Contractors' Questions: Can I charge 5% interest each week I'm unpaid?

Contractor’s Question: With a contract I’ve drawn up in the UK to send to my ‘Plan B’ customer who’s overseas, is the contract able to lawfully specify “5% interest accrued (to be added every 7 days), if the payment is late more than 14 days?”

I read somewhere online that one-man bands use this type of annotation to help head off late payment. But I cannot recall if the UK was where this statement on a contract is legally permissible; is it?

Expert’s Answer: In general, parties to a contract are free to agree their own terms, and the courts will not intervene, unless required to do so by legislation or public policy (generally represented by the body of case law).

The rate of interest you mention seems exorbitant to me. I suspect it might be open to challenge as an unlawful penalty - it may be hard to show that 5% per week to be a reasonable pre-estimate of the loss you would be likely to suffer as a result of late payment.

In a business-to-business contract governed by English law, unless the contract contains an express provision for interest on late payment, a provision is implied by the terms of the Late Payment of Commercial Debts (Interest) Act 1998, which, where a debt is overdue, entitles the creditor to

(a) a fixed payment (which depends on the amount of the debt - £70, if the debt is between £1k and £10k), intended to cover administrative and internal costs;

(b) interest, and 8% over base rate (currently 0.5% - so 8.5% total); and

(c) reasonable costs of recovering the debt, after giving credit for the fixed payment,

And if the contract itself is governed by English law, then it would seem to me that such a term would be implied, regardless of whether the client is overseas.

The expert was Roger Sinclair, a consultant at egos, a legal advisory specialising in contract law.

Monday 16th March 2015