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The basics – contract for sale

This page deals with the following:

* Contract for sale
* Creation of the contract
* Freedom of contract
* Oral or writing
* Implied terms of contract
* Terms and conditions
* Retail sales – shops and markets
* Custom and usage
* Terms implied by a course of dealing
* Terms and conditions of sale – the small print
* Contract procedure and the “battle of forms”
* Purchase contracts
* Real life issues

* Limitation and exclusion clauses

* Misrepresentation
* Mistakes

* Penalty clauses and liquidated damages
* Pricing errors
* Late payment of commercial debts

Contract for sale


The sale or purchase of any goods or supply of any services will involve a legally binding contract. A generally accepted definition of a contract is a promise which the law will enforce. The essential elements of a legally binding contract are:


*  there must be two or more separate persons (“parties”) who enter into the contract


*  the parties must have legal capacity to make a contract


*  the parties must be in agreement, i.e. there must be consensus on specific matters; usually done by one party making an offer to contract which the other party accepts unconditionally and communicates the acceptance to the first party


*  the parties must intend to create legal relations, i.e. to create enforceable promises


*  the contract must be sufficiently certain to be enforceable


*  the promises of each party must be supported by “consideration” i.e. money or a promise to do something

Creation of the contract


A contract is generally created by an offer which is accepted unconditionally. This can happen orally or in writing, or even by behaviour implying a contract or by custom.

Capacity


Not all persons have legal capacity to enter into a contract. For example, see: [Children and Young Persons]

Freedom of contract


Under English common law, parties are free to enter into any contract they wish except when the contracts offends against legal policy developed by the courts, such as immoral contracts and contracts which unreasonably restrain trade. Further, UK Parliamentary legislation has increasingly overridden contractual freedom, particularly in the areas of consumer protection, contract terms which try to limit or exclude liability for breach, competition law and others.

Oral or writing


A contract does not have to be in writing (except in a few cases, e.g. sale of real estate, contracts of guarantee). A contract is created when an offer to contract is unconditionally accepted. It is possible that a legally binding contract could arise orally or by custom.

The film producer Sam Goldwyn is reported to have said: “A verbal contract isn't worth the paper it is written on” It is always better to rely on a written contract in order to avoid doubt and the possibility of the law including (or “implying”) terms into the contract (note however some terms are implied which the law does not allow to be excluded).

As a general rule, if a contract is written, the courts will not allow external evidence that unwritten terms should be included in the contract.

What’s new items on this topic [go to the What’s New page or archive for the full item]:

24/09/2013: Proton Energy Group SA v Orlen Lietuva [2013] EWHC 2872 (Comm)
Proton Energy Group SA (“Proton”), a Swiss oil and gasoline trading company, made what was described as a "firm offer" to sell to Orlen Lietuva (“Orlen”) CIF Butinge, Lithuania 25,000 metric tons +/- 10% in the Seller's option of Crude Oil Mix CN27090090, European origin as per the specifications attached, with delivery period at the discharge port during 10-15 July 2012 and at a price based on five quotations after the bill of lading date.
The High Court held that a binding contract had come into existence between the parties on 14 June which Orlen had repudiated. The judge said the contract was “a classic spot deal where the speed of the market requires that the parties agree the main terms and leave the details, some of which may be important, to be discussed and agreed later.”

Legaleze comment: This case is an example of how important it is to be aware of how a legally binding contract may arise in the “heat” of day-to-day email or other communication. Trading staff concerned in buying and selling need to have a basic understanding of the English legal principles. The words “subject to contract” may be used to prevent a particular communication giving rise to a legal commitment.
That Proton’s terms of contract were subject to UK law and London courts shows how important UK law (or more accurately English law) is in international trade. In this case, the parties were Swiss and Lithuanian and the case had no other connection with the UK.

11/06/2013: Unsigned software development agreement is binding when performed by action
Destra Software Ltd v Comada (UK) LLP and others [2013] All ER (D) 80 (Jun)
[2013] EWHC 1575 (Pat)
This case involved a claim by a software developer and his company for ownership in a banking application he had worked on at the request of the defendants. Although he had not signed an agreement tendered by the defendants, he had continued to work after the agreement was tendered, invoiced and accepted payment.
The Patents Court (part of the High Court) rejected the claim, ruling that the claimant had accepted the contract by his behaviour.

