SaaS customers often delay payment of invoices. In order to protect your SaaS business and improve cash flow, SaaS suppliers usually include the right to claim interest on late payments in the terms of their SaaS agreement or rely on the statutory right to interest under the Late Payment of Commercial Debts (Interest) Act 1998 (“Act”). However, following the decision in Martrade Shipping and Transport GmbH v United Enterprises Corporation SaaS suppliers should be aware of the limitations of relying upon the Act, particularly where the SaaS customer or SaaS supplier is a non UK entity.
Contractual Right to Claim Interest
SaaS suppliers can state a specific interest rate in their SaaS agreement terms under which interest for any late payment will be claimed. This can be a number i.e. 5%, or a reference to an index i.e. the European Central Bank base rate, or a combination of both i.e. the Bank of England base rate + 2%. The interest rate specified can be higher or lower than the statutory rate.
Statutory Right to Claim Interest
Alternatively, SaaS suppliers can simply say nothing about interest in the SaaS agreement and rely upon their statutory right to claim interest on late payments from a business customer (BTB) under the Act. The statutory interest rate to be applied is the applicable Bank of England Base Rate plus 8%.
Right to Claim Compensation
In addition to claiming statutory interest from a SaaS customer, under the Act SaaS suppliers can claim a fixed amount of compensation. The amount is based upon the amount of the outstanding invoice:
- £40 – for debts less than £1,000;
- £70 – for debts between £1,000 to £9,999; and
- £100 – for debts over £10,000.
Recovery of Costs
Since the 16th of March 2013 SaaS suppliers have the additional right to claim the difference between the fixed compensation amount and their reasonable costs in recovering the debt e.g. the costs of appointing a debt recovery company or lawyer. However this right only applies to debts accrued after the 16th of March 2013.
Limitation to the Right to Claim Statutory Interest
Following the decision in Martrade in June 2014 the High Court disallowed a claim for interest for late payment under the Act on the basis that the parties had no substantial connection to England. Both parties were non-English entities but the contract was governed by English law and provided for arbitration in London.
The restriction imposed by the court is nothing new, it is included in section 12 of the Act, but many SaaS suppliers are unaware of it. Section 12 of the Act only permits the application of statutory interest to late payments if one or both of two further requirements are fulfilled:
- There must be a significant connection between the contract and England; or
- the contract must be one which would be governed by English law apart from the choice of law.
The High Court said that the Act did not apply in this case as by simply including a London arbitration or English court jurisdiction clause in the contract was not a connecting factor, as the decision to have disputes heard in London does not connect the substantive transaction itself to England. This therefore prevented the application of the Act and excluded the parties the right to claim penalty interest under the Act.
Implications for International SaaS Agreements
The above decision does not however mean that the application of the Act will be excluded from all international SaaS agreements. The Act and the high interest rate payable under it will apply if there is a substantial connection between the SaaS agreement and England
A substantial connection could for example be:
- the SaaS supplier or the SaaS customer being an English entity;
- England being the place of performance of obligations under the SaaS agreement;
- where the parties carry out some relevant part of the SaaS services in England; or
- where the SaaS agreement is governed by English law apart from the choice of English law.
Irene Bodle is an IT lawyer specialising in SaaS agreements with over 15 years experience in the IT sector. If you require assistance with any SaaS, ASP, software on demand contracts or any other IT legal issues contact me:
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