“Grossly unfair”: Government consults on tackling late payment by businesses

Late payment of business invoices by other businesses is a serious issue. Recent research shows that the average SME in the UK is waiting for £38,186 in overdue payments. A quarter of SMEs surveyed acknowledged that if the value of late payments they were owed grew to £50,000 they may be forced into bankruptcy. The knock-on effects of late payment can be far-reaching.

New BIS consultation paper

The Government wants to create a shift in the current payment culture, and to this end the Department for Business, Innovation and Skills (BIS) has issued a consultation titled “Challenging grossly unfair terms and practices“.

BIS is seeking views on how changes could best be implemented to enable representative bodies to challenge grossly unfair payment terms and practices, and on how “grossly unfair” can be better defined in statute.

The current legal position on late payments

Under the Late Payment of Commercial Debts Regulations 2002, on the application of a representative body for SMEs, a court can grant an injunction preventing a person from using a contractual term which “purports to oust or vary the right to statutory interest” where no other substantial contractual remedy for late payment has been agreed. The statutory interest rate is currently 8.5%.

This rather ineffectual remedy was followed in 2011 by the EU Directive on combating late payment in commercial transactions (2011/7/EU) (the Late Payment Directive). This Directive, which has been perhaps poorly implemented into UK law, required Member States to ensure that adequate and effective means exist to prevent the continued use of contractual terms and practices which are “grossly unfair”. Such means could include provisions by which “organisations officially recognised as representing undertakings or organisations with a legitimate interest in representing undertakings may take action … before the courts … on the grounds that contractual terms or practices [relating to the date or period for payment, the rate of interest for late payment or the compensation for recovery costs] are grossly unfair …”.

Given that “undertaking” is defined as being “any organisation other than a public authority …”, the Late Payment Directive expanded the power to all businesses, rather than just SMEs. And the right to take action is to apply to all late payment contractual terms or practices which are deemed grossly unfair, and not just those relating to ousting or varying the statutory right of interest. So, the current right to challenge contractual terms in the 2002 Regulations is narrower than outlined in the Late Payment Directive.

Exactly what “grossly unfair” means under the current law is also unclear.

What is the consultation about?

So BIS is consulting on a number of questions, revolving around two main issues:

1. The expansion of the representative bodies that could bring an action from those representing SMEs only, to those representing any size of business; and

2. Broadening the right from challenging only terms which seek to oust or vary the statutory right of interest, to preventing all contractual terms and practices that relate to late payment and which are “grossly unfair”.

Representative bodies: accreditation and powers

The consultation suggests that a list of officially recognised representative bodies should be published and maintained by the Secretary of State. Those bodies could take representative claims in relation to potentially grossly unfair late payment terms or practices; and would not have to demonstrate in court that they were in fact representative bodies. The list would be updated over time.

Representative bodies for SMEs include the Confederation of British Industry, the Federation of Small Businesses and the Forum of Private Business. BIS proposes that representative bodies should only be able to take action on behalf of their members, rather than also for non-members, and seems to support representative bodies being able to take action on behalf of individual businesses, rather than only on behalf of groups of businesses. 

So what does “grossly unfair” mean?

BIS is considering whether to enhance the definition of “grossly unfair”. Current legislation provides that all the circumstances of the case shall be considered in determining whether something is grossly unfair and that those circumstances shall include in particular:

(a) anything that is a gross deviation from good commercial practice and contrary to good faith and fair dealing;
(b) the nature of the goods or services in question; and
(c) whether the purchaser has any objective reason to deviate from the standard 60 day payment term.

It is unclear what the term “grossly unfair” means in practice. What may be considered grossly unfair in one sector or industry may not be grossly unfair in another. In particular, BIS requests views on whether the strength of the bargaining positions of the contracting parties should be given consideration (presumably so, given the importance of bargaining strength in the payment terms negotiated and when payment is in fact made).

Other measures

BIS reminds us that this is one of a number of measures being discussed or introduced in order to tackle the issue of late payment. For example, the Small Business, Enterprise and Employment Bill, which is currently at report stage in Parliament, permits the Secretary of State to require certain types of companies to publish information about their payment practices and policies.

And, following the recent consultation on proposed changes to the Prompt Payment Code (the Code), the Government is working with the Chartered Institute of Credit Management to amend and strengthen the Code and improve the monitoring and enforcement of the Code.

Leading by example?

The Government is seeking to lead by example. In March 2010, it announced that Government departments would aim to pay 80% of undisputed invoices within 5 working days.

However, the National Audit Office (NAO) believes that the payment performance figures publicly reported by a number of Government departments has been overstated and that the Government has failed to follow-up and discover whether the policy is actually helping businesses. The NAO reported that SMEs find that Government departments do generally pay more quickly than their private sector customers, but that Government departments’ good performance against the 5 day prompt payment commitment can be skewed for a variety of reasons. The NAO found that when measured from the date of the invoice, the departments took between 3 and 7 weeks to pay 80% of the value of paper invoices. Performance can also be skewed by a high volume of low-value electronic transactions with a few large suppliers.

These figures suggest that the Government, as well as the private sector, has a fair way to go in order to bring about a genuine shift in the current payment culture. 

The consultation closes on 9 March 2015.