Whether creditors can use the Late Payment of Commercial Debts (Interest) Act 1998 to recover the costs of collecting a debt years after payment

The Late Payment of Commercial Debts (Interest) Act 1998 (the Act) operates to insert an implied term in business to business contracts for the supply of goods and services for interest on a qualifying debt, plus an additional fixed sum.

Furthermore, for contracts entered into on or after 16 March 2013, section 5A(2A) of the Act provides as follows:

“If the reasonable costs of the supplier in recovering the debt are not met by the fixed sum, the supplier shall also be entitled to a sum equivalent to the difference between the fixed sum and those costs.”

The sum the creditor is entitled to under section 5A(2A) is treated as part of the implied contractual term inserted by section 1(1) of the Act for interest, by virtue of section 5A(3).

This piece will explore the possibility of recovering costs incurred in collecting a debt years after the debt is paid. Brief consideration will be given first to the costs that can be recovered and the conditions that apply in order for such costs to be recovered.

What costs can be recovered under the Act?

Section 5A(2A) was added to the Act in order to implement the Late Payments Directive 2011 (2011/7/EU) (the Directive). The Directive gives examples of the costs that can be recovered as follows.

Recital 19 of the Directive provides that the recovery of administrative costs and compensation for internal costs incurred due to late payment should form part of the fixed sum to which the creditor is entitled. This principle is set out in Article 6(2), with the fixed sum said to be “compensation for the creditor’s own recovery costs”.

Recital 20 of the Directive states that “[s]uch costs should include, in particular, those incurred by creditors in instructing a lawyer or employing a debt collection agency”. Article 6(3) then provides:

“The creditor shall, in addition to the fixed sum… be entitled to obtain reasonable compensation from the debtor for any recovery costs exceeding that fixed sum and incurred due to the debtor’s late payment. This could include expenses incurred, inter alia, in instructing a lawyer or employing a debt collection agency.”

It appears from the wide wording of Article 6(3) (“any recovery costs exceeding that fixed sum”) that the Directive intended that any of the creditor’s internal costs exceeding the fixed sum should be recovered in addition to the fixed sum. This interpretation has been carried across into section 5A(2A) of the Act, which does not distinguish between the internal costs and the external costs that are incurred by the creditor in recovering the debt. Therefore, under section 5A(2A), a creditor should be able to recover any costs which are “reasonable” and which have been incurred in collecting the debt that are not covered by the fixed sum in section 5A(2), even where these costs are internal administrative costs.

Conditions for recovery

In order to recover costs at all under section 5A(2A) of the Act, a number of conditions are required to be met. In brief, these are:

• The contract must have been entered into on or after 16 March 2013 and its terms must not exclude the right to interest under the Act.
• Statutory interest must begin to run in relation to a qualifying debt that has arisen in relation to the contract.
• The fixed sum the creditor is entitled to under section 5A(2) must not cover the entirety of the costs the creditor is seeking to recover.
• The costs that are sought must be “reasonable”.

Recovering costs a number of years after the debt is paid

If the conditions listed above are satisfied, rights to interest, the fixed sum, and reasonable costs will accrue under the Act. These rights are implied terms in the contract by virtue of section 1(1) of the Act. The Act does not provide that these rights end or are terminated upon payment of the debt. It is, therefore, reasonable to argue that those sums remain due under the contract, even where the full payment of the main debt has been made. There is also no condition in the Act requiring that these sums should be demanded formally before payment is due.

In that case, a creditor should be able to recover its reasonable costs of collecting the debt under the Act, even though a number of years have passed since the debt was paid. This would of course be subject to the claim being time-barred. According to section 9 of the Limitation Act 1980, actions to recover any sum recoverable by virtue of any enactment cannot be brought more than six years after the date on which the cause of action accrued.

Although the right to claim for reasonable costs of recovery under section 5A(2A) is triggered by the running of statutory interest under the Act, it is unlikely that, for limitation purposes, the cause of action for those costs is deemed to begin on the first day on which statutory interest runs. In many situations, costs will be incurred in recovering a debt long after the first day on which statutory interest begins to run. The wording of section 5A(2A) refers to costs which have actually been incurred, thus suggesting that the cause of action to recover those costs would accrue on the date on which the costs are actually incurred.

Does section 5 of the Act have any impact on recovery of reasonable costs years after the debt was paid?

Section 5 of the Act may apply to reduce the statutory interest that the creditor should receive, in the interests of justice by reason of any conduct of the creditor. For example, it could be argued that a delay of a number of years in seeking payment of the main debt could constitute conduct by which interest should be reduced. However, there is no equivalent provision in the Act for the reasonable costs of recovery to be so reduced.

While section 5A requires statutory interest to begin running before section 5A(2A) can apply, it would be consistent with the policy of the Act if there were no possibility for reduction of reasonable costs of recovery, even where under section 5(2) statutory interest does not run for a period. The Act clearly exists in order to deter late payment of sums due under a contract and to provide compensation to the creditor for late payment. If the creditor’s conduct is such that reduced compensation is deserved, this should only take the form of a reduction in the interest that is recoverable, given that the rate of interest is the compensatory factor. As regards the costs of recovery, the creditor would not have had to incur such costs had the debtor paid on time. Therefore the creditor should be able to recover those sums where they are reasonable.

Conclusion

The Act provides a useful mechanism by which creditors can seek to claim their reasonable costs of recovering a debt, where the contract itself does not provide for such costs to be paid by the debtor. The wording of the Act would seem to permit claims for those costs to be made later than, perhaps years after, the debt is paid, as long as the claim does not fall outside the limitation period.

This article originally appeared on the Thomson Reuters Practical Law Dispute Resolution Blog