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You are here: BAILII >> Databases >> Scottish Law Commission >> Scottish Law Commission (Reports) >> Interest on Debt & Damages (Report) [2006] SLC 203(Appendices) (1 September 2006) URL: http://www.bailii.org/scot/other/SLC/Report/2006/203(Appendices).html Cite as: [2006] SLC 203(Appendices) |
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Section
Schedule 1 — Modification of enactments
Part 1 — Modification of Acts
Part 2 — Modification of Instruments
Schedule 2 — Repeals
An Act of the Scottish Parliament to make provision for the creation of an entitlement to interest in certain circumstances; to change the law on entitlement to interest on damages payments; to make provision about interest and tenders in proceedings; and for connected purposes.
1 Entitlement to interest
(1) A person entitled to payment of a sum of money is entitled to interest on that sum in accordance with the provisions of this Act.
(2) Interest to which a person is entitled under subsection (1) is in this Act referred to as "statutory interest".
(3) In a case where a starting date falls to be ascertained in accordance with section 3, 4, 5, 6 or 11, statutory interest runs from that date until the date or dates of payment of the principal sum.
(4) In any other case, statutory interest runs from the date on which the principal sum is due until the date or dates of payment of that sum.
NOTE
Section 1(1) implements Recommendation 1 in part by creating a general statutory entitlement to interest where payment is due on a sum of money. This entitlement applies both to debts of various types and to damages.
Section 1(2) introduces the expression "statutory interest" which is used throughout the Bill.
Section 1(3) and (4) are concerned with the starting date from which interest runs. Certain specific types of payment are dealt with in sections 3, 4, 5, 6 and 11. For all other cases, section 1(4) provides a general rule that statutory interest runs from the date when the principal sum falls due until the date or dates when payment is made. This general rule covers a wide variety of circumstances in which payment may be due by one person to another, including sums payable in order to redress unjustified enrichment, claims for salvage, sums due by way of aliment or financial provision on divorce, and claims (including claims for legal rights in a deceased person's estate) against trustees or executors who are in default in failing to make sums over to persons entitled to them. In each of these circumstances the date when payment falls due is to be determined by application of the relevant existing law.
2 Circumstances in which interest not payable
Where a person (in this section referred to as "the creditor") is entitled to payment of a sum of money from another person (in this section referred to as "the debtor"), statutory interest is not due on that sum if—
(a) there is express or implied agreement between the creditor and the debtor—
(i) that interest is to be due on that sum on a basis different from that provided for in this Act; or
(ii) that no interest is to be due on that sum;
(b) the payment represents a fine, penalty or tax due to a public authority;
(c) any enactment (other than this Act or the Late Payment of Commercial Debts (Interest) Act 1998 (c 20))—
(i) makes provision for interest to be due on that sum; or
(ii) provides that no interest is due on that sum;
(d) interest is due on that sum by virtue of that Act of 1998 and is claimed as so due by the creditor; or
(e) the payment is of a type specified by the Scottish Ministers by order made by statutory instrument.
NOTE
Section 2 specifies certain circumstances in which statutory interest is not payable, either because interest is payable which is not "statutory interest" under this Bill, or because no interest is payable.
Sections 2(a) and (c) implement the remainder of Recommendation 1. The general statutory entitlement to interest in section 1(1) does not apply where interest is due on a different basis (or not due at all) by reason of an express or implied agreement or by another statutory provision (see paragraphs 3.5–3.6 of the Report).
Section 2(b) excludes fines, penalties or taxes from the scope of statutory interest. Accordingly, where a statutory provision imposes a fine, penalty or tax without making reference to interest, statutory interest under this Bill will not run.
Section 2(d) implements Recommendation 12. It is intended to avoid conflict between the interest regime created by the Late Payment of Commercial Debts (Interest) Act 1998 and that created by this Bill. At the same time it respects the UK's obligation to implement European Union directives (see paragraphs 3.37-3.41 for a full discussion of this point). Interest under the 1998 Act, as opposed to interest under this Bill, applies where a creditor claims the right to interest under the 1998 Act. That is, the 1998 Act will take precedence where a creditor to whom that Act applies (a creditor acting in the course of business) chooses to claim interest under it.
Section 2(e) implements Recommendation 2 which recognises that, as a matter of policy, it may be desirable to exclude some types of debt from the right to statutory interest. These debts could be excluded by the use of a ministerial power exercised by statutory instrument made under section 2(e). Certain debts such as utilities debts or housing debt do not at present usually attract interest, and even if interest is available under a contract, it is rarely claimed (see paragraphs 3.7-3.9). There may be fears that the availability of statutory interest on such debts could exacerbate problems of multiple debt. No distinction can be made between utility debts and other debts on the basis of legal principle. If, however, as a matter of social policy, it is thought necessary to make such exceptions then section 2(e) confers a power for Ministers to do so. These statutory instruments would be approved by resolution of the Scottish Parliament before being made by Scottish Ministers (section 15(2)).
3 Starting date: contracts generally
(1) This section applies where statutory interest is due on a sum of money payable under the terms of a contract.
(2) Where a contract (other than a contract such as is referred to in section 4 or 5) makes provision as to the date on which any payment under the contract is due, that date is the starting date in respect of that payment.
(3) Where a contract of a type referred to in subsection (4), (5) or (7) makes no such provision, the starting date is to be ascertained in accordance with whichever of those subsections is applicable.
