On what legal basis may interest be recovered where a contractual payment is made late?
Late payment strains cashflow, and interest is the compensation. The law now allows it by three routes, having moved from a starting position that refused interest for late payment of a debt.
Yes, by three routes: as damages for breach where the actual loss (including compound interest) is proved, as in Sempra Metals, under the Late Payment of Commercial Debts (Interest) Act 1998 at a penal 8 per cent above base rate unless the contract already provides a substantial remedy, or under the contract interest clause, the JCT forms providing 5 per cent above base rate
Yes, by three routes. First, as damages for breach: the old rule against interest, in Chatham and Dover Railway Co v South Eastern Railway Co, gave way to recovery of interest as special damages in Wadsworth v Lydall, approved in President of India v La Pintada, and in Sempra Metals Ltd v Inland Revenue Commissioners the House of Lords allowed interest, including compound interest, to reflect the loss of use of money, whether as damages measured by the actual loss or in restitution measured by the defendant's benefit, provided a claimant proves its actual interest losses. Second, under the Late Payment of Commercial Debts (Interest) Act 1998, simple interest at a penal 8 per cent above the Bank of England base rate is implied into business contracts, running from the contractual due date or thirty days after performance, unless the contract already provides a substantial remedy. Third, under the contract's own interest clause, the JCT forms providing 5 per cent above base rate. The 1998 Act applies across the United Kingdom, including Scotland, and interest on damages in Scotland falls under the Interest on Damages (Scotland) Act 1958, at the rate the court sets.
| As damages | Interest as special damages; compound interest on proof of actual loss (Sempra Metals) |
| 1998 Act | Simple interest at a penal 8 per cent above base rate, implied into business contracts |
| When it runs | From the contractual due date, or thirty days after performance |
| Contract clause | No 1998 Act where a substantial remedy exists; JCT gives 5 per cent above base |
| Scotland | 1998 Act applies UK-wide; damages interest under the 1958 Act |
The problem
Late payment is a constant problem in construction, straining cashflow and sometimes the ability to trade. Whether a contractor or subcontractor can recover interest to compensate for it has three answers, and the law has moved a long way from its starting point of refusing interest altogether.
Interest as damages
The old rule was against interest. In Chatham and Dover Railway Co v South Eastern Railway Co the House of Lords held that the common law did not allow interest as general damages for delay in paying a debt due under contract. The law then softened. In Wadsworth v Lydall the Court of Appeal recognised that interest could be recovered as special damages where a claimant proved a particular loss, there the cost of a mortgage taken out because an agreed sum was not paid, and the House of Lords later approved that approach in President of India v La Pintada.
Loss of use and compound interest
The House of Lords brought the law into line with commercial reality. Interest, including compound interest, could be recovered to reflect the loss of the use of money that was paid late or overpaid. The claim could be framed as damages, measured by the claimant's actual loss, the cost of borrowing or the interest it would otherwise have earned, or in restitution, measured by the benefit the defendant gained by having the money. A claimant seeking compound interest as damages must claim and prove its actual interest losses.
The statutory route
There is also a statutory route. The Late Payment of Commercial Debts (Interest) Act 1998 implies a term into contracts for the supply of goods or services between businesses, allowing simple interest at a deliberately penal rate of 8 per cent above the Bank of England base rate, to encourage prompt payment. Interest runs from the date for payment stated in the contract, or, if none is stated, thirty days after performance of the obligation to which the debt relates. The Act does not apply where the contract already provides a substantial remedy for late payment, and most standard forms now include an interest clause; the JCT forms provide 5 per cent above the Bank of England rate. Across the United Kingdom, including Scotland, the 1998 Act applies in the same way. In Scotland, interest on damages is governed by the Interest on Damages (Scotland) Act 1958, with the rate a matter for the court; a single statutory interest entitlement has been recommended for Scotland but not enacted.
Practical steps
Check the contract first; most standard forms now carry an interest clause, the JCT forms at 5 per cent above base rate.
Where there is no substantial contractual remedy, claim statutory interest under the 1998 Act at 8 per cent above base rate.
To claim interest as damages, and compound interest in particular, plead and prove your actual interest loss, as Sempra Metals requires.
Run statutory interest from the contractual due date, or thirty days after performance where no date is fixed.
In Scotland, the 1998 Act applies in the same way; interest on damages falls under the Interest on Damages (Scotland) Act 1958, at the rate the court sets.
Authorities
| Authority | Citation | What it decides |
|---|---|---|
| Chatham and Dover Railway Co v South Eastern Railway Co | (1893) | The common law did not permit the award of interest as general damages for delay in paying a debt due under contract |
| Wadsworth v Lydall | (1981) | Interest could be recovered as special damages where the claimant proved a particular loss caused by the late payment, such as the cost of a mortgage taken out to make up the shortfall |
| Sempra Metals Ltd v Inland Revenue Commissioners | [2007] UKHL 34 | Interest, including compound interest, is recoverable to reflect the loss of use of money paid late, as damages measured by the actual loss or in restitution measured by the defendant's benefit; a claimant must prove its actual interest losses for compound interest as damages |