The Late Payments Act compensates companies for the costs they incur while waiting for their money, so we may be able to say goodbye to an old bit of case law
Late payment is a big issue for UK business: it is reckoned by some to cost something like £20bn a year – and as you will no doubt be aware the construction industry is not exempt. This was, in part, the reason for the Latham report.
For nearly 30 years, contractors and subcontractors have been able to call on the case of FG Minter vs Welsh Health Technical Services Organisation to claim financing charges. The proposition was that the words “direct loss and expense” in a contract were wide enough, in principle, to allow a party to claim compensation for the cost of financing money that has not been paid to it. For example, this could include the cost of funding extra borrowing from the bank, such as the costs of an overdraft.
This proposition has produced a significant amount of case law. Issues have arisen in cases where the contractual provisions are not the same or are only similar to those in Minter. There are often arguments about causation – whether the costs were incurred in direct response to the breach of contract. The courts have also been called on to decide whether there was any evidence that the paying party knew that financing charges or the like were being incurred. The Minter case was resolved in 1980, but it involved the 1963 RIBA contract and things have moved on quite a bit since then.
In particular, we now have a statutory regime imposed on us by parliament that provides for an adequate remedy of interest on money not paid. The Late Payment of Commercial Debts (Interest) Act 1998 provides a right for any business to claim against any other on this basis. It implies a contractual term and gives a statutory right to interest on qualifying debts. The rate of interest that applies is 8% above the official base rate of the Bank of England at 30 June or 31 December. The legislation allows you to provide for a lower rate of interest, but if that lower rate is not a sufficient remedy then the rate defaults to the rate noted above.
This legislation has a number of consequences. First, if parliament provides an interest remedy and says that remedy is adequate, are the courts to look beyond that to award a compound remedy? Possibly, as arguably it is a different type of loss, but this is somewhat more difficult to argue now than before the late payment regime was introduced.
Furthermore, under the new JCT forms, it may be more difficult to go after financing costs anyway, as these say the claimant should receive compensation if it “incurs or is likely to incur direct loss or expense for which it would not be reimbursed by a payment under any other provision in these conditions”. Arguably, the implied term from the late payment legislation provides that reimbursement elsewhere, so a Minter claim would fail under that type of contract.
The act is intended to be a self-help remedy. Where interest is payable, there is no need to go to court to claim it
Second, the statutory late payment regime is a right implied in the contract. The difficulties of applying Minter, that is, proving that you have the same or sufficiently similar clauses and showing how much the financing charges were, are all avoided by the statutory route. The right is there, you just have to use it.
The act is also intended to be a self-help remedy. Where interest is payable, there is no need to go to court to claim it. All you have to do it tell the paying party in writing that you are owed the interest. There is also a late payment penalty of up to £100.
However, it is not all plain sailing, as the legislation applies to qualifying debts only. Contractual rights such as loss and expense, should be alright, but damages claims for an implied duty not to hinder or disrupt might not work under the act.
There is another issue that we all face at the moment that is likely to affect the use of the Minter principle. Minter gives you a compound interest claim: for example, in the case of Skanska vs Egger in 2004, it was 1% over base rates, compounded quarterly. With falling base rates, this might not be a great remedy. The calculator can take the strain of working out the benefits of a lower compound rate based on Minter or a higher simple rate under the legislation on a case by case basis, but clearly the late payment legislation is designed to encourage prompt payment.
So is there actually a role now for the Minter principle at all? The act allows for interest to be recovered without the need to obtain a judgment, the rate is potentially good and the idea is that it is a self-help regime. In the context of the disputes, risks and costs that using Minter has thrown up, perhaps this principle has now had its day.
James Bessey is a partner in the construction department at Cobbetts