The Questions Of Interest
In a claim to recover a debt, you will also normally be entitled to claim interest for the time that the debt has been outstanding until the date of actual payment.
The question though is usually at what rate.
Contractual Interest
The starting point is to check whether the agreement or contract provides for a rate of interest to apply in default of payment by a certain time.
If so, a court’s statutory power to award interest cannot override the contractual terms, as these were agreed between the parties.
But be careful about contracts where the rates are set disproportionally high especially in consumer contracts as these could be deemed an ‘unfair’ term or enforceable as a penalty.
In additional the Financial Conduct Authority introduced in 2015 price cap rules for payday lenders.
Statutory Interest
In the event that there is no agreement or contractual term governing the rate of interest to be applied, then the claiming party will have to rely on statutory provisions.
Late Payment of Commercial Debts (Interest) Act 1998
In commercial contracts between businesses which provide for the supply of goods and services, you are entitled to charge interest at 8% above base rate on all debts not paid within trading terms. A business could also charge a fixed sum of between £40 and £100 as compensation for late payment of each unpaid debt depending on the value of your debt being less than £1,000 or more than £10,000). These are payment even before you issue court proceedings on demand.
County Courts Act 1984 s69(4) and Senior Courts Act 1981 s35A(4)
These statutory provisions allow for interest to be claimed when you issue a claim. This only applies to a sum in excess of £5,000 in the County Court but if the judgment was then transferred to the High Court for enforcement purposes then interest at 8% can be claimed from the date of transfer.
This is a discretionary power though which is intended to fairly compensate the claiming party for being deprived of money which they are entitled to – it is not to penalise the non-paying party.
A court can choose to apply the rate of interest set s17 of the Judgments Act 1838 which is currently 8%. A different rate of interest can be applied to different periods depending on the circumstances of the case.
It is common practice to plead a claim for interest in the alternative under all the provisions set out above.
An Illustration
The current Bank of England base rate of interest is 0.5% and has been since 3 February 2022. As such contractual and statutory interest can reward claiming parties quite well
By way of illustration we look at what it could mean for a debt of £10,000 which has been owed for 390 days.
| Basis | Rate | Annual | Daily | Amount |
| Contractual | 2.5% | £250 | £0.68 | £265.20 |
| Fixed Statutory | 8.5% | £850 | £2.33 | £908.22 |
| Discretionary Statutory | 4.00% | £400 | £1.10 | £104.50 |
Conclusion
Always check terms and conditions carefully before signing a contract so you are aware of the consequences especially on termination and/or breach of the contract.
Be aware of the significance if a debt is not paid on time. Where possible agree repayment terms including those about interest to avoid the need for court proceedings.
If court proceedings do have to be contemplated then make sure you know what rights you have in relation to interest at the right rate so you are appropriately compensated for being deprived of monies owed.
If in doubt, legal advice should be sought at the earliest opportunity.
If you’re in need of expert advice relating to debt recovery please call our highly experienced Dispute Resolution team today on 0330 822 3451 to talk through your situation with us. Alternatively, you can request a call back or get in touch with us online.