B2B

“Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

-David Copperfield, Charles Dickens

One of the oddities of the Small Claims Track in this country, is that for many small claims cases, by which I mean cases worth less than £10,000 the costs restrictions of part 27 CPR are optional.

The reason they are optional is because the parties may have contracted out of them, and provided by an agreement that they will not apply when or if a dispute arises between them. Many contracts will provide provisions that a defaulting party will pay the other party’s costs, often on an indemnity basis.

One obvious context in which this occurs is in disputes between landlord and tenant, where if, for example the tenant has the temerity not to pay his ground rent or service charge, the landlord may pursue him for those unpaid sums and include a claim not only for interest but for the costs incurred in pursuing the claim. But there are many others. 

One such example, which perhaps surprisingly, is not universally known amongst firms who engage in debt collection is the pursuit of business-to-business debts of under £10,000. 

Section 5A of the Late Payment of Commercial Debts (Interest) Act 1998 provides as follows:

(1)Once statutory interest begins to run in relation to a qualifying debt, the supplier shall be entitled to a fixed sum (in addition to the statutory interest on the debt).

(2)That sum shall be–

(a)for a debt less than £1000, the sum of £40;

(b)for a debt of £1000 or more, but less than £10,000, the sum of £70;

(c)for a debt of £10,000 or more, the sum of £100.

(2A)If the reasonable costs of the supplier in recovering the debt are not met by the fixed sum, the supplier shall also be entitled to a sum equivalent to the difference between the fixed sum and those costs.

(3)The obligation to pay a sum under this section in respect of a qualifying debt shall be treated as part of the term implied by section 1(1) in the contract creating the debt.

(4)Section 3(2)(b) of the Unfair Contract Terms Act 1977 (no reliance to be placed on certain contract terms) shall apply in cases where a contract term is not contained in written standard terms of the purchaser as well as in cases where the term is contained in such standard terms.

(5)In this section “contract term” means a term of the contract relating to a sum due to the supplier under this section.

(4)Section 17(1)(b) of the Unfair Contract Terms Act 1977 (no reliance to be placed on certain contract terms) shall apply in cases where a contract term is not contained in written standard terms of the purchaser as well as in cases where the term is contained in such standard terms.

(5)In this section “contract term” means a term of the contract relating to a sum due to the supplier under this section.

The key provision can be seen to be section 5(2A). Whilst a payment of £40 or £100 is nice to have, an award of legal costs less £100 or £40, would be even nicer. But it has been suggested to me, that the scope of the section does not encompass legal costs: that it is directed to administration costs within the debtor’s business. But I do not think this is the case.

Leaving to one side the wording utilised in the section and its literal meaning, it is always useful to go to the historical documents or travaux preparatoires, which underpin any set of statutory provisions, and see what can be gleaned from the context in which the statute was enacted.

In this respect, what shouts out to the reader, is the fact that this section was added to the Act by way of amendment. So what caused Parliament to amend the statute?

Well, the short answer is European Union law. This particular subsection can be traced to a requirement on the part of the United Kingdom to give effect to a European Union directive, which can be found here: EU Directive 7 of 2011 which is itself the successor to an earlier EU Directive, dating from 2000. What the 2011 Directive noted in its recital of objectives is:

(12) Late payment constitutes a breach of contract which has been made financially attractive to debtors in most Member States by low or no interest rates charged on late payments and/or slow procedures for redress. A decisive shift to a culture of prompt payment, including one in which the exclusion of the right to charge interest should always be considered to be a grossly unfair contractual term or practice, is necessary to reverse this trend and to discourage late payment. Such a shift should also include the introduction of specific provisions on payment periods and on the compensation of creditors for the costs incurred, and, inter alia, that the exclusion of the right to compensation for recovery costs should be presumed to be grossly unfair.

The recital goes on:

(19) Fair compensation of creditors for the recovery costs incurred due to late payment is necessary to discourage late payment. Recovery costs should also include the recovery of administrative costs and compensation for internal costs incurred due to late payment for which this Directive should determine a fixed minimum sum which may be cumulated with interest for late payment. Compensation in the form of a fixed sum should aim at limiting the administrative and internal costs linked to the recovery. Compensation for the recovery costs should be determined without prejudice to national provisions according to which a national court may award compensation to the creditor for any additional damage regarding the debtor’s late payment.

(20) In addition to an entitlement to payment of a fixed sum to cover internal recovery costs, creditors should also be entitled to reimbursement of the other recovery costs they incur as a result of late payment by a debtor. Such costs should include, in particular, those incurred by creditors in instructing a lawyer or employing a debt collection agency.

And article 6 of the EU Directive provides:

1. Member States shall ensure that, where interest for late payment becomes payable in commercial transactions in accordance with Article 3 or 4, the creditor is entitled to obtain from the debtor, as a minimum, a fixed sum of EUR 40.

2. Member States shall ensure that the fixed sum referred to in paragraph 1 is payable without the necessity of a reminder and as compensation for the creditor’s own recovery costs.

3. The creditor shall, in addition to the fixed sum referred to in paragraph 1, be entitled to obtain reasonable compensation from the debtor for any recovery costs exceeding that fixed sum and incurred due to the debtor’s late payment. This could include expenses incurred, inter alia, in instructing a lawyer or employing a debt collection agency.

It follows that in my view both the literal wording and a resort to the EU Directive support the contention, that in £10,000 B2B debt collection work, solicitors should be recovering “proper costs” in addition to the debt and statutory or contractual interest.

That of course presupposes that the debtor has funds to pay all those sums. That cannot be assumed, although it should be noted that many commercial parties are not insolvent and simply regard not paying their bills, as an easy means of credit.

But I suspect many solicitors’ firms who undertake B2B debt recovery work are missing a trick, if their retainers do not make provision for section section 5A: and those retainers may need to be revised, both to cater for the recovery of costs and also to write off costs, which are not recovered in order to remain competitive in this area of work. 

Whether this provision now endures, and if it does endure, for how long, now we have left the European Union, is another question, which perhaps falls outside the scope of this blog post. At the moment, the statutory section has not been amended to remove the debtors rights, granted under European Union law.

I would also point out, that in many instances, counsels’ fees are also payable under contractual terms now, and it follows that even where fees are under £10,000, and proceedings against a defaulting professional client have to be taken in the Small Claims Court, counsel can recover the costs of doing so, in addition to the original fee. A small crumb of comfort, to carry the Bar forward into the New Year. 

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