10/01/2013: Media buying co enforces an oral contract
Resourceful Media Ltd v 111Pix.com [2013] All ER (D) 29 (Jan)
[2012] EWHC 3452 (QB)Resourceful Media Ltd (‘RML’) is a media buyer. In 2011 RML discussed an advertising campaign on London taxi cabs for the online TV distribution services of 111Pix.com (now called Filmon TV Limited) (‘the Defendant’). RML believed it had reached an agreement to carry out the campaign for a price of £115,000 plus VAT at a meeting with the Defendant at its offices in June 2011. RML sub-contracted the work for fixing the advertisements on the cabs to Transport Media Limited (‘TML’) at a price of £85,000 plus VAT.
The Defendant failed to go through with the advertising campaign, denied that it had entered into a binding agreement and relied on the absence of any written agreement. RML issued a claim against the Defendant in the High Court for the unpaid price of the campaign or alternatively damages for breach of the contract. The court found that the evidence in the case showed that the parties had entered into an oral contract and awarded damages to RML £115,000.
Legaleze comment: this case serves as a reminder that however careful a business may be in entering into sale contracts (see ‘battle of forms’), procedures may simply be bypassed if the business’s representatives commit orally to an agreement. Only a few types of agreement must legally be in writing, e.g. real property sales.
We note that RML has now issued a petition to wind up the Defendant, presumably due to the latter’s failure to satisfy the judgment.

09/03/2012: Is email “writing”?
Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd and another [2012] EWCA Civ 265 In the absence of a specific law or contract stating otherwise, an email is treated as “writing”. The Court of Appeal upheld the High Court decision (in an interlocutory decision) that an exchange of emails was potentially capable of satisfying the requirements of the Statute of Frauds 1677 that a guarantee must be in writing and signed by the guarantor or his agent.
[Original case report provided by BAILII is acknowledged with thanks. Contains public sector information licensed under the Open Government Licence v1.0]

Implied terms of contract


In certain cases, English law will imply, i.e. automatically include, certain terms and conditions into a contract if the contract has no specific provision covering the issue and does not exclude implied terms. This applies particularly in relation to the sale of goods and supply of services.

Terms and conditions


What is the difference between “terms” and “conditions”? To simplify, a “term” is any provision in a contact. A “condition” is an important term which is fundamental to the contract. If one party breaks a condition, the other party may treat the contract as terminated and claim damages. However the distinction has become blurred; it is better to specify in the contract what are the consequence of a breach of any term, rather than to rely on a term being a “condition”.

Retail sales – shops and markets

An example of a simple contract is that of a retail sale in a shop or market. In these cases the contract is usually formed when the customer tenders payment with the goods and the payment is accepted by the retailer at the till.

The issue of whether a binding contract has been created does not usually arise in a retail sale. However the essential elements of a binding contract will normally exist (but see the section on [sales to children and young persons and others lacking capacity]. The “consideration” supporting the delivery of the goods by the seller will be the money paid by the customer.

Retail sales may be governed by specific terms and conditions, e.g. in a notice at the premises if sufficiently obvious and clear. Retail sales are also governed by the law, in particular the law relating to the [sale of goods] and in some cases such as certain markets by local or “bye-laws”.

Custom and usage


In commercial and other transactions, terms and conditions may be implied by custom and usage. The legal theory is that the parties intended the written contract to be supplemented by the custom or usage (see e.g. British Crane Hire Corpn v Ipswich Plant Hire Ltd [1975] QB 303, [1974] 1 All ER 1059, CA (contract to hire heavy plant; the court held an indemnity clause was implied when a hired crane sank into the mud).

The Sale of Goods Act states that an implied about quality or fitness for a particular purpose may be incorporated into a contract of sale by usage.

Terms implied by a course of dealing


Even where it is not possible to show a local custom or usage that might be imported into a contract, it may be possible to imply a term on the basis of the previous course of dealings between the parties. An example is including a right to notice and other obligations of the parties to a commission agency (Roberts v Elwells Engineers Ltd [1972] 2 QB 586, [1972] 2 All ER 890, CA).

