Healthcare - March 2010
Bad news for business debtors
Good news for businesses seeking to recover late
payments and statutory interest!
Fitzroy Robinson Limited v Mentmore
Towers Limited [2009] EWHC 3365 (TCC) was a late payment
of a commercial debt case in which various issues were to be
decided including; what proportion of fees the claimant was
entitled to following the defendants’ suspension of the contracts
between them and issues surrounding any related interest. The
parties agreed that interest was due to be paid but the following
issues were in dispute:
- What principal sums should attract
interest;
- Which statutory provision applies; and
- How should the interest be assessed; in
particular:
a) the period over which the interest should be calculated;
and
b) the rate of interest that should be applied.
This case involved three defendants (property
owners and developers) who had contracts with the claimant
architects to develop properties. The parties had agreed a lump sum
fee for the contracts which was broken down into monthly
instalments.
The defendants suspended the contracts on the
24 December 2007. Under the terms of the contracts the
claimant was entitled to “a fair proportion of the fee” for any of
the services properly performed up to and including the date of
termination or suspension, having regard to the instalments
schedule set out in a schedule to the payments already made to the
claimant under the contracts.
The claimant made a claim for payment of fees.
It was held that the defendants were in breach of contract in
failing to pay the instalments when they fell due, and that the
claimant was entitled to interest on the unpaid sums.
The Court had to look at what was “a
fair proportion of the fee”. The claimant tried to argue that it
should be based on the number of hours worked but, unusually for
construction contracts that is not what the contracts provided for.
It was not a time based entitlement. Nor was there any provision in
the contracts for any entitlement to the claimant for additional
fees if the services took longer than envisaged. It was the
claimant’s risk under the contracts. There was no hourly rate
agreed in the contracts so it was not appropriate to calculate the
“fair proportion” solely based on time. Added to this the
claimant did not plead any specific facts/incidents that could have
justified a time based calculation at the trial.
The Judge decided the fairest method for
calculating a “fair proportion of the fee” would be to calculate
the percentage of work completed and where a work stage was
incomplete at the time the contract was suspended, a fair
proportion of the services completed could be assessed. Therefore
the percentage completion of the RIBA work stages was deemed the
appropriate contractual basis for assessment. Percentage
completion was eventually agreed by the parties on day 2 of the
hearing and the Court calculated that the sum due and owing was
£550,218.00 plus interest and VAT.
With regard to the interest due to be paid,
the claimant’s entitlement under the contracts altered over time.
Under the contracts the claimant was entitled to monthly
instalments. The defendants didn’t give notice of any proposed
adjustments so the payments were due and payable when they fell due
before the suspension on 24 December 2007. As a result of the
defendants’ breach of contract for not paying those instalments,
the claimant was entitled to interest on the unpaid sums. The sums
due under the fair proportion claim were less that the original
sums due by the way of instalment and although the Defendants
accepted the claimant was entitled to interest on the judgment
£550,218.00, it was their position that the claimant was not
entitled to interest on the additional sum of the unpaid
instalments.
The Court then considered the statutory regime
for interest. S35A(i) The Supreme Court Act 1981 (Now the
Senior Courts Act 1981) provides for simple interest at such a rate
as the court may think fit on any/all of the judgment given.
In certain circumstances, under the Late
Payment of Commercial Debts Act 1998, the Court may award interest
on commercial debts regardless of whether or not those debts are
included in a subsequent judgment sum if:
- the contract is caught by S2 of the Act;
and
- the debt is a qualifying debt in accordance
with S3 of the Act.
Further, the Court must consider S4 which sets
out the period for which statutory interest would run and S5 which
allows for the remission of the period and/or time of interest
where the interest of justice requires because of the conduct of
the supplier.
The defendants accepted that the judgment debt
assessed at £550,218.00 is a qualifying debt under the 1998 Act and
therefore attracts interest under the Act. However, the
defendants tried to claim the instalments were not a qualifying
debt under the 1998 Act and therefore no interest was recoverable
for the additional sum being the difference between the judgment
debt and the unpaid instalments.
In the original judgment it was decided that
interest was due on the additional sum. It was held that the
instalments were qualifying debts under S3 such that the claimant’s
entitlement to statutory interest operated as an implied term of
the contract pursuant to S1 of the Act.
The instalments were precisely identified on a
monthly basis and due pursuant to express terms of the contract.
They were not S11 advance payments because the amount was paid a
month in arrears not in advance.
The point made in the judgment was that just
because some part of a contractual instalment due might
contain an element of work not yet performed does not mean that a
claim for interest under the Act would fail. Since most of the
instalments payable under commercial contracts may include an
element of advance payment this would substantially defeat the
purpose of the Act.
So the claimant was compensated by way of
interest on the higher sum (represented by the difference between
the unpaid instalments and the judgment sum) up to the
30th day after the contract was suspended (there was a
clause in the contract providing for a 30 day notice period to
suspend). They were also compensated by way of interest on
the £550,218.00 actually due to them from that date onwards.
So there were two amounts due under the
1998 Act:
- the total of the sums due by way of unpaid
instalments under the contracts for which interest is payable from
the date that the particular instalment should have been paid,
until 23 January 2008 (which was 30 days after the work was
suspended); and
- the sum due under the contracts which was the
judgment of £550,218.00, on which interest was payable from 23
January 2008.
The relevant rate of interest applied was 8%
as provided for in S4 of the 1998 Act.
A court may only alter the period or time of
interest where S5 of the 1998 Act is applicable. S5 of the
1998 Act applies where by reason of any conduct of the supplier,
the interests of justice require remission of period or
time.
The Court also referred to the previous case
of Ruttle Plant Hire Ltd v Secretary of State for
Environment [2009] EWCA Civ 97 in which the Court of
Appeal held that when considering what is in the interest of
justice:
“…Questions such as the high rate
of interest under the Act were irrelevant: what matters is the
conduct of the supplier, and whether the conduct merits
remission.”
It is clear that the percentage of interest is
not affected by S5 of the 1998 Act and therefore it can be assumed
that the court will apply a rate of 8% interest over the base rate
on commercial debts where the 1998 Act is the relevant Act.
The 8% interest rate is set by The Late Payment of Commercial Debts
(Rate of Interest) (No. 3) Order 2002.
Historically interest rates tend to be reduced
by the courts, for example Part 36 offers attract an interest rate
of up to 10%, but this percentage rate tends to be substantially
reduced by the Court. Further, the rate of interest usually
claimed under the Senior Courts Act 1981 is 8% but the Courts have
a wide discretion as to what percentage rate to apply unlike under
the 1998 Act.
Comment
This case is
good news for companies who are involved in litigation with a
commercial client due to late payment of a commercial debt,
particularly in the current economic climate. Companies can
be confident that an interest rate of 8% will be applied to
commercial debts which can substantially increase the sum of money
recovered.
If you want to include interest in your claim
for a late payment of a commercial debt then the Court recommends
using the following wording:
“The claimant claims interest
under the Late Payment of Commercial Debts (Interest) Act 1998 at
the rate of [the reference rate for the six month period in which
your debt became late (the official dealing rate of the Bank of
England on either 30th June or 31st December
+ 8%] from [the date when interest started to run] to [the date you
are issuing the claim] in the sum of £[put in the amount] and
continuing at the same rate up to the date of judgment or earlier
payment at the daily rate of [enter the daily rate of
interest].”
Sarah O Driscoll,
Solicitor
Weightmans LLP