ABG Commercial Newsletter – April 2013

Late payment of commercial debts

The Late Payment of Commercial Debts Regulations came into force on 16th March 2013. They implement the EU Late Payment Directive 2011 and apply to commercial contracts made on or after 16th March 2013 for the supply of goods or services.

The Regulations provide for interest to be paid on outstanding payments where a business or a public authority purchases goods or services under a commercial contract.

In the case of a business purchaser, if no time for payment is stated in the contract, interest will start to run on outstanding payments from 30 days after the latest of:

  • receipt of the supplier’s invoice;
  • receipt of the goods or services;
  • verification or acceptance of the goods or services (where provided for by statute or by the contract).

However, the parties may agree a date for payment of up to 60 days from the last of these 3 events, in which case interest starts to run from the agreed due date. The Regulations state that the parties may agree to extend the due date for payment beyond 60 days, but this will only be valid if the extension is not grossly unfair to the supplier.

In case of public authority contracts entered into on or after 16th March 2013 for the supply of goods or services, if no time for payment is stated in the contract, interest will also begin to run on outstanding payments from 30 days after the latest of:

  • receipt of the supplier’s invoice;
  • receipt of the goods or services;
  • verification or acceptance of the goods or services (where provided for by statute or the contract).

The parties may agree a due date for payment within 30 days of the last of these 3 events, in which case interest starts to run from the agreed due date.

The interest rate will be 8% over the statutory rate or a rate which provides a substantial contractual remedy.

In addition a supplier will also be able to claim the reasonable costs of recovering the debt, in addition to the current fixed charge which can be claimed of £40, £70 or £100 depending on the size of the debt.

The practical effect of the Regulations is to set limits on payment periods for commercial debts to a maximum of 60 days in most cases and a maximum of 30 days for commercial debts incurred by public authorities. The Regulations amend the Late Payment of Commercial Debts (Interest) Act 1998 and are intended to combat the culture of late payments in commercial transactions by laying down maximum payment periods with interest accruing thereafter.

Corporate personality and piercing the corporate veil

It is a fundamental principle of company law (established in a leading Victorian case in 1897, Salomon -v- A Salomon & Co Ltd) that a company has a separate legal personality from its members (whether human members or corporate members).

Over the years there have been a number of cases where the Courts have been asked to “pierce the corporate veil” and hold the person or other companies controlling the company liable for its actions. The Courts appear to have been willing to do this in some limited instances and to disregard a company’s separate legal personality, fixing its members with the legal consequences of the company’s acts, usually where the corporate veil has been a façade or sham used by the person in control of the company to disguise or conceal the true facts. However, there is controversy and uncertainty about the circumstances in which the corporate veil will be pierced.

The Supreme Court has recently reconsidered this issue, but declined to make a definitive ruling on whether, as a matter of principle, the Court can in fact pierce the corporate veil at all. However, what it did decide was that, even if the corporate veil may be pierced, it should not be pierced to make a person controlling a company liable under a contract to which the company was a party but to which the person in control was not a party and where none of the contracting parties intended him to be liable under the contract. In other words, the member will not be treated as if he had been a co-contracting party to the contract.

Many international businesses have complex corporate structures. In their commercial transactions they should take care to identify which particular company in the organisation is the relevant contracting party. In the event of a dispute arising, the other party to the contract may seek to attribute liability to one or more of the other corporate vehicles in the group structure, but this ruling from the Supreme Court seems to demonstrate that the Courts will not pierce the corporate veil simply in order to achieve a just result.

A further important appeal case is currently pending before the Supreme Court and it is thought that the Court will then give further guidance on the longstanding principle of corporate personality and the limited circumstances, if any, in which it may be disregarded.

Is there an implied duty to perform a contract in good faith?

Under English law there is no overall general duty which requires a party to a contract to perform it in good faith. However, in a recent case the Court implied a number of obligations into a distribution agreement which it said were aspects of good faith. In the ruling it was pointed out that the Courts often imply a number of obligations into contracts, including to act honestly, to cooperate and not to exercise a contractual discretion arbitrarily. These are regarded as aspects of good faith.

In this particular case the parties entered into an agreement for the distribution of fragrances and toiletries in duty free outlets in parts of Asia. The distribution agreement was drafted by the parties themselves without involving lawyers and was skeletal in form. When the relationship ended acrimoniously before the end date of the agreement, there were a number of areas of dispute between the parties about failures to supply products, late deliveries and pricing.

In order to resolve the dispute the Court had to decide what implied terms were contained in the agreement because of the lack of detail which the parties themselves had included. In the event the Court decided that only two specific obligations were implied: an obligation not to undercut duty free prices and an obligation not to knowingly give false information.

This case highlights the dangers and problems that can arise when a homemade contract is used which is lacking in detail and fails to address important issues which may arise. It will then be a matter of potluck as to what terms a Court will be prepared to imply in order to overcome the deficiencies in the contract.

Shareholder agreements and implied terms

Also on the topic of implied terms the Court of Appeal has recently overturned a High Court decision in which the Judge had implied a term into an agreement between two shareholders of a company. The Court of Appeal said that the Judge had been wrong to imply the new term into the Agreement.

Two shareholders, who were also directors in the company, entered into an agreement to use their voting rights to appoint and continue reappointing another individual as a fellow director. However, the agreement did not contain any term preventing them and the other directors from unanimously removing that individual under the company’s articles of association.

The High Court Judge had implied a term into the agreement preventing the two shareholders from exercising their power of removal under the articles, but the Court of Appeal said this was wrong and that the implied term should not have been added to the agreement by the Judge. It said that the term should be implied only if all reasonable people (and not just a reasonable person) would agree that commercial common sense dictated the addition of the implied term to the express words of the agreement. The Court of Appeal felt the answer was no because a sensible bargain existed between the parties either with the implied term or without it. In those circumstances the implication of the term would involve a re-writing of the parties’ contract and that was not something which the Court should do.

This was a case in which the agreement had been carefully negotiated between the parties and had in fact been drafted by lawyers. The decision shows that in this kind of situation a Court is unlikely to interfere with the express terms of the agreement unless it is quite clear that all sensible people would agree that a further term should be implied as a matter of commercial common sense.

 

The comments in this note are of a general nature only. Full advice should be sought on any specific problems.

Tim Sisson
tsisson@abg-law.com
+44 (0)115 934 3333

Andrew Sutton
asutton@abg-law.com
+44 (0)115 934 3303