Terms and conditions of sale – the small print


Except in simple cases such as retail sales, the objectives of the seller should be to enter into a contract which:
* describes the goods or services accurately
* contains all the relevant terms and conditions as to price, delivery etc.
* minimises the seller’s potential legal liability
* is consistent with the seller’s marketing literature and sales pitch

Typically a seller will try to ensure that all his sales of goods and services are governed by terms and conditions which are as favourable as possible to him; i.e. he will sell on standard terms and conditions. Traditionally these were printed in small letters hence the expression “small print”. Modern legislation has curtailed the extent to which this may be done.

Contract procedure and the battle of forms


In order to ensure that the sale contract includes the desired standard terms and conditions, the seller must ensure that they are effectively incorporated into the contract. This is done by following a clear standard process for the creation of the contract. This should be tailor-made for the business concerned.

The “classic” way a contract should be formed is as follows:
*  “Invitation to treat” or quotation by the seller; i.e. seller says “Here are the goods or services I offer. I will sell subject to these terms and conditions. Do you want to buy?
*  Offer by the buyer to buy the goods or services at a specified price on those terms and conditions; i.e. the buyer makes an order
*  Acceptance (unconditional) by the seller of the buyer’s order

In this way there will be no doubt about when the contract is created and the terms and conditions of the contract.

Purchase contracts


From the point of view of a purchaser of goods or services, it is equally important that his purchase terms should apply to the contract rather than the seller's.

The case law and "real life" scenarios below illustrate the competing interests of the seller and buyer.

Case law:


* Butler Machine Tool Co Limited v Ex-Cell-O Corporation (England) Limited
http://www.bailii.org/ew/cases/EWCA/Civ/1977/9.html
The seller quoted on his terms and conditions and the buyer sent out an acknowledgement of order which referred to the buyer's terms and conditions. The seller signed the acknowledgement. The buyer's terms and conditions were subsequently held to apply, even though the seller wrote again, after signing the acknowledgement, in a letter which referred to his own terms and conditions. That later letter was found to be irrelevant because it referred simply to the price and identity of the machine in question, and did not, as a matter of construction, operate to incorporate the seller's terms back.


* Trebor Bassett Holdings Limited & another v ADT Fire and Security Plc
http://www.bailii.org/ew/cases/EWCA/Civ/2012/1158.html
The First Appellant, Trebor Bassett, was in 2005 the owner of a factory in Pontefract known as the New Manufacturing Unit, generally referred to as the "NMU". An extension to the NMU generally known as "Production Area B" was in 2005 used by the Second Appellant, Cadbury, for the production of popcorn by the "oil pop" method. The oil pop method of manufacture is a hazardous method which involves heating the popcorn in pans of soya oil over a naked gas flame until it reaches a temperature at which it "pops". There were three other distinct areas of the NMU. In Production Area A Cadbury produced popcorn using the "air popping" method. There was also a packaging area and an area concerned with the production of other chocolate confectionery.
On 8 June 2005 the entire NMU was destroyed by a fire which began in the oil pop production area.
The Respondent and cross-Appellant ADT had, pursuant to a contract concluded with Cadbury in 2003, designed, supplied, installed and commissioned a fire suppression system which was intended to extinguish fires in two discrete but connected parts of the oil pop production area, the elevator and hopper arrangements. The system was designed to discharge carbon dioxide, CO2, into the hopper and elevator automatically upon fire being detected by one or more sensors located within them. The fire suppression system did not automatically discharge CO2 into the hopper as, had it been properly designed to deal with a deep-seated fire of this nature, it would have done. It was common ground at the trial that, had the fire suppression system discharged CO2 into the hopper at an appropriate moment, it would have extinguished the fire before it had had an opportunity to escape that enclosed place.
Trebor Bassett and Cadbury sued ADT in the Technology and Construction Court in respect of their loss suffered in consequence of the fire. Trebor Bassett claimed in respect of the damage to the building. Cadbury claimed in respect of the damage to the machinery, increased cost of working and business interruption. The judge held that ADT owed to Cadbury a contractual duty to exercise reasonable skill and care in carrying out the design of the system. It was not in dispute that a co-extensive duty was owed in tort, and the judge so held. It was accepted that ADT owed a like tortious duty of care to Trebor Bassett. The judge found that ADT had failed to design the CO2 suppression system installed in the hopper with reasonable skill and care, and was accordingly in breach of the contractual and tortious duties.
The judge found that in the formation of the contract, Cadbury had won the “battle of forms” because although ADT had issued a quotation incorporating its terms and conditions of sale which could have limited its liability, Cadbury had replied with its own purchase order with quite different terms. The judge accordingly found ADT liable to both Trebor Bassett and Cadbury.
However the judge also found that Cadbury shared in the responsibility for the damage. He found that Cadbury was negligent, indeed "woefully at fault" and "even reckless" in its failure to segregate the oil pop production area from the rest of the building and to install sprinklers. Since the contractual duty of ADT owed to Cadbury was co-extensive with its tortious duty, he held, applying the decision of the Court of Appeal in Vesta v Butcher [1989] AC 852, that the damage recoverable by Cadbury from ADT could, in accordance with s.1 of the Law Reform (Contributory Negligence) Act 1945, be reduced to the extent appropriate to reflect Cadbury's responsibility for the damage. He held the appropriate reduction to be 75%.
Both parties appealed to the Court of Appeal which upheld the judgment of the lower court.

