Late performance of a contract, whether delivery by a seller or of payment by the purchaser, is a breach of contract. Buyers feel no inhibitions, especially if they work for a large company, in penalising suppliers which deliver late. And they will often be supported by the law which allows them to at least recover damages for the delay such as those arising in the ordinary course of events.

According to the consultative document on the late payment of commercial debt issued by the Department of Trade and Industry in 1993, many suppliers especially small organisations are reluctant to take action against delinquent purchasers through fear of jeopardising future business. These fears seem justified; many purchasers do resent being pressed to pay on time. Nor is the seller who is paid late protected by the law in the same way as the buyer whose goods are delivered late. Late payment of debt in itself does not entitle the seller to recover interest as general damages, only if payment of interest is specifically provided for in the contract.

But why do purchasers get offended when asked to comply with the payment terms agreed in the contract? And why are sellers not better protected?

There are three main reasons why purchasers do not honour their payment terms and object to being chased. First, and this applies particularly to the construction industry, contractors and some clients delay payment in order to boost their incomes through benefits they gain retaining money which belongs to others. It is not the buyer who is normally responsible for this but the finance department which insists on adopting payment practices which take no account of the contract terms.

Sir Michael Latham recommended in paragraph 5.18 of his report that a construction contract should "clearly set out the period within which interim payments are to be made to all participants in the process, failing which they will have an automatic right to compensation involving payment of interest at a sufficiently heavy rate to deter slow payment". He also recommended that where such provisions are included in standard form contracts, any attempt to amend or delete them should be invalid. So far the government is sitting on the fence on this recommendation while it considers the possibility of general legislation on late payment.

Second, clients are known to order work without having the necessary budgetary authority for funds to complete it. Sir Michael is reported in the press (The Times, 5 February 1996), commenting on Michael Heseltine"s advice to businesses to delay paying bills if they were in financial difficulties, as saying: "If they can't afford to pay their bills then they shouldn't order the work, and that's the message which should be put out."

Third, the remnants of the old ideology that the buyer is "king" still survive in some places. It must be hoped that this attitude will disappear with the increasing acceptance of co-operative relationships along the supply chain. Unfortunately, in some sectors of industry, it is prevalent and much needs to be done through education, making all concerned understand that teams get better results than adversaries. The ongoing work in the implementation of the Latham report should be a major factor in driving this message home.

But what of the second question: why are the legal rights of the seller so weak? The old common law rule was that a defaulting debtor could be sued only for the sum owed and no more, not even interest, unless it had been agreed in the contract. That rule has now been changed in two ways.

First, by statute, the court has discretion to award interest when giving judgement for the debt or payment may be made by the debtor after proceedings for recovery of the debt have commenced.

Second, the application of the old common law rule has been restricted to general damages. It follows that, if the creditor can prove he or she has suffered a loss and that the debtor knew of the particular circumstances which would be likely to result in that loss, then the creditor can recover the interest incurred. This happened when the debtor was late in paying the creditor £10,000, which as the debtor well knew was required by the creditor for completing the purchase of a farm (Wadsworth v Lydall [1981] 1 WLR 598).

But there is still no right for the creditor, under the common law rule or by statute, to recover interest if the debtor pays late but before the commencement of proceedings to recover the debt, unless the right is included in the contract. The same applies to interest forgone.

Interest alone, however, may not be sufficient to properly compensate the creditor. Suppose that the delay in payment prevents them from taking on other business or the small businessperson is forced to re-mortgage their house; can they recover these losses?

As a result of the 1988 decision of the House of Lords in The Lips (1988 A,C, 396) the answer today is "yes", provided the creditor can prove:

• he or she has actually suffered some other loss;
• the loss was foreseeable as likely to result from the delay, either in the normal course of events or because of some special circumstances known to the parties at the time of them entering into the contract.

Despite the improvements to the creditor's position from under the old common law, the rule that interest is not recoverable from a debtor who pays late, but before the start of legal proceedings, should be abolished. Its abolition was recommended by the Law Commission in their report No 88 more than 18 years ago. The reverse should apply. The right to be paid interest on late payment should be made mandatory.

SM

Peter Marsh and Frank Griffiths are associates at project strategy and contract management consultancy FGA Ltd (0116 279 3383)