(4) In the case of a contract for the supply of goods or services, the starting date is the date 30 days after whichever is the later of—
(a) the day on which the supplier's obligation is performed; and
(b) the day on which the other party has notice of—
(i) the amount of the debt; or
(ii) where that amount is unascertained, the sum which the supplier claims is the amount of the debt.
(5) In the case of a contract of insurance or indemnity, the starting date is whichever is the later of—
(a) the day 30 days after the day of claim; and
(b) the day on which loss is sustained in consequence of the event insured against or indemnified.
(6) In paragraph (a) of subsection (5), "the day of claim" is—
(a) the day on which a claim is intimated to the insurer or indemnifier in respect of the event insured against or indemnified; or
(b) if the contract requires the claim to be vouched to the insurer or indemnifier and that is not done until after the claim is intimated, the day on which the claim is vouched.
(7) In the case of a contract involving a cautionary obligation, the starting date in respect of any payment in satisfaction of the cautioner's right of relief against the principal debtor is the day on which payment under the contract is made by the cautioner.
NOTE
Section 3 implements the recommendations of this Report on the starting dates for the running of interest on various types of contractual debt (see paragraphs 3.12-3.36). Section 3(2) states the general rule that the starting date is the date when the parties agree that payment under the contract is due, and implements Recommendation 3.
Sections 3(4), 3(5) and 3(7) apply only in the absence of an agreement to which section 3(2) applies. These sections are also subject to section 2(a): if there is express or implied agreement that interest should be applied to a contract on a different basis from that in this Act, then interest will run according to that agreement. If there is express or implied agreement that no interest will run, then statutory interest is not due.
Section 3(4) implements Recommendation 4 with regard to debts due for the supply of goods and services. The term "supply" is defined to include "sale", and "seller" is defined to include "seller" (section 16(1)).
Sections 3(5) and 3(6) apply to contracts of insurance or indemnity (see paragraphs 3.24-3.29) and implements Recommendation 7 that interest on a contract of insurance or indemnity should run from the later of (a) the date 30 days after the insured intimates a claim and (b) the date when the loss for which the claim is made is sustained. This provision gives the insurer a reasonable period of time to investigate a claim and interest only runs from when the policyholder meets his obligations (for example, in relation to vouching) under the contract of insurance (section 3(6)).
Section 3(7) implements Recommendation 8 regarding a cautioner's right of relief under a cautionary obligation.
4 Starting date: contracts of loan
In the case of a contract of loan, the starting date is the day on which the loan is made.
NOTE
Section 4 preserves the common law rule that interest on a contract of loan runs from the date on which the loan is made (see paragraphs 3.31-3.32 and Recommendation 9). Section 4 is subject to section 2(a): if there is express or implied agreement that interest should be applied to the loan on a different basis from that in this Act, then interest will run according to that agreement. If there is express or implied agreement that no interest will run, then statutory interest is not due.
5 Starting date: contracts of employment or apprenticeship
In the case of a contract of employment or apprenticeship, the starting date in respect of payment for a period of service is the day 30 days after the day on which that payment falls to be made under the terms of the contract.
NOTE
Section 5 applies to contracts of employment or apprenticeship and implements Recommendation 10 that interest should run from 30 days after the end of the period in respect of which service under the contract is remunerated. For example, if the employee is paid monthly, then interest runs from 30 days after the end of the month; if the employee is paid weekly, then interest runs from 30 days after the end of the week. Section 5 is subject to section 2(a): if there is express or implied agreement that interest should be applied to the contract on a different basis from that in this Act, then interest will run according to that agreement. If there is express or implied agreement that no interest will run, then statutory interest is not due.
6 Starting date: damages
(1) Where statutory interest is due on a sum of money payable as damages, the starting date in respect of any part of that sum representing a head of loss is the day on which the loss in question is sustained.
(2) Nothing in this section prevents a court from treating a loss (including non-patrimonial loss) in respect of which an award of damages is made as having been sustained over a period of time.
NOTE
Section 6(1) sets out the general rule that in an action for damages interest should run on each head of loss from the date on which the loss in question was sustained (Recommendation 22).
Section 6(2) preserves the existing practice in relation to losses sustained over a period of time, such as solatium for pain and suffering, of applying interest at half rate throughout the period during which the loss was sustained. This practice is intended to reflect the fact that some consequences of injury continue over a period of time and are not sustained on any particular date.
7 Calculation of statutory interest
(1) Subject to section 8, statutory interest in respect of any period runs at the statutory rate for that period.
(2) Subject to subsection (3), statutory interest is simple interest.
(3) Where a court orders payment of a sum of money on which statutory interest is to run, interest runs from the date of the order on both—
(a) the principal sum; and
(b) any interest accrued on that sum as at that date.
(4) Subsection (3) does not apply in respect of—
(a) an order authorising execution in Scotland of a foreign judgment; or
(b) any order made in connection with, or in consequence of, the registration of a document for execution.
NOTE
Section 7 establishes the concept of a statutory rate of interest which is compensatory rather than penal in nature. "Statutory interest" is described in section 1(2) as interest to which a person is entitled under section 1(1) and "the statutory rate" is defined in section 16(1) as "the rate 1.5% per year over the official dealing rate." Section 7 is subject to an exception in section 8 for sums which are payable in a foreign currency. The intention is that the statutory rate created in this Bill would replace the current "judicial rate" (see paragraphs 7.5-7.7).
