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Arrangement of Clauses (Contents)

Late Payment of Commercial Debts (Interest) Bill [H.L.]
 
 EXPLANATORY MEMORANDUM
 
  The Bill gives effect to the Government's proposal to introduce a statutory right for businesses to interest on the late payment of commercial debts. It extends to England and Wales, Scotland and Northern Ireland.
 
  At present there is no right in England and Wales to interest on contract debts unless there is a suitable contract term. The courts may award interest under section 35A of the Supreme Court Act 1981 (there are similar powers for county courts and arbitrators) if the debt is not paid before a writ is issued.
 
  Part I provides for a statutory right to interest that will not depend on the existence of a contract term or the issue of a writ. Part II restricts the freedom of parties to make contractual provision having the effect of ousting or varying the right to statutory interest.
 
 PART I
 
 STATUTORY INTEREST
 
  Clause 1 inserts an implied term in contracts to which the Bill applies to the effect that qualifying debts will carry simple interest. This is referred to in the Bill as statutory interest. Although this interest is provided for by statute it is to be treated for the general purposes of the law in the same way as interest provided for by contract. Part I of the Bill is subject to Part II which deals with the parties' limited freedom to make their own arrangements about the consequences of late payment.
 
  Clause 2 identifies the commercial contracts to which the Bill applies: these are contracts for the sale or transfer of goods, contracts for the hire of goods and contracts for services. Certain contracts are excepted from the Bill under subsection (3) and subsection (4) contains a power for the Secretary of State to make further exceptions.
 
  The term "business" includes the activities of a government department or other public authority. They will only be affected by the Bill in relation to debts arising under commercial contracts.
 
  Clause 3 provides that statutory interest applies to debts created by virtue of an obligation to pay the whole or any part of the contract price under contracts to which the Bill applies. These are referred to in the Bill as qualifying debts. Subsections (2) and (3) prevent certain debts from carrying statutory interest and subsection (4) contains a power for the Secretary of State to make further exceptions.
 
  Clause 4 deals with the period for which statutory interest runs. The start date will normally be the day after any date the parties agree as the date for payment of the debt or, if no such date is agreed, the 30th day after the day on which the supplier performs the obligation which earns the sum due. In the case of a sum required to be paid in advance of the performance of the supplier's obligation, interest will not start to run until it is performed. If the purchaser does not have notice of the amount of the debt when the supplier's obligation is performed, the 30 day period starts when the supplier has notice of that amount.
 
  Clause 5 provides for statutory interest to be remitted, in whole or in part, in cases where the conduct of the supplier makes it unjust for the purchaser to pay the full amount of statutory interest.
 
  Clause 6 requires the Secretary of State to set the rate of statutory interest by order. An order will either prescribe a formula or specify a figure. Subsection (2) ensures that the Secretary of State considers the extent to which it is desirable to set the rate so as to compensate more financially vulnerable businesses who are paid late or so as to deter late payment generally.
 
 PART II
 
 CONTRACT TERMS RELATING TO LATE PAYMENT OF QUALIFYING DEBTS
 
  Clause 7 explains that Part II provides for the extent to which the parties to a contract can exclude or vary the right to statutory interest in relation to a qualifying debt. Part II only applies until the debt is created. After that time the parties' freedom of contract is unrestricted.
 
  Clause 8 contains detailed rules about the extent to which parties may make their own provision about the consequences of late payment.
 
  Parties may not exclude all remedies for late payment and terms to that effect will be void (so that the right to statutory interest will apply). Statutory interest is, however, excluded by a contract where the parties have agreed a substantial contractual remedy for the late payment of a qualifying debt.
 
  Parties may vary the right to statutory interest (where it is not excluded under subsection (2)), provided the overall remedy for late payment remains a substantial remedy. Subsection (4) renders void contract terms which purport to confer a contractual right to interest, or to vary the right to statutory interest, where the overall remedy for late payment is not a substantial remedy.
 
  Clause 9 sets out the test for deciding whether a remedy is substantial. All the circumstances of the case are to be taken into account when assessing that matter, including the matters listed in subsection (3).
 
  Clause 10 defines certain terms used in Part II.
 
 PART III
 
 GENERAL AND SUPPLEMENTARY
 
  Clause 11 deals with payments of all or part of the contract price which are due before the supplier has fully performed his obligations under the contract. It ensures that statutory interest does not run immediately in relation to a sum due before the relevant obligation of the supplier has been performed. In the case of an instalment due after part performance of the overall obligation of the supplier, the Bill will operate normally when the debt falls due. Otherwise, subsections (3) to (5) treat advance payments as not being due until the relevant obligation of the supplier is performed.
 
  Clause 12 deals with the application of the Bill to contracts with a foreign element. Where the law governing a contract is the law of England and Wales, Scotland or Northern Ireland only by the choice of the parties, the Bill will apply unless there is no significant connection between the contract and that part of the United Kingdom. Conversely, the Bill will apply to contracts governed by a foreign law if the contract is exclusively connected with any of the parts of the United Kingdom.
 
  Clause 13 provides for the continued operation of the Bill where there is a change in the identity of the parties to a contract or where the identity of the creditor or debtor changes.
 
  Clause 14 ensures that contract terms which seek to delay the creation of a qualifying debt are subject to the controls in sections 3(2)(b) and 17(1)(b) of the Unfair Contract Terms Act 1977, whether or not they are included in standard terms of business.
 
  Clause 15 makes provision as to the making of subordinate legislation under the Bill and provides for the negative resolution procedure to apply (except for commencement orders).
 
  Clause 16 defines certain terms used in the Bill.
 
  Clause 17 includes a commencement power to enable the Bill to be brought into force in stages in relation to different contracts, such as contracts entered into by particular kinds of businesses.
 
 Effects of the Bill on Public Sector Manpower
 
  It is not expected that the Bill will have any significant effect on public service manpower. Public sector bodies are currently expected to pay bills within 30 days and so should already have the necessary payment and monitoring systems in place.
 
 Business compliance cost assessment
 
  The Bill will only significantly affect businesses that either pay their debts late or attempt to exclude a substantial remedy for late payment. Since the Bill is designed to improve the position of creditors in relation to late payment, it less likely that debtors will benefit from the time value of money which is not paid on time. If creditors are paid promptly they will avoid the possibility of additional charges if they have to borrow money to meet their own obligations.
 
  A full Regulatory Appraisal (URN 97/980) for this Bill is available to the public from DTI Small and Medium Enterprises Policy (SMEP5). Copies may be ordered by telephone (0171 215 0259) or fax (0171 215 3875).
 
 
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Prepared 27 February 1998