Select Committee on Delegated Powers and Deregulation Tenth Report



Memorandum by the Department of Trade and Industry


  1. This memorandum gives an account of the delegated powers proposed to be taken in the Late Payment of Commercial Debts (Interest) Bill, which was introduced into the House of Lords on 10 December 1997.


  2. The Bill provides for a right to interest, called "statutory interest", in the event of late payment of certain commercial debts. Part I of the Bill makes provision concerning the operation of the statutory right - its precise nature as an implied term of the contract (clause 1(1)), the contracts to which the right applies (clauses 2 and 3), the time at which interest starts to run (clause 4), the rate of statutory interest (clause 5) and the circumstances in which remission of the right may occur (clause 6).

  3. Part II of the Bill sets out the circumstances in which the parties are free to oust or vary the provisions of the Bill. They are not at liberty to provide for no interest in the event of late payment (clause 8(1)) unless there is a substantial remedy for late payment. Whether or not a remedy is substantial is determined in accordance with clause 9; if the remedy is insufficient to compensate the supplier for late payment or for deterring late payment, the test is whether it is fair or reasonable to allow the remedy to be relied upon to oust or vary the Bill.

  4. Part III contains certain detailed provisions about the operation of the statutory right. Clause 15 provides for a power to commence the operation of the Bill by reference to appointed days. The power is exercisable by reference to different descriptions of contract.


  5. The Bill covers contracts for the supply of goods or services (clause 2(1)), that is to say, contracts for the sale or transfer of goods, contracts for the hire of goods and contracts for the supply of services (clause 2(2)). Such a supply is covered where both the supplier (or creditor) and purchaser (or debtor) are acting in the course of a business. Accordingly, the Bill provides a right to interest in situations of what is commonly called 'trade credit'.

  6. Clause 2(3) sets out contracts which are excepted, and 2(4) provides power to except further contracts. Similarly, clause 3(2), (3) and (4) provides that certain debts are to be excepted debts, and clause 3(5) gives power to except further debts.

  7. The term 'business' is defined in clause 2(6) to include a profession and the activities of any government department or local and public authority. Thus the supply of goods and services to a wide range of public sector bodies will be covered. Where those bodies supply goods and services, such supplies will also be covered. However, the late payment of sums due in the performance of statutory and governmental functions will not attract statutory interest - since such activities do not involve the provision of a service within the meaning of the Bill.

  Delegated Powers

  8. The Bill provides for five powers to make delegated legislation -

  (a) clause 2(4) - power to except contracts by order;

  (b) clause 3(5) - power to except debts by order;

  (c) clause 5 - power to set the rate of statutory interest by order;

  (d) clause 15(2) - power to bring the Bill into force on appointed days; and

  (e) clause 15(3) - power to make regulations to provide for transitional, supplemental or incidental provision in connection with the operation of the Bill whilst it is not fully in force.

  The Power to except Contracts and Debts

  9. The powers referred to in paragraphs 8(a) and (b) to except contracts and debts might conveniently be discussed together; they are likely to be exercised together. In most cases the proposed exception is likely to fall within both powers; however, whether the exception can more properly be described as the contract, or a particular type of debt due under the contract, depends upon the legal nature of the exception and how it arises - only one of the powers would be exercised on respect of any single transaction. Where a contract involves obligations to supply goods or services and other obligations, the exception regarding the contract price referable to the goods or services might more appropriately be drawn by reference to a debt than to a contract. The dual power thus makes for more flexibility.

  10. These powers will enable certain contracts and debts to be excepted for the time being. It will therefore be possible to disapply the Bill to contracts and debts to which it already applies, where injustice, hardship or anomaly is apparent, and to withdraw exceptions where they are no longer justifiable.

  11. The exceptions of broad principle have been set out on the face of the Bill. It is intended to exercise the powers to except to provide for both -

  (a) detailed exceptions which are likely to be long term; and

  (b) shorter term exceptions where the reason for exception is likely to be temporary.

  12. An example of the detailed exceptions for which it is intended to provide relates to contracts for hire. It is broadly intended to except the longer term contracts under which an asset is hired out for its entire economic life, since these are often a form of financing which serves the same purpose as authorised credit, and the Bill is intended to provide a remedy for late payment taking advantage of unauthorised credit. However, the distinction between short term hire and longer term hire is under review for the purposes of the Consumer Credit Act 1974 (consultation is in progress about amendment to that Act), and it is intended to act consistently with the distinction for that Act where appropriate.