Section 7 implements Recommendation 27: that the statutory rate should be a prescribed rate which fluctuates a specified percentage above the Bank of England rate. For example, if the Bank of England rate is 4.5% then statutory interest is 6% (1.5% above 4.5%). Section 7(1) is intended to make it clear that when the statutory rate changes (for example, if the Bank of England rate goes up) it changes the rate applicable to any sum to which this Bill applies. For example, if statutory interest is due on an unpaid debt and the statutory rate goes up, then the rate applicable to that debt after the date of the change is the new, higher rate.
Section 7(2) provides that statutory interest should be calculated as simple interest and not compounded. However, section 7(3) provides for interest to be compounded on one occasion: at the date of decree. This is the current practice in relation to damages (see paragraphs 7.40-7.45) and it is recommended (Recommendation 34) that this practice should also apply to debts. Section 7(4) provides that there should be no such compounding for interest due in accordance with foreign judgments authorised for execution in Scotland or under documents registered for execution in the Books of Council and Session or the sheriff court books (see paragraph 7.44).
8 Principal sum payable in foreign currency
(1) Where a principal sum is payable in a foreign currency, statutory interest on that sum runs at—
(a) the rate 1.5% per year over such rate as is, in relation to the foreign currency in question, that currency's nearest equivalent to the official dealing rate; or
(b) if it is not possible to identify such an equivalent, such rate as best meets the interests of justice.
(2) The Scottish Ministers may by order made by statutory instrument provide that paragraph (a) of subsection (1) is to have effect with the substitution, for the percentage of 1.5 specified there, of such percentage as is specified in the order.
NOTE
Scottish courts may competently award decree in a currency other than sterling (see paragraph 7.18). The statutory rate prescribed in this Bill is referable to the Bank of England base rate, but this would not be appropriate for a foreign currency with its own base rate. For example, if an award were in euros then it would be more appropriate to apply a rate referable to the European Central Bank rate (see Recommendation 30). Section 8(1)(b) allows the court discretion to apply a rate which best meets the interests of justice where there is not a suitable base rate for the foreign currency. Section 8(2) makes provision for amendment of the rate in section 8(1); for example, to change it to 1% over the foreign currency's official dealing rate.
9 Power of court to remit interest
(1) If a court considers that, by reason of any conduct of the person to whom statutory interest would be payable, it would be in the interests of justice to do so, the court may decide that—
(a) statutory interest which, but for this section, would be payable is not to be payable; or
(b) an amount payable as statutory interest is to be less than, but for this section, it would be.
(2) In subsection (1), "conduct" includes any act or omission (whether before or after the time when the principal sum fell due for payment).
NOTE
Section 9 provides for a judicial discretion in specified circumstances to decide that it is in the interests of justice either that interest is not payable or that the amount of interest to be paid should be less than it would be under the other provisions of this Bill. Discretion is exercisable only with regard to the conduct of the person to whom statutory interest would be payable. The court's discretion applies regardless of whether the claim is one for debt or for damages. This approach to judicial discretion implements Recommendation 24 and is similar to the discretion available to the court under the Late Payment of Commercial Debts (Interest) Act 1998 (section 5).
10 Tenders
(1) Where a tender is made in the course of any proceedings, the tender is, unless it states otherwise, in full satisfaction of any claim for interest in the action by any person in whose favour the tender is made.
(2) Where a court is considering whether a sum of money payable under an order made by it is equal to or greater than an amount tendered in the proceedings, it is to leave out of account any element of the sum which represents interest in respect of the period between the making of the tender and the date of the order.
NOTE
Section 10 implements Recommendation 25 that a tender should be presumed to be in full satisfaction of any claim for interest and in considering whether the tender has equalled or exceeded the award the court should not include interest between the date of the tender and the date the award is made. Section 10 is similar to section 1(1B) of the Interest on Damages (Scotland) Act 1958 (as amended in 1971), although the 1958 Act applies only to awards of damages.
11 Fees and outlays in proceedings
Where a party to proceedings is liable to pay any fees or outlays incurred by another party to those proceedings, statutory interest on the fees or outlays runs from the date on which they are paid by the other party.
NOTE
Section 11 amends the existing law that a party to litigation does not usually have a right, if successful, to claim interest on outlays (such as fees paid to expert witnesses) incurred in the course of the litigation. In Recommendation 26 it is suggested that where a party is entitled to recover outlays in judicial expenses from another party, statutory interest should be payable on the outlays from the dates when they were paid. By virtue of section 11, statutory interest would also be payable on legal fees from the dates on which they were paid.
12 Power to amend enactments
The Scottish Ministers may by order made by statutory instrument amend any enactment so as to—
(a) substitute the statutory rate for a rate of interest specified in the enactment; or
(b) specify that interest provided for in the enactment is to run at the statutory rate.
NOTE
Although statutory interest under this Bill does not apply to interest specified in another enactment (see section 2(c)), section 12 empowers Scottish Ministers to amend legislation so that the statutory rate replaces another rate of interest or so that that statutory rate applies where the legislation is silent on the rate of interest. (It should be noted that schedule 1 amends certain statutory provisions by introducing references to statutory interest.)
