The next phase of the act of parliament entitled Late Payment of Commercial Debts (Interest) Act 1998 has now started. The first phase of the act came into force on 1 November 1998, making it possible for small businesses to claim this penal interest from big business customers. The idea of penal interest was remarkable. Penalties don't usually apply in contractual relationships but in this case it was thought necessary. The big boys tended to beat up the little fellows and starve them of cash.
Then on 1 July 1999 came the second move. Any public authority, such as part of the Scottish administration or the new Welsh assembly, that owed a small business money was bound to pay 8% interest over the base rate. I wonder if that made them pay up? On 12 August 2000 came another move. The little firms in Northern Ireland were encouraged to have a prod at the auditor-general if he didn't pay up on time. As well as that, the Metropolitan Police and the London Fire Brigade were ordered by parliament to pay this whopping interest if they paid late for their new police stations and fire engines.
So on 1 November last year came a really big move. It is no longer just the big fellas who are thumped for interest. It is small firm against small firm. And next year any commercial firm will be able to pursue any other firm for their lumps of interest. In other words, from next year, if your firm buys widgets from ICI and your cheque is late, ICI can thump you for interest of base rate plus 8%.
In a moment I will tell you what is meant by a small outfit or a big outfit, but first let me tell you why this high interest figure is especially important to contractors and professional service people. Adjudication claims now focus a great deal not just on sums due, but on the considerable income due as a result of a 14% interest charge. That is an amount not to be sneezed at. And sometimes the right to penal interest is not expressly provided for in the contract documents; it is an implied or silent term brought into the contract automatically by dint of the act of parliament. In other words, the interest charge is there for the asking, it can amount to a whopping sum, and an adjudicator is very likely to insist it be paid.
Do you calculate that it is cheaper to pay your bills a fraction late rather than run up interest charges on your bank account?
So what is a small firm? Well, with regard to this particular parliamentary act, a small firm is defined by the number of full-time employees in the business on the day that the contract was made with the other party. If you have 50 or fewer employees on that day, you are classified as a small business. And by the way, employees include all those self-employed tradesmen, self-employed quantity surveyors and so on employed by the company. And the head-count also includes the firm's partners or sole-trader.
As for part-time employees, those who work under 35 hours a week, they must be counted as a fraction of the 35 hours that they work; got the idea? On top of all this, the act insists that you count the folk involved in "associated business". By the time you do this, you might easily find yourself classified as a large business.
Apparently the number of people employed in a large business must be aggregated with the numbers employed "in all other businesses run by the same or any associated employer". For example, two employers will be treated as "associated employers" if either has direct or even indirect control over the other. Presumably control means voting control or voting power, rather than force of personality. This is intended to ensure that a company is not divided up into different companies as a device to circumvent the legislation.
Tony Bingham is a barrister and arbitrator specialising in construction. You can write to him at 3 Paper Buildings, Temple, London EC4 7EY, or e-mail him on email@example.com.