow that and the Late Payment Act terms will not apply nor will they be implemented at all.
It is recommended that when considering contract terms the checklist should include whether or not the Late Payment Act applies. If nothing is included or the Late Payment Act is expressly included, then the Late Payment Act applies. If something else is included, e.g. interest only the Late Payment will not apply at all.
If you would like to discuss late payment remedies, please use our contact form or call one of our offices.