13 Application of Act
(1) Subject to subsection (2), section 1 creates an entitlement to statutory interest in a case where a principal sum is paid on or after the date on which that section comes into force.
(2) Where a sum of money is paid on or after the date referred to in subsection (1) but proceedings seeking payment of that sum are commenced before that date, there is no entitlement to statutory interest on that sum.
(3) This Act binds the Crown.
NOTE
Section 13 sets out the provisions for transition to the new interest regime, as explained in Part 10 of this Report. The principle is that the new regime will apply to all claims for payment of money except where a court action has been raised before the date of commencement of this Bill (Recommendation 38).
14 Modification and repeal of enactments
(1) Schedule 1, which modifies enactments, has effect.
(2) The enactments mentioned in the first column of schedule 2 are repealed to the extent specified in the second column.
NOTE
Statutory provisions which are to be modified are set out in schedules 1 and 2, and section 14 gives effect to those schedules.
15 Orders
(1) A statutory instrument containing an order under section 8(2) or 16(2) is subject to annulment in pursuance of a resolution of the Parliament.
(2) No order under section 2(e) or 12 is to be made unless a draft of the statutory instrument containing the order has been laid before, and approved by resolution of, the Parliament.
NOTE
Section 15 sets out the Parliamentary procedure for statutory instruments made under powers given in this Bill. Most orders which may be made under the Bill, such as an order to change the way the statutory rate is calculated, are to be made by negative procedure which would allow Scottish Ministers to react quickly to changing market conditions. However, orders under section 2(e), which confers a very wide power, and section 12, which may amend primary legislation, may be made only after a resolution of the Scottish Parliament.
16 Interpretation
(1) In this Act—
"court" includes any tribunal, arbiter or adjudicator;
"the official dealing rate" means the rate announced from time to time by the Monetary Policy Committee of the Bank of England ("the Bank") and for the time being in force as the official dealing rate, being the rate at which the Bank is willing to enter into transactions for providing short term liquidity in the money markets;
"principal sum" means a sum of money on which statutory interest is payable;
"starting date" means the date on which statutory interest on a sum of money begins to run;
"statutory interest" has the meaning given by section 1(2);
"the statutory rate" means the rate 1.5% per year over the official dealing rate.
"supply" includes "sale" and "supplier" includes "seller".
(2) The Scottish Ministers may by order made by statutory instrument amend the definition of "the statutory rate" in subsection (1) so as to substitute a different rate for the rate for the time being specified in that definition.
NOTE
Section 16 defines certain expressions used in the Bill.
As a consequence of the definition of "court", the judicial discretion to remit interest in section 9 is also available to tribunals, arbiters and adjudicators. The definition of "the official dealing rate" means that the statutory rate of interest will be referable to the Bank of England base rate. Alternative reference rates are discussed in paragraphs 7.11-7.13 but it is recommended that the rate should fluctuate by a specific percentage above the Bank of England rate (Recommendation 27). The definition of "statutory rate" provides for the rate to be 1.5% above the Bank of England rate but Scottish Ministers may substitute a different percentage by means of a statutory instrument made by negative procedure (section 16(2)).
17 Short title and commencement
(1) This Act may be cited as the Interest (Scotland) Act 2006.
(2) This Act (other than this section) comes into force in accordance with provision made by the Scottish Ministers by order made by statutory instrument.
(3) Different provision may be made under subsection (2) for different purposes.
NOTE
Section 17 sets out how the Bill is to be cited. It also provides for the commencement of the Bill by way of commencement order.
Bills of Exchange Act 1882 (c 61)
Partnership Act 1890 (c 39)
Trusts (Scotland) Act 1921 (c 58)
Conveyancing and Feudal Reform (Scotland) Act 1970 (c 35)
Law Reform (Miscellaneous Provisions)(Scotland) Act 1980 (c 55)
Bankruptcy (Scotland) Act 1985 (c 66)
Insolvency Act 1986 (c 45)
(a) after the words "the reference to" insert "the rate specified in"; and
(b) for the word "rules" substitute "statutory rate (within the meaning of the Interest (Scotland) Act 2006)".
Debtors (Scotland)Act 1987 (c 18)
Late Payment of Commercial Debts (Interest) Act 1998 (c 20)
Adults with Incapacity (Scotland) Act 2000 (asp 4)
MODIFICATION OF INSTRUMENTS
Insolvency (Scotland) Rules 1986 (SI 1986/1915)
Industrial Tribunals (Interest) Order 1990 (SI 1990/479)
(a) after the word "be" insert "in England and Wales"; and
(b) after the word "day" insert "and, in Scotland, the statutory rate (within the meaning of the Interest (Scotland) Act 2006)".
Industrial Tribunals (Interest on Awards in Discrimination Cases) Regulations 1996 (SI 1996/2803)
NOTE
Schedule 1 amends various enactments to provide that the rate applied is the statutory rate under this Bill. Part 1 provides for the amendment of primary legislation. Paragraphs 1 and 3 make amendments to apply the statutory rate where no rate is currently specified. Paragraphs 2, 4, 5, 6, 7, 8 and 10 substitute the statutory rate for a rate currently specified in those Acts.
Paragraph 9 of Part 1 amends section 3(2) of the Late Payment of Commercial Debts (Interest) Act 1998 to ensure that an entitlement to interest under this Bill does not override an entitlement under the 1998 Act.
