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UK courts to define 'grossly unfair' payment terms, says government

Difficult questions around whether supply chain payment terms and practices are "grossly unfair" should ultimately be settled by the courts or the new Small Business Commissioner, the UK government has said.27 Oct 2015

It instead intends to legislate to make it easier for representative bodies to challenge terms they believe fit the criteria in the courts on behalf of their members, according to a consultation published in conjunction with the Scottish Government. These bodies would be given the flexibility to decide whether to take action on behalf of individual small businesses or groups of businesses, and whether to take action on behalf of members or non-members, according to the consultation.

"By making it easier for disputes around contractual terms and practices to be taken to court, the courts would have an increased opportunity to decide whether terms and practices should be considered 'grossly unfair'," the governments said in the consultation. "In the longer term, this could increase the amount of case law created, which would help clarify the meaning of 'grossly unfair' for the wider business community."

However, commercial law expert Ben Gardner of Pinsent Masons, the law firm behind Out-Law.com, said that the government had missed an opportunity to further clarify the law for suppliers and their customers.

"It could take years to develop detailed case law as to what the term 'grossly unfair' means, and that is on the assumption that businesses are willing to take their customers to court in respect of their payment terms and practices," he said. "In the meantime, small and large businesses alike will not have any certainty as to whether the payment terms that they are using, or are being asked to accept, are grossly unfair or not."

The EU's Late Payment Directive, which should have been introduced into UK law through the 2013 Late Payment of Commercial Debt Regulations, gives contractor trade bodies the power to challenge late payment terms and practices which are 'grossly unfair'. The 2013 Regulations did not contain this power.

As a result of this, the UK government sought views on whether it should review the trade body power, so as to "make it clear that a representative body can challenge any grossly unfair term". It found "broad support" to enhance the new power so that it "better reflect[s] the intention of the 2011 directive", but has ruled out further legislative definition of the term'grossly unfair'.

However, the term has not been interpreted by the UK courts and there is currently very little guidance on how a customer might show that its payment terms are not grossly unfair. Gardner said that the representative bodies and business needed "a degree of certainty that, in going to court, there is reasonable chance of success. However, if there is no definition of what the term 'grossly unfair' actually means, they will not be able to assess how strong their case is and may be unwilling to become involved in costly court proceedings". 

According to the new consultation, representative bodies would be able to "self-nominate" themselves as being willing to challenge grossly unfair terms and practices in the courts. Despite support from respondents to the February discussion paper, the governments do not intend to maintain a list of recognised representative bodies as this would "add unnecessary bureaucracy to the process". Instead, whether a body has the right to bring an action under the regulations would be a question for the UK's courts.

The UK government has also announced its intention to establish a 'Small Business Commissioner', who would be able to help small businesses resolve payment disputes with their larger commercial customers without having to go to court. The new commissioner will be able to consider whether an act or omission relating to payment was "fair and reasonable" in the particular circumstances of the case, and the government intends to consult on scheme regulations that will specify the matters that the commissioner can take into account when making determinations, according to the paper.

Small and medium-sized UK businesses were owed a reported £26.8 billion in overdue payments as of June 2015, according to the consultation paper. This was down from £32.4bn the previous year, but still significantly higher than the amount owed in 2008, it said.

The consultation closes on 27 November.