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Applicability of Late Payment of Commercial Debts (Interest) Act 1998 – what is a "sufficient connecting factor" with England?

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Garvey Sarah
Sarah Garvey

Counsel

London

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30 September 2014

In Martrade Shipping & Transport GmbH v United Enterprises Corp [2014] EWHC 1884 (Comm), 12 June 2014, Popplewell J considered the application of the Late Payment of Commercial Debts (Interest) Act 1998 (the 1998 Act) to contracts governed by English law where there was a London arbitration clause. It was noted that this issue arose in an increasing number of cases.

Application of the Act means a statutory rate of interest (set by SIs) is implied into contracts (currently 8% above base rate). For obvious reasons it can be advantageous to a claimant to be able to apply the 1998 Act. Section 12 of the 1998 Act makes it clear however that a choice of English law is not in itself sufficient to attract the application of the Act. There needs to be a "sufficient connection" between the contract and England.

In considering whether this Act should apply to an arbitral award made by a London tribunal in relation to an English law contractual claim, Popplewell J referred to the policy underlying the Act. The Judge noted the Act was intended to be penal and not compensatory in nature, stating: "In my judgment factors which are capable of fulfilling the s12(1)(a) criterion of "significant connection" must connect the substantive transaction itself to England. Whether they provide a significant connection, singly or cumulatively, will be a question of fact and degree in each case, but they must be of a kind and a significance which makes them capable of justifying the application of a domestic policy of imposing penal rates of interest on a party to an international commercial contract. They must provide a real connection between the contract and the effect of prompt payment of debts on the economic life of the United Kingdom."

The judge found that factors that might constitute a "sufficient connection" include that the place of performance of the contract is in England, one of the parties is English or carrying on some relevant part of its business in the UK, or that the economic consequences of delay are felt in the UK (eg tax consequences, related contracts). Significantly, the judge held that the inclusion of an English jurisdiction or London arbitration clause in the contract itself was not a relevant connecting factor for the purposes of s12(1)(a) of the 1998 Act.