Memorandum by the
Department of Trade and Industry
1. The Committee has requested
the Department to submit a memorandum on the following point:
Was the consent
of the Treasury obtained to the making of this Order, as required
by section 6(1) of the Late Payment of Commercial Debts (Interest)
Act 1998? If so, please explain why this is not mentioned in the
preamble (see paragraph 2.26 of the Statutory Instrument Practice)
and why the instrument does not indicate that it was signed by
two of the Lords Commissioners who consented to the making of
2. The Department acknowledges
that the Order required the consent of the Treasury, and that
that consent should have been recited in the preamble and signified
by two of the Lords Commissioners. However, due to an oversight,
no consent was in fact obtained.
3. In the circumstances it
would appear that the Order was invalid, and that no rate of interest
was effectively prescribed under section 6 of the Late Payment
of Commercial Debts (Interest) Act 1998 ("the Act").
4. On receipt of the Committee's
request the Department realised the consequences of the error
and immediately set in motion the making of a new Order to correct
the error. That new Order was made, with the consent of the Treasury,
on 12th November 1998, and laid before Parliament in typescript
the same day. It came into force on 13th November 1998.
5. The new Order is the Late
Payment of Commercial Debts (Rate of Interest) (No. 2) Order 1998
(S.I. 1998/2765). This Order revokes the defective Order
(article 2) and prescribes the rate of interest (article 4). Copies
of that Order, and the memorandum laid therewith, are annexed
to this memorandum.
6. The Department considered
that the possibility of prejudice to creditors necessitated the
immediate replacement of the defective Order. It was thus considered
inappropriate to apply the 21 day rule. The new Order came into
force at the beginning of the day following laying before Parliament,
rather than on the same day, since interest is calculated as a
7. The Department considers
that it is unlikely that many creditors would be affected in practice.
The Act applies (by virtue of the Late Payment of Commercial Debts
(Interest) Act 1998 Commencement (No. 1) Order 1998 (S.I. 1998/2479))
to contracts made on or after 1st November 1998 by small
business suppliers with large business or public sector purchasers.
Interest would be lost only in circumstances where the relevant
day falls on or before 12th November 1998.
8. Pursuant to section 4(2)
of the Act, the rate of interest applicable is that obtaining
at the end of the relevant day; interest runs from following day.
For the relevant day to have fallen on or before 12th November
1998, all of the following conditions would have to be satisfied
(a) the goods or services
would have to be delivered on or before that date;
(b) the debt would have
to fall due on or before that date;
(c) the contract would
have had to provide for the debt to be created on a day falling
on or before that date;
(d) no contractual period
of grace applied to allow payment to be made by a date falling
on or after 13th November 1998 (if a period of grace was allowed,
it would operate as a variation of the right to statutory interest
which has the effect of deferring the relevant date).
In addition, the payment would
have to be late, for any interest to be involved.
9. The Committee will be
aware that, where the contract does not specify the time for payment,
the law provides that payment is due on delivery (section 28 of
the Sale of Goods Act 1979 declares this rule for contracts for
the sale of goods). In such a case, section 4(5) of the Act provides
for a statutory 'period of grace' of 30 days. The relevant day
falls at the end of the 30 days, and interest starts to accrue
on the thirty first day. Since only 12 days elapsed between the
Act coming into force and the error being corrected, no such contracts
could be affected.
10. Further, contracts which
satisfy the conditions set out in paragraph 8 above, but which
provides a contractual remedy for late payment, will not be affected.
No contracts made between 1st and 12th November 1998 which specify
a date for payment falling after 12th, or where delivery takes
place after 12th, will be affected. Contracts made on or after
13th November 1998 will not be affected.
11. For the above reasons,
the Department considers that very few creditors are likely to
have been affected by the error, but nonetheless corrected the
error as soon as possible to minimise any prejudice.
16th November 1998