This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.
A recent judgment in the Technology and Construction Court has revealed the unintended potential mark-up associated with ambiguous or discretionary interest clauses relating to late payment in construction contracts. With historically low interest rates remaining ubiquitous for the foreseeable future, the repercussions of not properly addressing such a clause are more important than ever.
Yet, many employers, contractors and sub-contractors may be falling into this blind trap following the judgment in John Sisk & Son Limited v Carmel Building Services Limited (In Administration) (15 April 2016).
The case in question concerned a relatively simple dispute for late payment between a contractor (Sisk) and a sub-contractor (Carmel). At arbitration, Carmel had been awarded interest on the outstanding debt to the tune of £359,329.10 (the original outstanding sum being £975,965.48).
The award was calculated using the Late Payment of Commercial Debts (Interest) Act 1998’s penal interest rate (8% above the Bank of England base rate) (statutory interest) due to the use of the following clause in the sub-contract:
“If Sisk fails to pay in full any sum properly due hereunder by the final date for payment, Sisk may (but shall not be obliged to) pay interest thereon from the final date for payment until payment of such sum is made.” (clause 15.9)
Due to the discretionary nature of the Sisk’s obligation, the clause fell foul of the Act’s substantial contractual remedy for the late payment of debt test; therefore, statutory interest became an implied term of the contract.
However, Sisk appealed the arbitrator’s award on a point of law (section 64 of the Arbitration Act 1996) – that the incorrect interest rate had been applied. Sisk argued that the JCT Conditions of a Sub-Contract had been validly incorporated into the sub-contract and that clause 4.10.5 of those conditions constituted a substantial contractual remedy in that it provided for an interest rate of 5% above the base rate to be applied to late payments. The application of the penal 8% interest rate had cost Sisk an additional hundred thousand pounds.
While the arbitrator had originally concocted some reasoning around the timing of incorporating and severing the two concurrent interest clauses, the appeal judge took a much more straight forward approach in ruling that 4.10.5 applied only to interim and final payments (and Carmel’s payment was a payment on termination due to administration).
Upon review of the arbitrator’s award, the appeal judge noted that the proper test under the Act should be whether the contract, as a whole, can be judged to provide the claimant with the substantial contractual remedy for late payment. Once clause 15.9 failed due to its discretionary nature, and clause 4.10.5 failed due to its only applying to interim payments, the contract as a whole did not provide an adequate remedy and statutory interest must be implied.
Consequently, drafters must take note that relying upon the JCT’s Conditions of a Sub-Contract (and all other forms of JCT Conditions) can leave debtors open to an unexpectedly high interest rate of 8% above base rate. Drafting ambiguous or discretionary interest clauses may cause you to fall foul of the Act’s test. Once you’ve fallen at that hurdle, the case of Sisk is evidence that the JCT Conditions are not the catch-all many believe them to be.
