Interest on late payment, and who actually claims it

There are two routes to interest on a late construction payment, and they do not sit side by side as free alternatives.

Route one: the contract

Most standard forms provide for interest. JCT contracts typically entitle the unpaid party to simple interest at five per cent above the Bank of England base rate on any amount not paid by the final date for payment. NEC4 provides for interest at the rate stated in the Contract Data, compounded annually.

Contractual interest is usually straightforward to calculate and does not require an argument about entitlement. The amount was due, it was paid late, interest runs.

Route two: the Late Payment of Commercial Debts (Interest) Act 1998

The 1998 Act implies a right to statutory interest into commercial contracts. The rate is eight per cent above the Bank of England base rate, which is materially higher than most contractual rates.

It also provides fixed sum compensation for each late debt, on a scale by debt size, and a right to reasonable recovery costs above that fixed sum. The fixed sums are modest individually and add up across a portfolio.

Which one applies

This is the part that gets assumed. The 1998 Act does not simply sit alongside the contract as a better option to be selected.

Broadly, statutory interest is displaced where the contract provides a substantial contractual remedy for late payment. Whether a contractual rate amounts to a substantial remedy depends on the circumstances, and a rate set low enough to be worth less than the cost of borrowing invites the argument that it is not substantial at all.

The practical consequence: on a standard unamended JCT, expect the contractual rate to govern. On a heavily amended contract where interest has been reduced to a token rate, the argument that the statutory rate applies instead becomes considerably more interesting.

Why hardly anyone claims

The usual answer is relationship, and on a repeat client it is a real consideration. But it is worth separating three different situations that get treated as one.

The client who pays a few days late every month. A relationship worth protecting, and interest would be a poor use of it. Though it is worth knowing what the annual figure is, because a habit that costs you four figures a year is a commercial fact, not a scheduling quirk.

The client who is slipping. Payments moving from a few days late to a few weeks. Here, not claiming is not tact, it is a decision to fund someone else's cash flow problem without being asked.

The account that has gone wrong. Once a matter is heading for dispute, interest is simply part of the claim, and omitting it is leaving money behind for no benefit.

Getting the calculation right

• Interest runs from the final date for payment, not the due date and not the invoice date
• It runs on the amount unpaid, so a part payment reduces the base from the date it is received
• Base rate changes during the period, so a long-running debt needs the rate applied in segments
• Simple and compound interest produce noticeably different figures over a year; check which your contract specifies
• Under the 1998 Act, remember the fixed sum compensation as well as the interest

The record that makes it possible

Every one of those calculations needs one fact: the date payment was actually received, set against the final date for payment. If that pairing is not recorded at the time, the claim has to be rebuilt from bank statements and remittance advices months later, and the effort usually exceeds the sum.

Which is the real reason interest goes unclaimed. Not tact. Reconstruction cost.

This is a general summary and not legal advice. Whether a contractual interest provision constitutes a substantial remedy is fact-specific.