1 Introduction
1.1 Who should read this practice note?
All legal aid solicitors who are concerned about receiving late payments from the Legal Services Commission (LSC).
1.2 What is the issue?
Delays in LSC payments for civil licensed work are not uncommon. These delays can create serious cash flow problems for firms. Firms may have valid claims for debt, and/or damages or interest against the LSC for delayed payments. This note sets out ways in which firms may be able to pursue such claims.
Delays in payments for criminal legal aid cases also occur. This creates different legal issues which we consider further in section 7 below.
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1.3 Status of this practice note
Practice notes are issued by the Law Society for the use and benefit of its members. They represent the Law Society's view of good practice in a particular area. They are not intended to be the only standard of good practice that solicitors can follow. You are not required to follow them, but doing so will make it easier to account to oversight bodies for your actions.
Practice notes are not legal advice, nor do they necessarily provide a defence to complaints of misconduct or of inadequate professional service. While care has been taken to ensure that they are accurate, up to date and useful, the Law Society will not accept any legal liability in relation to them.
For queries or comments on this practice note, contact the Law Society's Practice Advice Service.
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1.4 Terminology
Must - A specific requirement in legislation or of a principle, rule, outcome or other mandatory provision in the SRA Handbook. You must comply, unless there are specific exemptions or defences provided for in relevant legislation or the SRA Handbook.
Should
- Outside of a regulatory context, good practice for most situations in the Law Society's view.
- In the case of the SRA Handbook, an indicative behaviour or other non-mandatory provision (such as may be set out in notes or guidance).
These may not be the only means of complying with legislative or regulatory requirements and there may be situations where the suggested route is not the best possible route to meet the needs of your client. However, if you do not follow the suggested route, you should be able to justify to oversight bodies why the alternative approach you have taken is appropriate, either for your practice, or in the particular retainer.
May - A non-exhaustive list of options for meeting your obligations or running your practice. Which option you choose is determined by the profile of the individual practice, client or retainer. You may be required to justify why this was an appropriate option to oversight bodies.
SRA Code - SRA Code of Conduct 2011
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2 SRA Principles
There are ten mandatory principles which apply to all those the SRA regulates and to all aspects of practice. The principles can be found in the SRA Handbook.
The following sections of the SRA Code are most relevant to this issue:
When thinking about how to meet the outcomes in the Code, you must consider the principles which apply across the Handbook including the Code. You should always bear in mind what the ten principles are and use them as your starting point when implementing the outcomes.
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3 The contractual position
The point at which action may be taken in respect of late payments will depend on the contract under which the work was done. Licensed work commenced between 1 April 2007 and 14 November 2010 will be paid under the terms of the Unified Contract (Civil) 2007 (the Unified Contract). For the Family and Family and Housing categories, the Unified Contract was extended until 31 January 2012.
See section 3.1 Payment times under the Unified Contract
The 2010 Standard Civil Contract ( the 2010 Contract) applies to civil work that commenced on or after 15 November 2010, excluding work under the Family and Family and Housing categories commenced before 1 February 2012.
See section 3.2 Payment times under the Standard Civil Contract.
3.1 Payment times under the Unified Contract
Under clause 17.10 of the Unified Contract, claims are to be paid no later than 42 days from the 'relevant date'. Claims will have been assessed either by the court or by the LSC.
Under clause 17.11 (a) the 'relevant date' for claims assessed by the court is 30 days after the LSC has received all the 'necessary information and payments' as defined by clause 17 (12).
The credit period for court assessed bills is therefore up to 72 days.
For bills assessed by the LSC, including requests for payments on account, clause 17.11 (b) states that the 'relevant date' is the date of assessment or the date of receipt of 'all necessary information and payments,' whichever is the latest.
The credit period for bills assessed by the LSC is therefore 42 days from the date of the assessment. However there is no specified timescale for the LSC to carry out an assessment.
Furthermore, the 'all necessary information' requirement can cause additional delay where defective bills are returned to providers, even if the defects are minor and could be resolved by telephone without returning the bill.
Nevertheless, it may still take the LSC more than 42 days to pay the claim.
3.1.1 Interest on payments made later than these time limits
The Unified Contract makes no provision for the LSC to pay interest to providers in the event of payments made later than these specified time limits. However, there may be a remedy under legislation governing late payments.
See section 4 Claims for interest under the late payments legislation.
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3.2 Payment times under the 2010 Standard Civil Contract
Provisions for payment of claims for licensed work can be found in clause 6 of the 2010 Standard Civil Contract Specification (the 2010 Specification). These provisions are essentially lifted from clause 17 of the Unified Contract with two significant changes.
Under clause 6.4 of the 2010 Specification, correctly submitted claims will be paid within 28 days of the 'relevant date' as opposed to the 42 day period in the Unified Contract.
