Articles

In the recent case of Ruttle Plant Hire Ltd –v- Secretary of State for Environment, Food and Rural Affairs, the Court of Appeal considered the operation of section 4 of the Late Payment of Commercial Debts (Interest) Act 1998 (“the Act”), and gave guidance to paying parties as to whether they could withhold payment for sums due until a correct invoice was issued.

Ruttle had carried out works for the government department under a contract that was arranged in a hurry, such that the terms were not precisely defined and the contract rates were not clear. As a result, Ruttle later raised invoices which were based on the wrong contract rates, and claimed more than Ruttle were entitled to. However, the government department could have calculated the correct amount from the documentation sent with the invoices.

The Court below initially found that because the wrong contract rates had been applied, the invoices did not give the government department “notice of the amount of the debt” within the meaning of Section 4 of the Act and that notice was only given when a final account, using the correct contract rates, was raised. Therefore the lower Court held that late payment interest would not run until the final account was raised.

However, the Court of Appeal questioned whether “notice of the amount of the debt” required invoices to be correct, and whether any error, however small, would be sufficient to exclude entitlement to interest. The Court decided the Act should not require invoices to be perfect before interest could run. If this were the case, it could lead to parties looking for the smallest error in an invoice. If they found one, they could then delay payment of the whole sum due and avoid payment of the statutory interest. The purpose of the Act would be frustrated.

The Court below had determined that the invoices were based on the wrong rates, that this was Ruttle’s fault, and that therefore there should be no interest. The Court of Appeal found this approach disproportionate, as it meant that Ruttle were deprived of all interest even on sums clearly owing, and the government department had the benefit of holding on to the money. The Court noted that the government department could have avoided any interest by paying at the contract rate which it considered was correct. It should, as a minimum, have paid Ruttle the amount which it knew was due.

Instead, it was held that the Court’s powers under Section 5 of the Act to remit or reduce interest should apply to sums in respect of which Ruttle had created uncertainty. There should be no remission on sums which from the government department’s point of view were clearly payable.

In short, the Court determined that Section 4 of the Act would allow a paying party to withhold payment of sums reasonably in doubt. What a paying party could not do was to pay nothing at all and expect to escape the high rates of interest imposed by the 1998 Act on what was, in any case, due. To say that a paying party had no obligation to pay until a correct invoice had been submitted was untenable.

Rebecca Latus