Real life issues


In real life, things often do not go as smoothly as this. Typical scenarios are:

Scenario 1: late communication of terms and conditions
*  Seller accepts an order from buyer without drawing buyer’s attention to seller’s terms and conditions.
*  Buyer sends in the order with payment
*  Seller “accepts” the order and sends an invoice stating “subject to terms and conditions of sale”

Scenario 2: “battle of forms”
*  Seller sends to buyer a quotation with terms and conditions of sale on the back
*  Buyer sends an order with buyer’s terms and conditions of purchase
*  Seller accepts order and delivers the goods or services

Scenario 3: general confusion
*  Seller sends buyer a quotation for goods.
*  Buyer wants to alter specifications, prices, warranty of quality and delivery times
*  Lengthy discussions follow by telephone and email. Quantities, quality, price and delivery dates are negotiated and discussed.
*  Eventually the buyer sends to seller  an order for the goods on terms “agreed”
*  Human nature being what it is, the exchanges between buyer and seller are full of ambiguities, imprecisions and contradictions.
*  Seller accepts order but delivers goods not in conformity with buyer’s expectations.

In scenario 1, the seller may not have effectively incorporated his terms and conditions into the sale contract. He may depending on the circumstances be able to argue that the buyer is bound by those terms and conditions because:
*  the buyer was fully aware of the terms and conditions due to the previous course of dealing between seller and buyer
*  there is a generally recognised trade custom

In scenario 2, the buyer’s terms and conditions will probably prevail if they were the last in the “game of snap”. THe cases cited above, Butler Machine Tool and Trebor Bassett Holdings Limited, are examples of this.

Scenario 3 occurs all too often and it will be very difficult to sort out the precise terms of the contract.

If the seller and buyer in such cases are unable to resolve the issues, they may have to pay lawyers and go to court with all the resulting expense and uncertainty.

This is why it is important for the seller to follow a clear contract process and always be precise about the specification of the goods or services and the terms and conditions of sale before committing to deliver.

The process of forming a contract can be particularly important in the case of e-commerce sales via a website or otherwise. [See E-commerce]

If you require advice about terms and conditions of sale, contact us.

Limitation and exclusion clauses


Business people and their advisers will naturally try to limit or exclude liability for breach of a contract term. Such clauses are affected both by English common law and by statute. 

Consumers (i.e. persons who are not contracting in the course of a business) have special protections which are dealt with in another article; see Sales to consumers.


Before considering statutory law such as the Unfair Contract Terms Act, the courts will apply the traditional common law rules about interpreting exclusion and limitation clauses:


* A party seeking to rely on an exclusion or limitation clause to save himself from liability in contract or tort to the other contracting party must show that it was incorporated as a term of the contract, which usually involves the taking of reasonable steps to bring it to the notice of the other party


* An exclusion clause is strictly interpreted against the party who wants to rely on it


Any contractual term which attempts to limit or exclude liability for misrepresentation has to meet the “requirement of reasonableness” test to be valid (Misrepresentation Act 1967 s.3 and Unfair Contract Terms Act 1977 s.11(1)). See below: Unfair Contract Terms Act.


