Can public authorities set their own interest rates in commercial contracts?

Jennifer Grigg, Browne Jacobson

This interesting question highlights a potential conflict between English law and EU law in relation to the level of interest that may be payable by a public authority under a contract governed by English law for late payment. In particular, whether a public authority can set their own level of interest or specify an alternative remedy within a contract or transaction.

The position under English law, as set out in the Late Payment of Commercial Debts Act 1998 (the ‘Act’), is that ‘statutory interest’ (currently 8% above base) will be imposed where a contract is silent on the matter and a payment is due but not paid. Section 8(1) of the Act expressly allows parties to oust statutory interest provided that an alternative arrangement is included that constitutes a ‘substantive remedy’. It is worth noting that section 8 of the Act does not draw a distinction against transactions between two undertakings and transactions between an undertaking and a public authority.

The concept of a ‘substantive remedy’ has been discussed at length by the courts and is something that should be carefully considered by any party wishing to deviate from the statutory interest, however it is beyond the scope of this note.

The most recent EU law on the matter is Directive 2011/7/EU on combating late payment in commercial transactions (the ‘Directive’) for which the implementation deadline was 16 March 2013. The Directive aims to address the ‘late payment’ culture across the continent, which some believe has harmed small and medium size businesses that do not have the capacity to absorb losses incurred as a result of late payment by customers. The Directive’s focus is to ensure that prompt payment is made to suppliers (within 30 days by a public authority), supported by an obligation to pay interest (statutory interest or other remedy) should payments be missed or delayed.

Article 4 of the Directive relates to transactions between undertakings and public authorities and contains the substantive provisions on interest. It states:

“4.1 Member States shall ensure that, in commercial transactions where the debtor is a public authority, the creditor is entitled upon expiry of the period defined in paragraphs 3, 4 or 6 to statutory interest for late payment, without the necessity of a reminder, where the following conditions are satisfied:

(a) the creditor has fulfilled its contractual and legal obligations; and

(b) the creditor has not received the amount due on time, unless the debtor is not responsible for the delay.”

This is in contrast with Article 3 which relates to transaction between undertakings which at 3.1 states “Member States shall ensure that, in commercial transactions between undertakings, the creditor is entitled to interest for late payment…”

The inclusion of the defined term ‘statutory interest’ in Article 4, and the omission of it from Article 3, suggests that there a higher level of obligation under Article 4 (as between undertakings and public authorities) and implies that no other level of interest would be acceptable.

The Directive was implemented through Late Payment of Commercial Debts Regulations 20131 (as amended) (the ‘Implementing Regulations’) which came in to force on 16 March 2013. These make amendments to various sections of the Act, but do not vary Section 8 and the ability to oust statutory interest. The Implementing Regulations also do not make any amendments to reflect the split in the directive between transactions between undertakings and those between undertakings and public authorities.

While the Implementing Regulations do not appear to cover all aspects of the Directive, background (37) of the Directive does not require a full implementation. It only requires implementation of the provisions which represent a substantive change from Directive 2000/35/EC.

The main provisions of Directive 2000/35/EC are the regulation of the payment of interest. Article 3 of this directive imposes interest based on the equation in Article 3.1.(d), which does not distinguish between transactions between undertakings and those between undertakings and public authorities. In fact, background (22) states that the directive should regulate all commercial transactions whether or not a public authority is a party.

It can be argued that the UK has exercised its discretion on implementation by not prohibiting the exclusion of the Act by public authorities; under article 249 a directive shall be binding “as to the result to be achieved” but leaves to the choice of form and method to the national authority.

Even where this discretion is exercised, a directive may sometimes be considered to have a direct effect (i.e. to be enforceable even without the usual implementing law.) The case law on this has developed from Van Duyn case2 which concluded that where a directive was ‘sufficiently clear’ then a Directive is capable of having a direct effect. The case of Ratti3 developed the principle of estoppel in relation to directives and concluded that a failure to implement a directive should not prevent an individual from relying on that directive where it imposes obligations on the State (other than the obligation to implement the directive). The State should not be able to avoid obligations through omitting them from the implementing law.

The case of Foster4 considered which bodies may constitute the ‘State’ and gave an exceptionally broad remit without a clear definition. Local authorities and devolved administrations will be considered part of the ‘State’ as well as health care providers and bodies who carry out public functions; in this case it was felt that British Gas was an organ of the State.

There is very little commentary or guidance on this although the Department for Business Innovation & Skills (BIS) published ‘A Users Guide to the recast of the Late Payment Directive’ in October 2014 . The guide sets out a ‘Summary of the new measures’ at page 4 and does not mention the new distinction between Articles 3 and 4. However pages 8 and 9 do comment that a public authority must pay statutory interest and cannot agree a lower rate despite this not being included in the Implementing Regulations.

The government’s Prompt payment policy focuses on the timely payment of invoices and again mentions that supplier may claim statutory interest under the Act, although it states that this interest is not paid automatically.

Conclusion

English law does not prohibit a public authority from setting an interest rate within a transaction, and public authorities may choose to include a rate such as 4% above base, which is a commonly accepted commercial rate. The risk is that it could be considered contrary to the Directive, and there is potential for an individual to challenge this on the basis that the Directive should be directly applied.

A public authority may choose to specify 8% above base, or statutory interest as defined in the Act to avoid any potential challenge.

Invoices raised under contracts signed before 16 March 2013 and which include a lower interest rate will not be caught by the Directive so can continue to enjoy whatever lower rate or alternative remedy has been agreed.


1 Late Payment of Commercial Debts (No. 2) Regulations 2013 and Late Payment of Commercial Debts Regulations (Amendment) Regulations 2015/1336

2 Case 41/74 Van Duyn v Home Office [1974] ECR 1337

3 Case 148/78 Pubblico Ministero v. Tullio Ratti [1979] ECR 1629

4 Case C-188/89 A. Foster and Others v British Gas plc [1990] ECR I-3313