HT-2020-000448 - [2024] EWHC 2025 (TCC)

This argument proceeds on the basis that, contrary to my conclusion above, disputed elements of invoices remain payable so as to give rise to a qualifying debt for the purposes of the 1998 Act.

Sections 8 and 9 of the 1998 Act deal with the circumstances in which it is possible to oust or vary the Act. The present case is not one where it is said to be ousted: instead it is said to be varied insofar as it is limited to debts which are ‘undisputed’. This, it is said, must implicitly be read as disapplying the 1998 Act to those debts which are disputed on a bona fides basis.

Sections 8 and 9 of the 1998 Act relevantly state:

There is little authority on the application of sections 8 and 9 of the 1998 Act. One authority which DBS drew to the Court’s attention is the decision of Edwards-Stuart J in Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720 (TCC); [2011] Bus LR 360. In that case, the learned Judge was required to consider whether a substantially lower interest rate than the statutory rate (of 8%) meant that there was not a substantial remedy. Notwithstanding the different underlying facts, of some interest in the present context is the Judge’s general remarks about the factors which ought to be borne in mind in the necessary analysis, as set out at [87] and [88]. Edwards-Stuart J said:

In the Banham case, referred to in the extract above, Eady J considered the circumstances in which the Section 5 remission might apply. In doing so, he identified the relevance of the distinction, also drawn by Edwards-Stuart J, between what might be described as conscious non-payment of sums known to be due and owing, and those which are the subject of legitimate dispute. The judge observed:

The distinction, again being drawn in the specific context of remission under Section 5 of the 1998 Act rather than the test under Section 8, is echoed by the Court of Appeal in Ruttle Plant Hire Ltd v Secretary of State for the Environment, Food and Rural Affairs [2009] EWCA Civ 97; [2010] 1 All ER (Comm) 444. At [38], Jacob LJ considered the position where the supplier may overclaim by a large amount. The Judge said:

As indicated by Eady J at [72] in the extract at paragraph 47 above, whilst containing the discretion to remit the application of interest, there is no wording in the 1998 Act which permits the conclusion that the statutory interest regime is not to apply at all in cases of bona fide dispute. Nevertheless, each authority recognizes in slightly different ways the existence of an important distinction between awarding interest on a sum that is disputed, whether as to liability or as to amount, and awarding interest on a debt in respect of which there is no room for reasonable dispute. When construing the 1998 Act, it is relevant therefore to bear this distinction in mind, and that the principal mischief the statute aimed to deter was the non-payment of debts which were due – to coin Jacob LJ’s phrase – ‘on any view’.

Mr Croall accepted that the 1998 Act applied to genuinely disputed debts. Nevertheless, Mr Croall contends that by Clause 16.3, the Agreement has limited the application of the statute to those sums claimed to those which are undisputed, by which he means are not the subject of a bona fide dispute. As a matter of construction of the Agreement, it is correct that by stating that the 1998 Act would apply to ‘undisputed’ invoices, the effect of Clause 16.3, by implication, is to (seek to) disapply the 1998 Act to ‘disputed’ invoices.

In my view, it is no coincidence that Clause 16 refers to Schedule 2-4 (Invoicing Procedure), at Clause 16.1; and that Clause 3.3 of Schedule 2-4 refers back to Clause 16. Clause 3.3 specifically deals with a ‘disputed’ invoice, and requires the Authority to make payment of any ‘undisputed’ amount in accordance with Clause 16. It requires the reason for non-payment to be identified, and for the Contractor to indicate whether those reasons are accepted. If it does, it supplies a replacement invoice; if not then the matter is to be dealt with in accordance with the provisions of Clause 27. Clause 27 is the Dispute Resolution Procedure, and cross-references to Schedule 2-9.

It is therefore clear that the word ‘undisputed’ in Clause 16.3 should be construed in the context of the words ‘undisputed’ and ‘disputed’ in Clause 3.3 of Schedule 2.4. If the AUTHORITY does not follow procedure within Clause 3.3, the mere non-payment of part of an invoice does not mean that the sum is ‘disputed’. If a sum is to be ‘disputed’ for the purposes of implication within Clause 16.3, the procedure in Clause 3.3 of Schedule 2-4 needs to be followed. Otherwise, it is ‘undisputed’ for the purposes of the application of the 1998 Act.

On any view, and irrespective of my view of the precise meaning of ‘undisputed’ and its implied opposite within Clause 16.3, the construction for which Mr Croall contends is one in which the contractual remedy for late payment of debts (assuming a debt exists in relation to the disputed element of an invoice) is clearly of a narrower ambit than the regime within the 1998 Act. The central question is, therefore, whether the clause is void pursuant to Section 8 of the 1998 Act. Mr Croall contends that, by permitting interest on debts which are undisputed, even though the Section excludes the debt from the regime if it is disputed, the overall remedy nevertheless remains a ‘substantial’ remedy for the purposes of Section 8.

