'I'm having difficulties getting paid on time. I understand I'm not entitled to charge interest, so I agreed a term at my last renewal that if a payment was late I would be entitled to a handling charge of £100. After paying the first couple of these the agency now says this amounts to 'interest' and that I'm not entitled to it. I'm considering giving notice to terminate, so that the client doesn't suffer.'
Under English law, the parties to a contract generally are free to agree to be bound by whatever terms they see fit.
Where however a term of a contract is itself unlawful, one of two things will happen. If the unlawful term goes to the root of the contract (ie without it, the contract would be wholly different), then the entire contract may fail. But if the unlawful term is simply incidental, then the contract will stand, but with the unlawful term deleted.
The classic illustration of the first situation was when in 1725 a Mr Everet (some might say foolishly) tried to invoke the courts' assistance to resolve his dispute with a Mr Williams, claiming that they had formed a partnership contract 'to deal with several gentlemen for divers watches, rings, swords, canes, hats, cloaks, horses, bridles, saddles and other things to the value of £200 and upwards' which 'might be had for little or no money, in case they could prevail on the said gentlemen to part with the said things'. As the case progressed, it became clear that both parties were highwaymen. The 'contract', unsurprisingly, was not enforced. (Both in due course were hanged.)
The second situation would occur where a restriction imposed on one party went further than reasonably necessary to protect the other's legitimate commercial interests; or where a 'penalty' is imposed, going further than giving reasonable compensation to the innocent party for losses resulting from a breach.
And penalties are what we need to consider here. We are looking at what parties to a contract can agree between themselves should happen if one party is in breach by being late in payment. You seem to be under the impression that you are not entitled to charge interest. Not so. The true situation is as follows:
If there is no provision in a contract for interest, then you are not entitled to interest - unless you actually start court proceedings to recover the money overdue, in which case you are entitled to claim for interest at the statutory rate (currently 8% pa).
However, there is nothing to stop parties to a contract from agreeing a contractual term for interest on late payments, so long as the rate is no more than reasonable compensation for the breach - ie the delay in making payment. I cannot see that a provision for payment of interest at (say) 2% per month on payments overdue would be unreasonable. It seems that the agency have misled you into thinking that you cannot, legally, have a contractual provision for interest - and I'm willing to bet that they themselves have such a provision in their own contract with the Client!
What then about a fixed 'handling charge'? A slightly trickier question.. Start here: assuming it's been agreed as a term of the contract, then it will stand - unless there is some valid legal reason to the contrary. You would have to persuade a court that, viewed on the day the contract was formed, £100 was no more than a reasonable pre-estimate of the loss you'd expect to suffer if they were late in paying you - whether that lateness was as little as a day, or as long as a year. It may well be that you can show this - even if payment were a day overdue, you might have to take time off to make arrangements with your bank, and then pay an arrangement fee. Provided the amount is reasonable, it should not be considered to be a penalty, and should stand up. But a term providing for interest would certainly have been better - you'd get more if the delay in payment was for a substantial period.
What else can you do? I take the view that where in a contract which entails ongoing regular payments, the paying party can't or won't pay regularly on time, then the other party should seriously consider getting out at the earliest moment. Since you have allowed them to get away with late payments for some time, you should first make 'time of the essence' and write to them, reminding them of their poor payment record, requiring payments to be brought up to date within 7 days, and thereafter to be made strictly on the due date. If they don't, you should then be able to safely terminate without notice. You will also be entitled to damages, assessed at what you would have continued to earn during whatever notice period they could have given you.
So far as the client is concerned, I think your loyalty is misplaced. Let the client have a copy of the letter to the agency making time of the essence. But if you're not paid, terminate. It was the client, after all, who appointed the agency!
11th July 1998
I'd really appreciate your feedback on this FAQ - so mail me and tell me what you think of it, if it's been useful to you, or let me know of any specific problem you have where I may be able to help.
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