  13. An example of the shorter term exceptions is mobile telephones. Certain networks impose 'penal' conditions (both contractual and technical) on users who change networks before minimum subscription periods have expired. An additional right to interest for the service provider would further disturb the balance of rights and obligations, and thus an initial exception is required. The industry concerned is working towards satisfactory self-regulation and thus the need for the exception is likely to disappear.

  14. It is not considered necessary to make transitional provision in relation to such exceptions, since any exception will only apply to contracts made on or after the date when the exception takes effect. It is intended to exercise this power in anticipation of the Bill's coming into force, pursuant to section 13 of the Interpretation Act 1978. The orders will be subject to annulment by resolution of either House (clause 2(5)(b) and 3(6)(b)).

  Power to set the rate of Statutory Interest

  15. The power referred to in paragraph 8(c) above, to set the rate of statutory interest, may be exercised either by prescribing a formula or the rate itself. The rate may (but need not) be set with a view to protecting suppliers whose financial position makes them particularly vulnerable if they are paid late, and deterring the late payment of qualifying debts. The rate will be fixed at the end of the day before the date on which interest starts to accrue.

  16. It is intended to set the rate by reference to a formula. Under the present arrangements for carrying out economic and monetary policy, the Bank of England's Monetary Policy Committee (MPC) sets its base rate (being the rate at or around which it will undertake certain dealings with the clearing banks) by announcement. It is intended to set a formula by reference to this base rate plus a factor which is likely to be in the region of 7 to 8 per cent, initially.

  17. However, the arrangements for carrying out economic and monetary policy change from time to time as do other circumstances, which might necessitate the adoption of another formula or even a fixed rate. The power is wide enough to ensure that an appropriate rate can always be set. It may be necessary to exercise the power very quickly in certain circumstances. Again, there will be an anticipatory exercise of this power. The order is required to be laid before Parliament after being made (clause 5(3)).

  18. With regard to the matters to which regard may be had, the rate of base rate plus 7 to 8 per cent is considered to be the level necessary to protect the smallest and weakest businesses who are most vulnerable in the event of late payment. This is the rate at which such businesses can borrow without additional security and represents the cost of late payment to these most vulnerable businesses.

  19. Such a rate will provide an element of deterrence both generally and where the creditor, not being amongst the more vulnerable businesses, can borrow at a lower rate. Moreover, it is expected that a draft EU directive will be proposed which is likely to set the rate of interest at a deterrent level. For the reasons given in this and the preceding paragraph, it is considered necessary to refer expressly to the protection of vulnerable creditors and deterrence if the power is to be clearly wide enough to set the rate at a level which achieves those purposes.

  Commencement and Transitional Powers

  20. Paragraphs 8(d) and (e) above refer to the powers to bring the Bill into force by order on appointed days (clause 15(2), and to make transitional, supplemental and incidental provision by regulations (clause 15(3)). It is intended that the Bill should be brought into force in phases, as follows -
Phase creditors debtors
(1) small businesses large businesses and public sector
(2) small businesses all debtors covered
(3) all creditors covered all debtors covered

  It is intended to introduce the second phase approximately 2 years after the first phase, and the third phase approximately 2 years after the second phase, although this proposed timetable is subject to prevailing factors arising such as the extent to which the payment culture changes during the initial phases and the position of small businesses generally as regards credit management skill.

  21. It will thus be necessary to define, in the first commencement order, small and large businesses, and the public sector. It is proposed to draw the line between small and large businesses by providing that if the business has 50 or fewer persons employed in it on the relevant date, then it will be considered small. Other businesses will be considered large, as will the small members of large groups of companies. Clause 15(2) gives power to appoint different days for different descriptions of contract, which may be specified by reference to any feature of the contract (including the parties).

  22. In the normal course of events, if the creditor had to bring proceedings to enforce the right to interest, he would have to prove all the material facts, including facts relating to his own size and the debtor's size. It is proposed to achieve the result that a party will be required to prove facts relating to his own size. The power to make regulations to make provision for transitional, supplemental and incidental provision, considered necessary or expedient in connection with the operation of the bill whilst it is not fully in force, is intended to cover inter alia this matter and any other matters of proof, procedure or evidence which may need to be addressed whilst the distinction between small and large businesses remains relevant during phasing in.

  16 December 1997

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