The Unfair Contract Terms Act 1977 (“UCTA”) is misleadingly named. It regulates limitation and exclusion clauses in contracts,not unfair terms generally (unfair terms are a separate subject; see Unfair terms). The Act covers “business liability” i.e. liability for breach of obligations or duties arising from things done by a person in the course of a business  or from the occupation of premises used for business purposes of the occupier. There are some exceptions noted below (UCTA s.1(3)).


Liability for death or personal injury resulting from negligence may never be excluded or restricted (UCTA s.2(1)).

In other cases of negligence, liability may be not be excluded or restricted except as far as the term satisfies the “[requirement of reasonableness]” (s.2(2)) (see below).

Right to sell: the implied term as to the seller (sale or hire purchase) having the right to sell the goods may not be excluded or restricted by a contract term (UCTA s.6(1)). This applies to any contract, not just 'business liability'.

If a person is dealing on written standard terms of business or with a consumer, the following types of contract terms may only be used if the term meets the “requirement of reasonableness” test:

*  excluding or limiting liability for breach of contract
*  terms which try to allow a performance of the contract substantially different from that which was reasonably expected or to render no performance at all
*  terms excluding or restricting liability for breach of the statutory implied terms as to conformity of goods with description or sample, or as to their quality or fitness for a particular purpose

A person is a consumer if he is not dealing in the course of business or holding himself out as doing so.


The “requirement of reasonableness" test is that the term in the contract must have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.


Certain ctegories of contract excepted from UCTA, e.g. iInternational sales of goods, insurance contracts, contracts creating, transferring or terminating an interest in land or an interest in intellectual property, contracts relating to the formation or dissolution of a company, partnership or association and contracts relating to the creation or transfer of securities.


Assuming a UK court or arbitrator has jurisdiction to hear a dispute, UCTA may not be avoided by making the contract subject to a law other than that of the UK, if it appears to the court or arbitrator that the foreign law was imposed wholly or mainly for the purpose of enabling the party imposing it to evade the operation of UCTA. The same applies if one of the parties dealt as consumer, and he was then habitually resident in the United Kingdom, and the essential steps necessary for the making of the contract were taken there.

For further detail, see Limitation and exclusion clauses.

Misrepresentation


If a person is induced to enter into a contract by a “misrepresentation”, he may be able to rescind i.e. cancel the contract or recover damages. This right applies whether the misrepresentation was fraudulent, negligent or innocent (Misrepresentation Act 1967).

A misrepresentation is a positive statement of fact which is untrue. The statement may be oral or in writing or may even arise by implication from words or conduct.

The statement must be a matter of present or past fact. There are however grey areas in applying this principle to certain classes of statements. For example, if a person makes a statement relating to his own or some other person's opinion or intention, or containing a  forcast as to the future, is that a statement of fact? If the person never had that opinion or intention, or never believed in the forecast, that is probably a misrepresentation.

It is better to avoid any question of a misrepresentation by ensuring sales people follow an approved sales “pitch” in which facts and claims have been carefully checked. To some extent it may be possible to avoid the consequences of a misrepresentation by including an “entire contract” and exclusion clauses in the terms and conditions of sale. However see Limitation and Exclusion clauses.

What’s new item on this topic [see What’s new page or archive for full item]:

12/02/2014:Supreme Court overturns Scottish decision on misrepresentation
http://www.bailii.org/uk/cases/UKSC/2014/9.html
Cramaso LLP v Ogilvie-Grant and others
[2014] UKSC 9  Hearing Date: 12 February 2014

Mistakes


The general rule under common law is that if one party has made a mistake as to the terms of the contract and that mistake is known to the other party, then the contract is not binding.

However if one party makes a mistake unknown to the other party, the contract will normally be binding.

Pricing errors


If you as seller make a pricing error and enter into a binding contract to sell, you will be bound by the contract unless you can prove that the buyer knew of the error which may not be possible. Even if it is obvious there was an error in the price, it may be impractical for goodwill reasons to try to avoid the deal.

The risks of errors may be reduced if a clear process for the formation of a contract is used. Thus the contract terms and conditions of sale should make it clear that the customer’s order is subject to your acceptance. This is particularly important in the case of e-commerce sales.

Penalty clauses and liquidated damages

If there is a breach of contract, the seller (or party who is seeking to enforce the contract) must establish the loss in monetary terms which he has suffered as a result of the breach.

