Late Payment of Commercial Debts
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Excuse 24: Penalties are not valid in law!

Applicability

The argument here is that the Late Payment of Commercial Debts (interest) Act 1998 only covers interest charges and that penalty charges are not allowed in contracts. As such any charge for breach of contract has to be a realistic pre-estimate of costs so as not to be a penalty.

Obviously the argument goes on to say that £40 is a penalty and not enforcable.

Underlying reasons

Customer has looked up the Late Payment of Commercial Debts (interest) Act 1998
The most likely reason is that someone looked up specifically the originally published Act, such as shown on the opsi web site rather than the current version of the Act with modifications from the legislation web site. They see nothing on penalties, only interest. They need to look at the act as modified.
Customer has looked at various web sites about clawing back bank charges because they are penalties.
Normally a clause in a contract defining costs for a breach has to be a realistic pre-estimate of costs to be valid as penalties are not allowed in common law. However, in this case, the penalties are statutory so do apply. There is also a good argument that they are easily a realistic pre-estimate of costs and maybe should be more even.

Resolution

  • A policy of crediting first time works well to defuse the situation as usual.
  • Explain where the law can be found, www.legislation.gov.uk and show them section 5A in the Act.
  • Ignorance of the law is no defence.

This has also been subject to some debate as the way the Act works is by making the penalty charge part of the contract automatically. There is an argument that this is no different to having the penalty in there explicitly in the first place and such a penalty clause can be challenged under contract law if it is not a reasonable pre-estimate of costs. There is however a general principle that a parliamentary Act overrules common law and so the clause has to remain valid. This is matter for lawyers to debate, but to be honest we cannot see any court suggesting that a statutory contract clause is invalid and our experience is that this has not been an issue in county court claims. Even if this was an issue it is not hard to see how pursuing late payers can easily take up considerable staff time which is probably not fully covered by the late payment penalties collected hence making it a reasonable charge anyway.

Variations

We have seen some variations on this, such as people not quite reading the legislation sensibly. A recent one (2015) was someone insisting that as we charge for services in advance that we cannot charge penalties if not paid on the due date. This is basically correct - the penalties when charging in advance are once the goods/services are completely supplied. So we may charge monthly in advance on 7 working day terms but paying any time during the month, i.e. before we have completely supplied the service, does not give rise to a penalty. There is a way you could interpret such cases as partly in advance and partly in arrears meaning a penalty could still apply if not paying at least part of the bill, but we have never had to argue that case. In this instance the customer had in fact paid later (in the following month) so penalties applied anyway, and his argument was simply to try and bully us by saying we acted unlawfully!