Out-Law / Your Daily Need-To-Know

This guide was last updated in August 2011.

In some circumstances, a party who is owed money under a construction contract will be able to claim interest on that money for as long as the payment is outstanding. Claims for interest play an important part in the recovery of damages and it will only be in exceptional circumstances that a party will not seek to recover interest. However, parties do not have an automatic right to recover interest. This guide looks at the ways in which a right to claim interest can be created.

Under the contract

The most straightforward way to create a right to claim interest on money due is expressly to include this right under the main construction contract. An express contractual clause can be inserted to say that interest will be payable on any sums due under the construction contract. It will be important to check from when the interest will apply - usually from the final date for payment rather than the date the completion certificate is issued - and if there are any preconditions which need to be settled, such as making a written demand.

Even if there is no express right to interest, it may be included as part of a claim for loss and/or expense if there are contractual provisions which allow such claims. This was established in a 1980 case between FG Minter and the Welsh Technical Service Organisation. However, going down this route will require proving that you have suffered an actual loss as a result of the delayed or missed payment - the most common way is to show how costs arising due to the non-payment were financed.

The Late Payment of Commercial Debts (Interest) Act

This law may apply if the contract does not address the issue of interest. The Late Payment of Commercial Debts (Interest) Act provides a high rate of interest at eight per cent above the Bank of England base rate, but does not apply to consumers. In addition, it cannot be used for claims for damages due to breach of contract unless the damages are based on a contractual right to be paid.

Interest starts to apply from the later of:

  • the date that the supplier performs the obligation which the debt relates to; or
  • the date the purchaser receives notice of either the amount owed or, where that amount is unascertained, the sum which the supplier claims is the amount of the debt.

Government regulations set out the mandatory way to calculate interest, based on six-month periods.

As a head of damages

Interest can also be a separate category, or head, of damages in its own right. In a 2007 case, the House of Lords confirmed that since interest in the commercial world is paid on a compound basis, meaning that as interest accumulates to the principle amount any future interest becomes payable on that amount too, it is only fair that in certain circumstances interest would be recoverable as damages on a compound basis.

Adjudication proceedings

An adjudicator does not have an automatic right to award interest on any sums due under a construction contract. However the Scheme for Construction Contracts does give this right to an adjudicator.

This right was created following a 2006 Court of Appeal decision where it was held that interest can only be awarded if it is a matter in dispute, if the parties agree to include it or if it is necessarily connected with the dispute.

Court proceedings

The court has a discretionary right to award interest in claims for overdue sums and damages. This has to be specifically identified in the claim form when it is submitted to the court.