Under clause 6.5(a) the 'relevant date' is seven days after assessment by the court. Therefore the maximum credit period is 35 days for court assessed bills compared to 72 days under the previous contract.
The provision for LSC assessments mirrors clause 17.11 (b) of the Unified Contract. However, once the assessment has been carried out, the LSC must pay within 28 days of the assessment rather than the 42 days allowed under the previous contract.
3.2.1 Interest on payments made later than these time limits
The 2010 Contract makes no provision for the LSC to pay interest to providers in the event of payments made later than these specified time limits. Again, there may be a potential remedy under the late payments legislation.
See section 4 Claims for payments under the late payments legislation.
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4 Claims for interest under the late payments legislation
The Late Payments of Commercial Debts (Interest) Act 1998 as amended (the 1998 act) and supplemented by the Late Payment of Commercial Debts Regulations 2002 entitles creditors to claim interest for late payments on qualifying debts.
4.1 Qualifying debts
The 1998 act applies to 'qualifying debts' created by 'a contract for goods and services where the purchaser and supplier are each acting in the course of a business' (ss1 and 2).
Under s. 2(7) 'business' includes a profession and the activities of any government department or local or public authority. Therefore the legislation applies to the LSC contract.
Under s.3 a 'qualifying debt' is debt under a contract covered by the 1998 act to pay the whole or any part of the contract price. It is clear that licensed work payments made at the end of the case are 'qualifying debts'.
It is also likely that Standard Monthly Payments (SMP) and payments on account are 'qualifying debts' although, as licensed work payments on account are discretionary, they are not debts until the area director exercises discretion to approve a payment.
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4.2 When does the interest start to run?
The period from which statutory interest runs is set out in s.4 of the 1998 act. Interest runs from the day after the 'relevant day', which is the date agreed for payment of the debt in the contract (s.4(3)).
For civil licensed work claims, the 'relevant day' will therefore be 42 days from the 'relevant date' as defined by clause 17.11 of the Unified Contract and 28 days from the 'relevant date' as defined by clause 6.5 of the 2010 Specification. See section 2 above: 'The contractual position'.
Where the contract does not specify a date for payment, s.4(5) of the 1998 act applies, providing that the 'relevant day' is either 30 days from the day on which the supplier's obligation under the contract was performed or 30 days from the day on which the purchaser has notice of the amount of the debt, whichever is the later.
In most cases, the later date is likely to be the date when a claim is submitted to the LSC (ie when the LSC receives notice of the debt).
See Section 6 for the remedies under late payments legislation.
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5 Unreasonable contract terms
5.1 Unreasonable credit periods
Although late payments legislation will apply where the delay in payment exceeds the credit periods set out in the contracts, there is still a problem where the terms of the contract give the purchaser the benefit of an exceptionally long credit period, as is arguably the case in relation to the 72 day credit period provided by the Unified Contract.
Contract terms that give debtors the benefit of unusually long credit periods can be subject to statutory control under s.3 of the Unfair Contract Terms Act 1977 (UCTA) and s.14 of the Late Payments of Commercial Debts (Interest) Act 1998. Such terms are enforceable only if the debtor can satisfy the court that they are reasonable. Whether or not the credit periods specified in the LSC contracts could be deemed to be unreasonable is beyond the scope of this practice note but if you are considering an unreasonable contract terms claim, the Law Society may be able to assist with some further information.
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5.2 Delays in assessments
One problematic aspect of the payment provisions contained in clause 17.11 (b) of the Unified Contract and 6.5 (b) of the 2010 Specification, is that where claims are assessed by the LSC time runs from the date that the assessment is completed.
What constitutes a reasonable time for completing as assessment will depend on all the circumstances including, for example, the complexity of the case.
In a case where there is a particularly long delay in performing an assessment, you may have a remedy in damages if the delay in assessment has resulted in actual financial loss. This could include for example the cost of the firm borrowing money. Sempra Metals v Inland Revenue Commissioners [2008] AC 561.
5.2.1 Postponing the 'relevant date'
Clauses 17.11 of the Unified Contract and 6.5 of the 2010 Specification purport to postpone the 'relevant date' until the LSC has received 'all necessary information and payments', including 'correct and properly completed forms' and 'responses to all reasonable queries'. This means that the LSC can postpone commencement of assessment until all the information they require has been received.
It is unlikely that any practice of delaying claims while small errors are rectified would be upheld by the courts. This argument is based on the judgment of the Court of Appeal in Ruttle Plant Hire Ltd v Secretary of State for the Environment, Food and Rural Affairs [2009] EWCA Civ 97; [2010] 1 All E.R. (Comm) 444.
In that case the court made a number of observations about the policy of the 1998 act, saying in particular that 'the purpose of the act would be frustrated' if a debtor was able to delay payment of the whole sum due by finding 'the smallest detail of error in an invoice', and that such an approach would make the 'socially damaging behaviour' of late payment more likely.