Against this, Mr Cogley submitted that the ‘qualifying debt’ to which the 1998 Act relates is one which may by definition be or include a debt in respect of which there is a bona fide dispute. In respect of this, he is undoubtedly correct. Moreover, he is also correct that there is no other contractual provision for interest (applying a lower rate to such disputed debts, for example) under the Agreement for payment of interest on a disputed debt once resolved. By excluding such a debt from the ambit of the contractual regime altogether, Mr Cogley argued that the Agreement was not providing a substantial remedy in respect of late payment of that particular category of debt, namely a disputed debt. To use Mr Cogley’s phrase, the position in relation to disputed debts was left in vacuo. This, he said, drove a coach and horses through the 1998 Act and the logic which has been applied to it within the authorities referred to above. The disapplication of statutory interest to disputed debts therefore falls foul of Section 8 of the 1998 Act and is void.

I was initially attracted to Mr Cogley’s submission. However, upon careful reflection, I consider that this conclusion is wrong for a number of reasons.

The starting point is that, subject to Section 8, the parties are free to agree contract terms which deal with the consequences of late payment of the debt. Section 8(3) is predicated on the basis that the right to statutory interest may be varied by agreement providing that the remaining ‘overall remedy’ is a ‘substantial remedy’.

‘The debt’ referred to in Section 8(3) of the 1998 Act is the sum of money owing pursuant to a particular demand for payment (providing it is a qualifying debt). It may or may not be disputed. It is wrong to pre-define, when considering whether the overall remedy in respect of that debt is a substantial one for the purposes of Clause 8(3), ‘the debt’ as a ‘disputed debt’ and then ask ‘is there a substantial remedy in relation to a debt which is disputed?’: this necessarily produces the answer ‘no’, but the answer is the product of asking the wrong question. The correct question is, rather, to ask whether an overall remedy agreed by the parties which limits the application of statutory interest to situations where the debt is (genuinely) disputed is ‘a substantial remedy for late payment of the debt’.

I then turn to answering this question in stages: is a clause which provides for interest to be paid in respect of the qualifying debt in certain circumstances but not in others nevertheless an ‘overall remedy’ in respect of that debt? The answer to this question is undoubtedly yes: there is plainly a remedy provided, even though that remedy is more limited than the statutory remedy in that it does not apply in all circumstances. An analogy might be the insertion of a contractual provision that requires the supplier to provide a notice, upon non-payment of an invoice within the relevant period, that the supplier will charge the statutory interest, and that in the absence of such a notice the supplier’s right to statutory interest is lost. There is still a remedy in this case, even though the statutory regime is varied so that it is disapplied in certain circumstances.

The critical question is then, whether the overall remedy, narrower though it may be than the statutory scheme, is nevertheless a ‘substantial’ remedy. To answer this question one must look to Section 9(1).

The starting, or default, position is that ‘a remedy’ is to be regarded as substantial unless Section 9(1)(a) and (b) apply. By reason of the conjunction ‘and’ both Section 9(1)(a) and (b) must be established to avoid the presumption that the remedy will be a substantial remedy.

Section 9(1)(a) asks whether the remedy is insufficient either for the purpose of compensating the supplier for late payment or for deterring late payment. It is clear that, in a strict sense, removing the right to statutory interest when the debt is genuinely disputed means, in those specific circumstances, there is no (contractual) remedy by way of interest to compensate the supplier for payment which – if the dispute is resolved against the non-payor – will be retrospectively seen as ‘late’. There will of course always be the discretion to allow pre-judgment interest at an appropriate rate pursuant to Section 35A of the Senior Court Act 1981, but this is not relevant to the consideration of sufficiency under section 9(1)(a) (although this will be relevant under 9(1)(b)). The first relevant insufficiency, therefore, exists.

As to the second, is the overall remedy insufficient ‘for deterring late payment’. In this context, it is necessary to consider what is meant by deterrent. As stated clearly by Eady J, and echoed in the substance of the other authorities, the mischief to which the statute appears to be primarily directed is that of casual or feckless non-payment. Indeed, the ‘deterrent’ element of the 1998 Act could never sensibly be seen as seeking to ‘deter’ a genuine legal dispute, even though the Act is wide enough to catch late payment of debts in respect of which there are such disagreements. Seen through this lens, the modified application of the 1998 Act regime agreed by the parties within Clause 16.3 is clearly sufficient to continue to provide the relevant deterrent, namely against non-payment of sums which are due – to repeat Jacob LJ’s phrase – ‘on any view’.

Thus, there may be a partial insufficiency for the purposes of Section 9(1)(a). It is necessary then to consider Section 9(1)(b).

As to Section 9(1)(b):

Balancing all these factors, I consider that it is fair and reasonable to allow two sophisticated contracting parties to agree freely within their contract to an overall remedy in respect of the late payments of debt which varies the statutory regime which would otherwise apply so as to disapply it to disputed debts. A key consideration is the distinction the Courts have readily drawn between those who choose not to pay their outstanding debts and those who refuse to pay because of a genuine legal dispute, and the fact that Clause 16.3, whilst varying the application of the 1998 Act, still provides the important deterrent against the mischief the statute was primarily directed towards, namely the non-payment of debts known to be due.

As such, the requirement of Section 9(1)(b) is not met, and the remedy for the late payment of the debt shall be regarded as a substantial remedy. It is not voided by Section 8.

It follows that I accept, as Mr Croall submitted, that in light of Clause 16.3, the claim for interest pursuant to the 1998 Act in respect of debts which were not paid by reason of the existence of a (in this case, both genuine and reasonable) dispute about the proper construction of the Agreement has no reasonable prospect of success and should not be permitted on amendment.