Further measures in place to tackle unfair payment terms and practices

High Court decision highlights contractual termination pitfalls

The laws around payment under commercial contracts have recently been amended to allow certain representative bodies to challenge the use of “grossly unfair” payment terms and practices.

The Late Payment of Commercial Debts (Amendment) Regulations 2018 came into force on 26 February 2018 and introduced a new regulation to the 2002 Regulations giving certain representative bodies the right to challenge the use of “grossly unfair” payment terms and practices on behalf of their members.  This right of action is available for business-to-business contracts to which the Late Payment of Commercial Debts (Interest) Act 1998 applies.

The purpose of the new Regulations is to encourage representative bodies to challenge contractual terms on behalf of Small and Medium Enterprises (SMEs). This move signifies a further step aimed at addressing the imbalance of power between SMEs and larger businesses by making it more likely that “grossly unfair” terms might be challenged.  Challenges can be made to the following terms or practices in a business-to-business contract or trading relationship:

  • length of payment periods;
  • the right to interest for late payments; and
  • compensation for late payment.

If the court considers any of these terms or practices to be “grossly unfair”, it may grant an injunction restraining the customer from applying or relying on the term.

Interestingly, the Regulations stopped short of defining what is “grossly unfair” in this context.  However, it is hoped that this will become clear once the courts have dealt with a number of challenges.

The new Regulations represent a further step in the government’s efforts to tackle the widespread issue of late payment in the UK, which particularly affects SMEs.  Other recent measures include:

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