Interest On Late Payments Under Construction Contracts

The Late Payment of Commercial Debts (Interest) Act

1998 ("Late Payments Act") allows high interest

rates to be levied on late payments under construction contracts in

certain circumstances. A recent decision of the Court of Appeal has

clarified the operation of the Act and will be of interest to

contractors faced with worsening payment practices in the current

economic climate.

There are four ways in which interest may be recovered for

delayed payments under construction contracts:

Under a specific contractual provision allowing interest

Under a specific contractual provision allowing interest

Under the Late Payments Act, which presently allows 8% above

the Bank of England base rate

By proving one's actual financing costs (or loss of

investment return) as damages for breach of contract

Under the general powers of courts and arbitral tribunals to

award interest on top of their judgments/awards (and also by

adjudicators where the applicable adjudication rules so

provide)

Of these four, the substantial rate of interest allowed by the

Late Payments Act often provides the best recovery (although only

as simple interest – the other ways mentioned above

sometimes allow compound interest). Whilst the Act is generally

applicable to most payments under construction contracts, the

parties are free to agree otherwise. The Act requires however that

any such agreement still provide a "substantial

remedy" for late payment. If it does not, because it

provides too low a rate for example, then the higher rate under the

Late Payments Act will continue to apply. Although most standard

forms substitute a lower rate of interest, some still leave room

for the higher statutory rate to apply in certain circumstances and

it remains to be seen whether the lower rates found in all standard

forms will amount to a "substantial remedy" (one

TCC judge recently suggested they may not).

Unless the amount claimed to be due is precisely specified in

the contract, the contractor is required under the Act to give

notice of the sum "which it claims is the amount of the

debt". The Court of Appeal's decision has clarified

the meaning of this phrase and particularly how it applies to

claims which are initially overvalued. The case concerned invoices

issued by a contractor at an early date which were subsequently

agreed at a lesser amount in a Final Account document. The employer

argued that interest should be calculated based on the date of the

Final Account document whereas the...