Interest on late payment

Most forms of contract provide for interest to be payable at an agreed rate where the employer fails to pay a sum due under the terms of the contract, whether that amount is certified in an interim certificate or the final certificate. For example, the JCT 2016 Standard Form of Building Contract provides that if the employer fails to make proper payment of a sum due to the contractor by the final date for payment, the employer must in addition to the unpaid amount pay simple interest at the rate of 5% per annum above the Bank of England base rate until payment is made (see clause 4.11.6). 

Interest will fall due under this clause where payment of an interim certificate is withheld in the absence of a valid withholding notice, even if the underlying reason for withholding payment was valid. The interest which accrues cannot be recovered by the employer in a subsequent certificate.

Under statute

When bringing a claim for late or non-payment of a sum due under the contract a contractor may also be entitled to claim interest under:

• the Late Payment of Commercial Debts (Interest) Act 1998;
• section 35A of the Senior Courts Act 1981;
• section 69 of the County Courts Act 1984; or
• section 49 of the Arbitration Act 1996.

The Late Payment of Commercial Debts (Interest) Act 1998 provides for an enhanced rate of interest for late payment of a 'qualifying debt' under a contract for the supply of goods and services where both parties are acting in the course of a business. The enhanced rate is set by the government and is currently eight per cent over the official dealing rate of the Bank of England (The Late Payment of Commercial Debts (Rate of Interest) (No.3) Order 2002).

Section 35A of the Senior Courts Act 1981 and section 69 of the County Courts Act 1984 give the courts discretion to award interest on damages or debts which are found to be due in court proceedings up to the date of judgment or payment. Interest continues to run after judgment on unpaid sums pursuant to section 74 of the County Courts Act 1984 or section 17 of the Judgments Act 1838.

Section 49 of the Arbitration Act 1996 gives arbitrators the power to award interest, subject to any agreement between the parties to the contract. However, it is usual for the terms of the contract to give both adjudicators and arbitrators an express power to award interest.

Damages

If the contractor can prove that he or she incurred interest losses (including borrowing costs) as a result of the late payment or non-payment, it is open for him or her to claim these as damages for breach of contract: Sempra Metals Ltd v Revenue and Customs Commissioners.