Companies must pay up undisputed amounts to avoid punitive interest, says Court of Appeal

The Late Payment of Commercial Debts (Interest) Act was designed to ensure that debts are paid on time by allowing for high rates of interest to be charged on commercial debts which are not paid on time. The law allows companies to charge 8% over the Bank of England base rate of interest.

Ruttle Plant Hire was asked by the Department of Environment, Food and Rural Affairs (DEFRA) to carry out emergency work after the outbreak of a pig disease and then foot and mouth disease in 2000 and 2001. The agreements to carry out the work were hurried, leaving some ambiguity about some contractual issues.

There was a dispute about how much was to be charged for the work. Ruttle made some errors in calculating its invoices and in the end three sets of invoices were sent to DEFRA. DEFRA disputed the invoices and did not pay them, leading Ruttle to claim interest for the late payment of the invoices.

The High Court had ruled in DEFRA's favour, but the Court of Appeal said that it was not fair for an organisation to withhold the whole payment for goods or services just because there was confusion over some of it.

"And as to policy it makes no sense to suppose that the Act requires the invoice to be perfect before interest can run," said Lord Justice Jacob in his ruling. "If it did, it would lead an employer looking for the smallest detail of error in an invoice. If he found one he could delay payment of the whole sum due and avoid payment of the statutory interest. The purpose of the Act would be frustrated."

He said that DEFRA had argued "that the supplier should get the statutory rate only if he played his part properly by getting his invoice right. But I can see no factual or rational basis in such a limited purpose," he ruled.

Lord Justice Jacob said that the power to remit, or reduce, interest payments that section 5 of the Act provides is enough to protect purchasers of goods or services, who should pay any undisputed amounts.

"A paying party can withhold payment for sums reasonably in doubt or not yet properly settled. The court will protect him by the use of [section] 5 remission because the uncertainty to that extent was created by the supplier," he said. "What he cannot do is to pay nothing at all and expect to escape the high rates of interest imposed by the Act on what on any view is due."

Lord Justice Jacob disagreed with DEFRA's assertion in court that the submission of an incorrect invoice meant that no debt was in place.

"I just do not accept that. Ruttle had done the work for and supplied the plant to DEFRA. To say that there was no obligation whatsoever to pay anything at all unless a correct invoice had been submitted is untenable. An invoice is a two-fold statement by the supplier 'this is what I think you owe' and 'pay me now.' Getting the former wrong does not mean that nothing is owing," he said.

Litigation and dispute resolution specialist Mo Bhaskaran of Pinsent Masons, the law firm behind OUT-LAW.COM, said that the case would give suppliers leeway in pushing for interest on invoices which are paid late.

"If it is clear that a significant part of the debt cannot be disputed then debtors need to pay the undisputed amount to avoid the risk of interest under the Act being awarded on the whole amount," he said.

He said that until now the view has been taken that someone owing money could avoid paying interest as long as they could find errors in another company's invoice, but that that was no longer true.

"Lawyers will often try to rely on what might be described as technical or legal arguments that take advantage of the lack of formal validity in the actions of the other party," he said. "The court here decided to look beyond detailed technical arguments around the accuracy of invoices and applied a common sense approach consistent with the reason why the Late Payment interest legislation was brought in. The Act is to incentivise late payers and following this judgment debtors will need to be careful before basing non-payment on minor deficiencies affecting documentation."