Part 2 of schedule 1 provides for the amendment of subordinate legislation. Paragraph 11 applies the statutory rate in the definition of "official rate" in the Insolvency (Scotland) Rules 1986, and paragraphs 12 and 13 ensure that the rate applied by Employment Tribunals in Scotland will be the statutory rate.
Further amendments to apply or substitute the statutory rate could be made by statutory instrument under the power in section 12 of this Bill.
| Enactment | Extent of repeal |
| Sheriff Courts (Scotland) Extracts Act 1892 (c 17) | Section 9. |
| Interest on Damages (Scotland) Act 1958 (c 61) | The whole Act. |
| Interest on Damages (Scotland) Act 1971 (c 31) | The whole Act. |
| Administration of Justice (Scotland) Act 1972 (c 59) | Section 4. |
NOTE
The Interest on Damages (Scotland) Act 1958 (amended in 1971) is repealed in its entirety by schedule 2.
The other repeals in schedule 2 are related to the replacement of the "judicial rate" by the statutory rate under this Bill. Section 9 of the Sheriff Courts (Scotland) Extracts Act 1892 currently provides for a rate of 8 per cent to run on sheriff court decrees and extracts. Section 4 of the Administration of Justice (Scotland) Act 1972 provides for amendment of section 9 of the 1892 Act by Act of Sederunt.
Appendix B
Current statutory provisions
This appendix contains the text of two statutes referred to in the Report: the Interest on Damages (Scotland) Act 1958 and the Late Payment of Commercial Debts (Interest) Act 1998. Both texts are shown as amended.
An Act to amend the law of Scotland relating to the power of the courts to order payment of interest on damages. [1st August 1958].
1. Power of courts to grant interest on damages
(1) Where a court pronounces an interlocutor decerning for payment by any person of a sum of money as damages, the interlocutor may include decree for payment by that person of interest, at such rate or rates as may be specified in the interlocutor, on the whole or any part of that sum for the whole or any part of the period between the date when the right of action arose and the date of the interlocutor.
(1A) Where a court pronounces an interlocutor decerning for payment of a sum which consists of or includes damages or solatium in respect of personal injuries sustained by the pursuer or any other person, then (without prejudice to the exercise of the power conferred by subsection (1) of this section in relation to any part of that sum which does not represent such damages or solatium) the court shall exercise that power so as to include in that sum interest on those damages and on that solatium or on such part of each as the court considers appropriate, unless the court is satisfied that there are reasons special to the case why no interest should be given in respect thereof.
(1B) For the avoidance of doubt, it is hereby declared that where, in any action in which it is competent for the court to award interest under this Act, a tender is made in the course of the action, the tender shall, unless otherwise stated therein, be in full satisfaction of any claim to interest thereunder by any person in whose favour the tender is made; and in considering in any such action whether an award is equal to or greater than an amount tendered in the action, the court shall take account of the amount of any interest awarded under this Act, or such part of that interest as the court considers appropriate.[1]
(2) Nothing in this section shall—
(a) authorise the granting of interest upon interest, or
(b) prejudice any other power of the court as to the granting of interest, or
(c) affect the running of any interest which apart from this section would run by virtue of any enactment or rule of law.
2. Amendment of s 31 of Sheriff Courts (Scotland) Act 1907
[Section thirty-one of the Sheriff Courts (Scotland) Act, 1907 (which among other things specifies the grounds on which an interlocutor of a sheriff entering judgment under that section may be appealed to the Court of Session) shall have effect as if after head (4) thereof there were inserted the following head—
"(5) That no grant of interest on the damages (if any) has been included in the interlocutor or that any such grant so included is inadequate or is excessive."
and as if there were added at the end of the section the words "and upon any such appeal so far as based on the ground specified in head (5) of this section the court may make such order as to it seems just."][2]
3. Citation, interpretation, extent and commencement
(1) This Act may be cited as the Interest on Damages (Scotland) Act 1958.
(2) In this Act, "personal injuries" includes any disease and any impairment of a person's physical or mental condition.[3]
(3) This Act shall extend to Scotland only, and shall not apply to any action commenced against any person before the passing of this Act.
An Act to make provision with respect to interest on the late payment of certain debts arising under commercial contracts for the supply of goods or services; and for connected purposes. [June 11, 1998]
1 Statutory interest
(1) It is an implied term in a contract to which this Act applies that any qualifying debt created by the contract carries simple interest subject to and in accordance with this Part.
(2) Interest carried under that implied term (in this Act referred to as "statutory interest") shall be treated, for the purposes of any rule of law or enactment (other than this Act) relating to interest on debts, in the same way as interest carried under an express contract term.
(3) This Part has effect subject to Part II (which in certain circumstances permits contract terms to oust or vary the right to statutory interest that would otherwise be conferred by virtue of the term implied by subsection (1)).
2 Contracts to which Act applies
(1) This Act applies to a contract for the supply of goods or services where the purchaser and the supplier are each acting in the course of a business, other than an excepted contract.
(2) In this Act "contract for the supply of goods or services" means—
(a) a contract of sale of goods; or
(b) a contract (other than a contract of sale of goods) by which a person does any, or any combination, of the things mentioned in subsection (3) for a consideration that is (or includes) a money consideration.
