Locums: can you charge late payment interest? And if so, when?

We are always blogging about the benefits of being a locum, and we thought it would be wise for us to probably talk some more about the pitfalls. We have been hearing from many of you complaining about late payment from your customers (whether practices or agencies) and so thought it a good idea to give you a refresher on rights when it comes to charging interest on late payment.

Lantum aims to always pay you on time, and if there is ever a delay in payment, rest assured our in-house credit controllers will chase outstanding payments on your behalf, so you don’t have to! If you find that a payment from a practice is delayed, here are some further steps you can take to recoup your hard earned money.

When can I charge Late Payment Interest?

There is legislation in the UK which implies late payment terms into business contracts. Where monies are owed in terms of a commercial contract, it is implied by statute into that contract that interest will run on the unpaid sums.

So, even if you have no terms and conditions relating to this issue, the Late Payment of Commercial Debs (Interest) Act 1998 implies a term into your contract for you.

Only for ‘business’ contracts

The Act applies where a supplier and a purchaser are both acting in the course of business.  It is designed to apply in commercial situations, so it won’t apply to contracts of sale or service to consumers.

What Interest can I charge?

The rate applied by the Act can vary by statutory regulation. Currently, the rates are 8% above base in both Scotland and England and Wales, This means that the current late payment rate is 8.5%. If the base rate goes up or down, so too will the late payment rate.

As well as the implied term as to interest, the Act also provides that once statutory interest has started to run on a debt, then the supplier is also entitled to charge the following one-off penalties:

• Where the debt is < £1,000: £40;
• Where a debt is between £1,000 and £10,000: £70; and
• Where a debt is > £10,000: £1,000.

OK… so when does interest kick in?

There are a couple of alternative “start dates” for interest to run, depending on the scenario.

Generally, interest will start to run the day after the agreed date for payment of the debt. So, if your contract provides for immediate payment, interest starts to run the day following the rendering of your invoice. If your payment terms are 30 days, interest starts to run on day 31.

Where no date for payment has been agreed, then interest runs from the later of 30 days after performance of the obligation (i.e. the supply of the goods or service) or 30 days after the purchaser receives notice of the debt.

I already have late payment penalties in my contract!

While the Act implies a term as to late payment interest, many of you will prefer to make the consequences of late payment loud and clear in your terms and conditions.

You are free to do so, but the Act does impose a condition. The Act provides that a contract term which does not provide a “substantial remedy” is void. If that is the case, then the statutory rates will apply, notwithstanding what the contract says. So, in order to override the interest provisions implied by the Act, any contractual terms dealing with late payment must provide a “substantial remedy”.

What is a substantial remedy? The Act gives some guidance. If a remedy is not sufficient to compensate the supplier for late payment, it won’t cut the mustard. Likewise, the Act provides that a remedy is not substantial if it would not be fair and reasonable to allow to override the statutory implied terms. What is fair and reasonable will depend on the circumstances around the contract, including the respective bargaining strengths of the parties.

In a fairly recent case (Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720 (TCC)), a construction contract applied late payment interest of 0.5% over base, when the industry standard contract provided 5% over base. The unpaid party went to Court to determine whether or not the 0.5% provision provided a “substantial remedy”.

The Court here found that a rate of 0.5% did not provide a substantial remedy. That finding should not be looked at in isolation though, as the Court was at pains to point out that a contractual rate lower than the statutory rate was not in of itself enough to lead to a finding that the remedy was lacking. In that case, the Court looked at the industry standard, and found that in the context of that industry, the contractually agreed rate was too low.

So there are no hard and fast rules. Context is everything in determining what a Court will prefer: the contractually agreed rate or the implied statutory term.

A word of warning…

There is provision in the Act that any statutory interest may be cancelled or reduced where there has been poor conduct on the part of the supplier. This is intended to deal with circumstances where non-payment arises as a result of incorrect invoices or late responses to queries. So make sure you perform your work diligently and send correct invoices on time

When all else fails

The ability to charge interest is all well and good, but what if your customer STILL won’t pay?  At that stage, you may have to move into debt recovery mode.

Where the debt is not disputed, you might want to consider serving a statutory demand and considering the insolvency tools that might be available to you. Where it is disputed, Court action might be your only option: that, however is another topic, for another day.

Need more help?

See our Guide to chasing payments, or download our Guide to Credit Control.

Freelance adviser is a blog providing all sorts of useful advice to freelancers in the UK. Go to http://www.freelanceadvisor.co.uk/ for more information.