In order to avoid the complication of having to prove loss, it may be convenient to provide in the contract that in the event of breach, the party in default must pay a fixed sum. If this sum is a 'genuine pre-estimate' of the loss, it will in general be enforced by the courts. By contrast, if the sum is far in excess of the loss, the clause will be struck down and treated as void on the bais that it is a 'penalty'.

The application of these principles have been developed in the common law over hundreds of years  and still cause difficulty today. One of the leading cases is Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 which established that the question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach. There are four main tests to apply:


(a) It will be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach;

(b) It will be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid;

(c) there is a presumption (but no more) that it is a penalty when ‘a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage’; but on the other hand

(d) it is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties.

What’s New items on this topic [go to the What's New page or archive for the full item]:

10/01/2016: Supreme Court rules on penalty clauses

Cavendish Square Holding BV (Appellant) v Talal El Makdessi (Respondent)

ParkingEye Limited (Respondent) v Beavis (Appellant)

In two separate cases, the Supreme Court has rendered important decisions on the application of the common law principles of penalty clauses in contract.

Late payment of commercial debts


Background

The Late Payment of Commercial Debts (Interest) Act 1998 was enacted to give suppliers under most commercial contracts the right to interest in the event of late payment. The Act enables the government to set regulations specifying the rate of interest and compensation.

The 1998 Act has been amended in order to comply with EU legislation including Directive 2000/35/EC of the European Parliament and of the Council of 29th June 2000 and Directive 2011/7/EU of the European Parliament and of the Council of 16th February 2011 on combating late payment in commercial transactions.

Types of contracts covered by the 1998 Act

The 1998 Act applies to a contract for the supply of goods or services where the purchaser and the supplier are each acting in the course of a business, other than an excepted contract. The Act implies into the above type of contract a term that any qualifying debt created by the contract carries simple interest and the right to compent

sation in the event of late payment..

The Act lays down that the payment periods for commercial debts must be set at a maximum of 60 days in most cases and 30 days for those incurred by public authorities.

Excepted contracts are:

* a consumer credit agreement;

* a contract intended to operate by way of mortgage, pledge, charge or other security.

What if the contract excludes or already provides for interest on late payment ?

The right to interest and compensation may not be excluded by a term in the contract.

The Act provides that interest must be paid on debts due at the rate specified in regulations unless the contract provides for a "substantial remedy". A remedy for the late payment of the debt ise regarded as a substantial remedy unless:

* the remedy is insufficient either for the purpose of compensating the supplier for late payment or for deterring late payment; and

* it would not be fair or reasonable to allow the remedy to be relied on to override the right to statutory interest that would otherwise apply in relation to the debt. .

In determining whether a remedy is not a substantial remedy,the court must have regard shall be had to all the relevant circumstances at the time the terms in question are agreed, in particular:

* the benefits of commercial certainty;

* the strength of the bargaining positions of the parties relative to each other;

* whether the term was imposed by one party to the detriment of the other (whether by the use of standard terms or otherwise); and

* whether the supplier received an inducement to agree to the term.

When is interest and compensation payable?

Interest starts to run on the day following the payment date set by the contract, subject to a maximum payment period as follows:

* maximum payment period of up to 30 days from the date when the supplier performs his obligations in relation to the debt where the purchaser is a public authority;

* in other cases the payment period may be up to 60 days or longer if the additional period is not "grossly unfair" to the supplier (see below).

In addition to interest, the supplier has a right to compensation for the reasonable costs to the supplier of recovering a debt incurred if that amount exceeds the fixed sums allowed in the 1998 Act (i.e. £40 for a debt less than £1000, £70 for a debt of £1000 or more but less than £10,000 and £100 for a debt of £10,000 or more).

What is 'grossly unfair'?

In determining whether something is ‘grossly unfair’ for the above purposes, all circumstances of the case must be considered; and for that purpose, the circumstances of the case include in particular:

* anything that is a gross deviation from good commercial practice and contrary to good faith and fair dealing;
* the nature of the goods or services in question; and
* whether the purchaser has any objective reason to deviate from the 60 or 30 period in question.

Note:the Late Payment of Commercial Debts (Amendment) Regulations 2015 (SI 2015 No. 1336)  amended the 1998 Act with effect from 21 June. The purpose of the Regulations is to clarify the terms of section 4 of the1998 Act in England, Northern Ireland and Wales. Similar regulations apply in Scotland made by the Scottish Government under devolved powers.