(3) Those things are—
(a) transferring or agreeing to transfer to another the property in goods;
(b) bailing or agreeing to bail goods to another by way of hire or, in Scotland, hiring or agreeing to hire goods to another; and
(c) agreeing to carry out a service.
(4) For the avoidance of doubt a contract of service or apprenticeship is not a contract for the supply of goods or services.
(5) The following are excepted contracts—
(a) a consumer credit agreement;
(b) a contract intended to operate by way of mortgage, pledge, charge or other security [; and
(c) a contract of a description specified in an order made by the Secretary of State.
[(6) An order under subsection (5)(c) may specify a description of contract by reference to any feature of the contract (including the parties).] [4]
(7) In this section—
"business" includes a profession and the activities of any government department or local or public authority;
"consumer credit agreement" has the same meaning as in the Consumer Credit Act 1974;
"contract of sale of goods" and "goods" have the same meaning as in the Sale of Goods Act 1979;
"government department" includes any part of the Scottish Administration;
"property in goods" means the general property in them and not merely a special property.
2A Application of the Act to Advocates
The provisions of this Act apply to a transaction in respect of which fees are paid for professional services to a member of the Faculty of Advocates as they apply to a contract for the supply of services for the purpose of this Act.[5]
3 Qualifying debts
(1) A debt created by virtue of an obligation under a contract to which this Act applies to pay the whole or any part of the contract price is a "qualifying debt" for the purposes of this Act, unless (when created) the whole of the debt is prevented from carrying statutory interest by this section.
(2) A debt does not carry statutory interest if or to the extent that it consists of a sum to which a right to interest or to charge interest applies by virtue of any enactment (other than section 1 of this Act).
This subsection does not prevent a sum from carrying statutory interest by reason of the fact that a court, arbitrator or arbiter would, apart from this Act, have power to award interest on it.
(3) A debt does not carry (and shall be treated as never having carried) statutory interest if or to the extent that a right to demand interest on it, which exists by virtue of any rule of law, is exercised.
[(4) A debt does not carry statutory interest if or to the extent that it is of a description specified in an order made by the Secretary of State.
(5) Such an order may specify a description of debt by reference to any feature of the debt (including the parties or any other feature of the contract by which it is created).][6]
4 Period for which statutory interest runs
(1) Statutory interest runs in relation to a qualifying debt in accordance with this section (unless section 5 applies).
(2) Statutory interest starts to run on the day after the relevant day for the debt, at the rate prevailing under section 6 at the end of the relevant day.
(3) Where the supplier and the purchaser agree a date for payment of the debt (that is, the day on which the debt is to be created by the contract), that is the relevant day unless the debt relates to an obligation to make an advance payment.
A date so agreed may be a fixed one or may depend on the happening of an event or the failure of an event to happen.
(4) Where the debt relates to an obligation to make an advance payment, the relevant day is the day on which the debt is treated by section 11 as having been created.
(5) In any other case, the relevant day is the last day of the period of 30 days beginning with—
(a) the day on which the obligation of the supplier to which the debt relates is performed; or
(b) the day on which the purchaser has notice of the amount of the debt or (where that amount is unascertained) the sum which the supplier claims is the amount of the debt,
whichever is the later.
(6) Where the debt is created by virtue of an obligation to pay a sum due in respect of a period of hire of goods, subsection (5)(a) has effect as if it referred to the last day of that period.
(7) Statutory interest ceases to run when the interest would cease to run if it were carried under an express contract term.
(8) In this section "advance payment" has the same meaning as in section 11.
5 Remission of statutory interest.
(1) This section applies where, by reason of any conduct of the supplier, the interests of justice require that statutory interest should be remitted in whole or part in respect of a period for which it would otherwise run in relation to a qualifying debt.
(2) If the interests of justice require that the supplier should receive no statutory interest for a period, statutory interest shall not run for that period.
(3) If the interests of justice require that the supplier should receive statutory interest at a reduced rate for a period, statutory interest shall run at such rate as meets the justice of the case for that period.
(4) Remission of statutory interest under this section may be required—
(a) by reason of conduct at any time (whether before or after the time at which the debt is created); and
(b) for the whole period for which statutory interest would otherwise run or for one or more parts of that period.
(5) In this section "conduct" includes any act or omission.
5A Compensation arising out of late payment
(1) Once statutory interest begins to run in relation to a qualifying debt, the supplier shall be entitled to a fixed sum (in addition to the statutory interest on the debt).
(2) That sum shall be—
(a) for a debt less than £1,000, the sum of £40;
(b) for a debt of £1,000 or more, but less than £10,000, the sum of £70;
(c) for a debt of £10,000 or more, the sum of £100.
(3) The obligation to pay an additional fixed sum under this section in respect of a qualifying debt shall be treated as part of the term implied by section 1(1) in the contract creating the debt.[7]
6 Rate of statutory interest
(1) The Secretary of State shall by order made with the consent of the Treasury set the rate of statutory interest by prescribing—
(a) a formula for calculating the rate of statutory interest; or
(b) the rate of statutory interest.
(2) Before making such an order the Secretary of State shall, among other things, consider the extent to which it may be desirable to set the rate so as to—
(a) protect suppliers whose financial position makes them particularly vulnerable if their qualifying debts are paid late; and
(b) deter generally the late payment of qualifying debts.
