This is not all that common in Britain and such interest is often not enforced, even when the seller has a contractual right to do so. Nevertheless, it is sometimes included in contracts and in conditions of sale, and it can be extremely important. It might even be possible to charge interest on late payments made in the past.
To be effective the conditions of sale must govern the contract and not merely be printed on the invoice. Subject to this, interest permitted by a contract may be charged on unpaid debts included in a claim. A contract takes precedence over statutory interest so long as it provides a 'substantial remedy'. It also takes precedence over interest at the statutory rate (currently 8%). Interest permitted by a contract is likely to be at a higher rate than this, although it may be lower. You may have seen examples such as 'two per cent per month' or '6% over the base rate of Barclays Bank PLC applying from time to time'. The courts will not enforce usurious rates of interest but they will enforce commercial rates, even high commercial rates.
A long-running campaign for a general statutory right to interest if debts were paid late was finally rewarded by the Late Payment of Commercial Debts (Interest) Act 1998. This does provide for substantial interest penalties and should in theory have led to a marked improvement in the late payment culture that is so prevalent in Britain. Unfortunately the results of the Act are generally regarded to have been very disappointing, although as large businesses have only been able to claim this interest since August 2002 it is possible that this judgment will eventually have to be reassessed.
The key points of the Late Payment of Commercial Debts (Interest) Act 1998 may be summarised as follows: Implementation in stages This has been in three stages:
It is not possible to contract out of the Act, even if both parties wish to do so. However, a contract that provides a 'substantial remedy' for late payment will take precedence.
The Act only applies to contracts where both buyer and seller are acting in a business capacity. Certain categories of debt, such as mortgages, are excluded. There are no minimum or maximum amounts to the debts on which interest may be charged.
Payment dates in a contract will fix the due payment dates, so long as the contract is commercially realistic and provides a substantial remedy for late payment. In the absence of contractual terms it is possible that established custom and practice will fix the payment period, so long as a substantial remedy is provided, but this is not easy to establish. In the absence of both a contractual term and custom and practice, the allowed payment period is 30 days. This is not a right to 30 days credit and a legal case to recover the principal sum may be commenced within this period.
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