 

How much interest and compensation is payable?

The Late Payment of Commercial Debts (Rate of Interest) (No. 3) Order 2002 provides that the rate of interest for the purposes of the Late Payment of Commercial Debts (Interest) Act 1998 is 8 per cent per annum over the official dealing rate in force on the 30th June (in respect of interest which starts to run between 1st July and 31st December) or the 31st December (in respect of interest which starts to run between 1st January and 30th June) immediately before the day on which statutory interest starts to run.

At the time of writing, the effective rate is therefore 8.5%.

Contracts made before 18 March 2013

Different rules apply contracts made before 16th March 2013. In those cases, the payment period is 30 days from the agreed date for payment.

Guidance on late payments legislation


Tthe Government has published A Users Guide to the recast Late Payment Directive.


Legaleze comment

Although the principle is simple enough, the drafting of the 1998 Act as amended is convoluted, partly in order to prevent buyers from trying to impose unreasonably long payment periods.

It remains to be seen whether the introduction of the concept of a ‘grossly unfair’ test for payment periods longer than 60 days will make a significant difference to payment practice. The test is new to UK law. The Unfair Contract Terms Act 1977 is more to do with contractual clauses which exclude or limit liability rather than terms which are ’unfair’ as such.

In our view the government guide referred to above is less than helpful or confusing in some respects. It states that ‘Businesses must pay their invoice within 60 days, unless expressly agreed otherwise and provided it is not unfair to the creditor’. In fact, the legislation contains the test of being ‘grossly unfair’ which is a higher barrier for a creditor to prove. No examples are given of what might be ‘grossly unfair’, although in fairness this is ultimately a matter for the courts to decide in any particular case.


The guide also correctly states that statutory interest rate applies (at least 8 percentage points above the Bank of England’s reference rate) to the debt unless an agreement has been reached which amounts to a substantial remedy for the late payment of the debt. There follows a table offering some examples of what is a ‘substantial remedy’, but these appear to be negative examples, i.e. if the contract contained a clause similar to one of these examples, it would not be a ‘substantial remedy’

What's new

19/02/2018: Government to introduce greater flexibility to challenge ‘grossly unfair’ contract terms

Subject: Selling and marketing/contract for sale/late payment

Source: GOV.UK Late payment and 'grossly unfair' terms and practices: changes to the regulations

The Government is to widen the power representative bodies currently have to challenge certain contract terms and practices deemed ‘grossly unfair’. The intention is to give representative bodies the flexibility to decide whether to take action on behalf of individual businesses or groups of individual businesses. Representative bodies will be able to decide whether to take action on behalf of members or non-members.

The Government received 32 responses, all broadly in favour of the proposals , to its October 2015 consultation on how to provide business representative bodies with wider powers to challenge ‘grossly unfair’ contract terms and practices,

Among other changes, to be approved by Parliament, the government has:

• included ‘practices’ as well as ‘terms’

• removed the reference to small and medium-sized enterprises from Regulation 3(1) of the Late Payment of Commercial Debts Regulations 2002 so that a ‘representative body’ is defined as: ‘an organisation established to represent the collective interests of any enterprise, either in general or in a particular sector or area’.

 

31/01/2017: New guidance to help large businesses with late payment reporting

In December 2016, the Government published its consultation response ‘Duty to report on payment practices and performance: government response’. The document explained how the Government would implement a duty on large businesses to report on their payment practices, policies and performance, under section 3 of the Small Business, Enterprise and Employment Act 2015. Included in the document were the draft Reports on Payment Practices Regulations 2017.

Latest figures show that SMEs are owed £26.3bn in overdue payments. The new measures, laid in Parliament on 31 January 2017, aim to highlight bad practice by making large businesses publish details on the time taken to pay their suppliers.

The Department for Business, Energy and Industrial Strategy (BEIS) has now issued Guidance on the Duty to report on payment practices and performance to help large businesses report on how quickly they pay their suppliers. The guidance has been published ahead of measures coming into force in April 2017 which aim to boost transparency of payment practices to help small and medium sized businesses (SMEs).

[Page updated: 20/02/2018

 

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