7 Purpose of Part II
(1) This Part deals with the extent to which the parties to a contract to which this Act applies may by reference to contract terms oust or vary the right to statutory interest that would otherwise apply when a qualifying debt created by the contract (in this Part referred to as "the debt") is not paid.
(2) This Part applies to contract terms agreed before the debt is created; after that time the parties are free to agree terms dealing with the debt.
(3) This Part has effect without prejudice to any other ground which may affect the validity of a contract term.
8 Circumstances where statutory interest may be ousted or varied
(1) Any contract terms are void to the extent that they purport to exclude the right to statutory interest in relation to the debt, unless there is a substantial contractual remedy for late payment of the debt.
(2) Where the parties agree a contractual remedy for late payment of the debt that is a substantial remedy, statutory interest is not carried by the debt (unless they agree otherwise).
(3) The parties may not agree to vary the right to statutory interest in relation to the debt unless either the right to statutory interest as varied or the overall remedy for late payment of the debt is a substantial remedy.
(4) Any contract terms are void to the extent that they purport to—
(a) confer a contractual right to interest that is not a substantial remedy for late payment of the debt, or
(b) vary the right to statutory interest so as to provide for a right to statutory interest that is not a substantial remedy for late payment of the debt,
unless the overall remedy for late payment of the debt is a substantial remedy.
(5) Subject to this section, the parties are free to agree contract terms which deal with the consequences of late payment of the debt.
9 Meaning of "substantial remedy"
(1) A remedy for the late payment of the debt shall be regarded as a substantial remedy unless—
(a) the remedy is insufficient either for the purpose of compensating the supplier for late payment or for deterring late payment; and
(b) it would not be fair or reasonable to allow the remedy to be relied on to oust or (as the case may be) to vary the right to statutory interest that would otherwise apply in relation to the debt.
(2) In determining whether a remedy is not a substantial remedy, regard shall be had to all the relevant circumstances at the time the terms in question are agreed.
(3) In determining whether subsection (1)(b) applies, regard shall be had (without prejudice to the generality of subsection (2)) to the following matters—
(a) the benefits of commercial certainty;
(b) the strength of the bargaining positions of the parties relative to each other;
(c) whether the term was imposed by one party to the detriment of the other (whether by the use of standard terms or otherwise); and
(d) whether the supplier received an inducement to agree to the term.
10 Interpretation of Part II
(1) In this Part—
"contract term" means a term of the contract creating the debt or any other contract term binding the parties (or either of them);
"contractual remedy" means a contractual right to interest or any contractual remedy other than interest;
"contractual right to interest" includes a reference to a contractual right to charge interest;
"overall remedy", in relation to the late payment of the debt, means any combination of a contractual right to interest, a varied right to statutory interest or a contractual remedy other than interest;
"substantial remedy" shall be construed in accordance with section 9.
(2) In this Part a reference (however worded) to contract terms which vary the right to statutory interest is a reference to terms altering in any way the effect of Part I in relation to the debt (for example by postponing the time at which interest starts to run or by imposing conditions on the right to interest).
(3) In this Part a reference to late payment of the debt is a reference to late payment of the sum due when the debt is created (excluding any part of that sum which is prevented from carrying statutory interest by section 3).
11 Treatment of advance payments of the contract price
(1) A qualifying debt created by virtue of an obligation to make an advance payment shall be treated for the purposes of this Act as if it was created on the day mentioned in subsection (3), (4) or (5) (as the case may be).
(2) In this section "advance payment" means a payment falling due before the obligation of the supplier to which the whole contract price relates ("the supplier's obligation") is performed, other than a payment of a part of the contract price that is due in respect of any part performance of that obligation and payable on or after the day on which that part performance is completed.
(3) Where the advance payment is the whole contract price, the debt shall be treated as created on the day on which the supplier's obligation is performed.
(4) Where the advance payment is a part of the contract price, but the sum is not due in respect of any part performance of the supplier's obligation, the debt shall be treated as created on the day on which the supplier's obligation is performed.
(5) Where the advance payment is a part of the contract price due in respect of any part performance of the supplier's obligation, but is payable before that part performance is completed, the debt shall be treated as created on the day on which the relevant part performance is completed.
(6) Where the debt is created by virtue of an obligation to pay a sum due in respect of a period of hire of goods, this section has effect as if—
(a) references to the day on which the supplier's obligation is performed were references to the last day of that period; and
(b) references to part performance of that obligation were references to part of that period.
(7) For the purposes of this section an obligation to pay the whole outstanding balance of the contract price shall be regarded as an obligation to pay the whole contract price and not as an obligation to pay a part of the contract price.
12 Conflict of laws
(1) This Act does not have effect in relation to a contract governed by the law of a part of the United Kingdom by choice of the parties if—
(a) there is no significant connection between the contract and that part of the United Kingdom; and
(b) but for that choice, the applicable law would be a foreign law.
(2) This Act has effect in relation to a contract governed by a foreign law by choice of the parties if—
(a) but for that choice, the applicable law would be the law of a part of the United Kingdom; and
(b) there is no significant connection between the contract and any country other than that part of the United Kingdom.
(3) In this section—
"contract" means a contract falling within section 2(1); and
"foreign law" means the law of a country outside the United Kingdom.
13 Assignments, etc
(1) The operation of this Act in relation to a qualifying debt is not affected by—
(a) any change in the identity of the parties to the contract creating the debt; or
(b) the passing of the right to be paid the debt, or the duty to pay it (in whole or in part) to a person other than the person who is the original creditor or the original debtor when the debt is created.
