The late payment of debts is a problem for many businesses, causing cash flow problems and even, in a worst case scenario, putting the nail in the coffin of many small businesses. The figures make sober reading. According to the Federation of Small Businesses (FSB) a third of small businesses are paid late. If small businesses were paid on time, the result would be a staggering £2.5 billion annual boost to the UK economy.

The UK first introduced the Late Payment of Commercial Debts Act back in 1998 to try and protect businesses against the culture of late payment. The 1998 Act (as amended) gives businesses the right to claim interest from business customers at the rate of 8% over the Bank of England base rate, plus a fixed sum and its reasonable costs of recovering the debt. However according to the FSB, 79% of small businesses do not charge interest. Partly, due to a lack of awareness and partly due to a reluctance to take on bigger businesses, who often use their clout to negotiate “unfair” payment terms.

A recent amendment to the law on late payments which came into force earlier this year, hopes to go someway to readdressing this imbalance of power. The amendment expands the existing ability of representative bodies to challenge contractual terms on behalf of SMEs. It will allow any business to approach representative bodies (such as, the FSB and CBI) for assistance in applying to the court to stop businesses relying on “grossly unfair” payment terms. Unfortunately the legislation is not clear as to what counts as “grossly unfair” nor does it give any examples. However the hope is that the change to the law will make it easier for disputes around unfair contractual terms and practices to be taken to court, which through the development of case law will lead to further clarity as to the meaning of “grossly unfair” for the wider business community.

For help drafting and reviewing contractual payment terms please contact Emily Sadler and for assistance pursuing an overdue debt, please contact Chris Holliss.