(2) Any reference in this Act to the supplier or the purchaser is a reference to the person who is for the time being the supplier or the purchaser or, in relation to a time after the debt in question has been created, the person who is for the time being the creditor or the debtor, as the case may be.
(3) Where the right to be paid part of a debt passes to a person other than the person who is the original creditor when the debt is created, any reference in this Act to a debt shall be construed as (or, if the context so requires, as including) a reference to part of a debt.
(4) A reference in this section to the identity of the parties to a contract changing, or to a right or duty passing, is a reference to it changing or passing by assignment or assignation, by operation of law or otherwise.
14 Contract terms relating to the date for payment of the contract price
(1) This section applies to any contract term which purports to have the effect of postponing the time at which a qualifying debt would otherwise be created by a contract to which this Act applies.
(2) Sections 3(2)(b) and 17(1)(b) of the Unfair Contract Terms Act 1977 (no reliance to be placed on certain contract terms) shall apply in cases where such a contract term is not contained in written standard terms of the purchaser as well as in cases where the term is contained in such standard terms.
(3) In this section "contract term" has the same meaning as in section 10(1).
15 Orders and regulations
(1) Any power to make an order or regulations under this Act is exercisable by statutory instrument.
(2) Any statutory instrument containing an order or regulations under this Act, other than an order under section 17(2), shall be subject to annulment in pursuance of a resolution of either House of Parliament.
16 Interpretation
(1) In this Act—
"contract for the supply of goods or services" has the meaning given in section 2(2);
"contract price" means the price in a contract of sale of goods or the money consideration referred to in section 2(2)(b) in any other contract for the supply of goods or services;
"purchaser" means (subject to section 13(2)) the buyer in a contract of sale or the person who contracts with the supplier in any other contract for the supply of goods or services;
"qualifying debt" means a debt falling within section 3(1);
"statutory interest" means interest carried by virtue of the term implied by section 1(1); and
"supplier" means (subject to section 13(2)) the seller in a contract of sale of goods or the person who does one or more of the things mentioned in section 2(3) in any other contract for the supply of goods or services.
(2) In this Act any reference (however worded) to an agreement or to contract terms includes a reference to both express and implied terms (including terms established by a course of dealing or by such usage as binds the parties).
17 Short title, commencement and extent
(1) This Act may be cited as the Late Payment of Commercial Debts (Interest) Act 1998.
(2) This Act (apart from this section) shall come into force on such day as the Secretary of State may by order appoint; and different days may be appointed for different descriptions of contract or for other different purposes.
An order under this subsection may specify a description of contract by reference to any feature of the contract (including the parties).
(3) The Secretary of State may by regulations make such transitional, supplemental or incidental provision (including provision modifying any provision of this Act) as the Secretary of State may consider necessary or expedient in connection with the operation of this Act while it is not fully in force.
(4) This Act does not affect contracts of any description made before this Act comes into force for contracts of that description.
(5) This Act extends to Northern Ireland.
Appendix C
List of consultees who submitted written comments on Discussion Paper No 127
Aberdeen University School of Law
Citizens Advice Scotland
Employment Tribunals Scotland
Faculty of Advocates
Harvey McGregor, QC
North Lanarkshire Council
Professor Robin Evans-Jones, University of Aberdeen
Professor John Murray, QC
Robert BM Howie, QC
Scottish Consumer Council
Note 1 Section 1(1), (1A) and (1B) substituted for s 1(1) by the Interest on Damages (Scotland) Act 1971, s 1(1). The original s 1 provided that: "Where the court having jurisdiction in any action for damages pronounces an interlocutor decerning for payment by any person of a sum of money as damages, the interlocutor may, if the circumstances warrant such a course, include decree for payment by that person of interest on the sum or any part thereof at such rate as may be specified in the interlocutor, from such date as may be so specified (being a date not earlier than the date on which the action was commenced against that person) until the date of the interlocutor." [Back] Note 2 Section 2 was repealed by Law Reform (Miscellaneous Provisions) (Scotland) Act 1980, s 11(2), Sch 3. [Back] Note 3 Section 3(2) was substituted by the Interest on Damages (Scotland) Act 1971, s 1(3). The original s 3(2) provided that: "In this Act references to an action include references to a counter-claim, and for the purposes of this Act an action shall be taken to commerce against a person on the date of the citation of that person, or, in the case of a counter-claim, the date of the lodging of defences or other document containing the counter-claim, or, when the counter-claim is included in the record by way of adjustment or amendment, the closing, or, as the case may be, the re-closing, of the record." [Back] Note 4 Words in italics repealed as regards Scotland by The Late Payment of Commercial Debts (Scotland) Regulations 2002 (SSI 2002/335). [Back] Note 5 Section 2A applies to Scotland only and was inserted by The Late Payment of Commercial Debts (Scotland) Regulations 2002 (SSI 2002/335). [Back] Note 6 Subsections 3(3) and 3(4) were repealed as regards Scotland by The Late Payment of Commercial Debts (Scotland) Regulations 2002 (SSI 2002/335). [Back] Note 7 Section 5A was added by The Late Payment of Commercial Debts (Scotland) Regulations 2002 (SSI 2002/335). [Back]