This indicates that the court would not uphold a term that postpones the time that the payment period for the whole debt starts to run until every detail of the claim form is correct.
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6. Remedies under the late payments legislation
Under the late payments legislation, creditors are entitled to claim for interest on the outstanding debt together with compensation for reasonable recovery costs.
Interest is calculated on a daily basis from the 'relevant date' (see section 3 The contractual position above) until payment of the principal, at the current 'reference rate' plus 8 per cent.
The 'reference rate' is set for six months at the Bank of England base rate that prevails on 31 December and 30 June of each year.
Compensation for costs of recovery can be claimed in the prescribed sums given below.
| Size of unpaid debt | Compensation |
|---|
| Up to £999.99 | £40 |
| £1,000 - £9,999.99 | £70 |
| £10,000 or more | £100 |
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7. Making a claim
To make a claim, you should submit a letter of claim to the LSC for interest and compensation which can be calculated as set out in section 5, “Remedies”, above.
If you receive a negative response or no response, you should pursue the matter through the LSC's internal review requirements. These requirements, which vary according to the contract under which the work has been undertaken, are explained in further detail below.
7.1 The Unified Contract
The Unified Contract provides, at clauses 32 and 33, for a detailed dispute resolution process that parties are contractually required to use. There are strict time limits.
In all cases, an informal review should be requested (clause 32.1). This needs to be requested within 21 days of the action or the date the LSC notify you of the decision.
If the outcome of the informal review is unsatisfactory then, in certain cases, a formal review must be requested. Those cases include disagreements with decisions on payment under a schedule (clause 32.4(d)) and breach of contract (which would include the implied term as to interest pursuant to the 1998 act) (clause 32.4(e)). The formal review needs to requested within14 days of the date of the decision on the informal reconsideration under Clause 32.1 or, if earlier, no later than 28 days after your request for an informal reconsideration if the LSC have not by then advised you of the outcome of an informal reconsideration (clause 32.10)..
7.1.1 Exclusions from the formal review process.
Decisions on assessments are excluded from the formal review process (clause 32.5(b)). 'Assessment' is defined in clause 1 as an assessment by the LSC or a court or tribunal of the amount due in respect of a claim. 'Assessment' does not, therefore, include disputes about late payment which appear to fall within the category of 'decisions on payment' or, depending on the facts, within disputes about breach of contract. It therefore seems likely that a formal review will be necessary in these cases.
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7.2 The 2010 Standard Civil Contract
The position is similar, but not identical, under the 2010 Contract. That contract provides, at clauses 27 and 28, for a detailed dispute resolution process that parties are contractually required to use.
There are strict time limits, although these time limits, if used to try and defeat a claim for statutory interest, may be vulnerable under either UCTA or Part II of the 1998 act.
In all cases, an informal review should be requested (clause 27.1) within 21 days of the action or inaction or the date the LSC notify you of the decision.
If the outcome of the informal review is unsatisfactory then, in certain cases, a formal review must be requested. Those cases include disagreements about an SMP (clause 27.4(d)) and breach of contract (which would include the implied term as to interest pursuant to the 1998 act) (clause 27.4(e)). The formal review should be requested within fourteen days of the date of the decision on the informal reconsideration under Clause 27.1; or, if earlier, if you have not been advised of the outcome of the informal reconsideration within 28 days of the date of your request, within fourteen days of the expiry of that 28 day period.( clause27.11).
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7.2.1 Exclusions from the formal review process.
Decisions on 'assessments' are excluded from the formal review process (clause 27.5(b)).
The exclusion also extends to any claim or dispute which relates to the recovery by a provider (or the LSC) of payments due under the contract.
Claims that a payment is late, in breach of contract (whether an express or implied term), arguably fall into both clauses 27.4(e) and 27.5(b).
However, as there is an express exclusion specifically for claims relating to recovery of sums due under the contract, it is most likely that the formal review procedure does not apply.
Given the time limits applicable for formal reviews, however, you should notify the LSC that you are not using the formal review procedure within those time limits and, to reserve your rights in respect of the formal review procedure, you should request that the LSC notifies you if it disagrees that the formal review procedure does not apply.
Clause 27.5 states that, where a claim does not fall within the formal review procedure, the review procedure referred to in the Specification must be followed. This includes, under clause 27.5 (b), 'decisions on Assessments and/or any claim or dispute which relates to the recovery by you or us of payments due to you or us under this Contract. 'The only review procedure provided in the specification is an appeal system for reviewing any decision as to the costs of contract work (clause 6.68).
The term 'costs' suggests that this appeal procedure should only be used for disputes relating to the amount of a claim rather than claims for late payment. However, given the ambiguity in the wording of clause 27.5(b) of the contract itself, you should clarify with the LSC within the appropriate time limits whether it takes the view that a specific case falls within the appeal procedure or not.
If the matter is not resolved in the course of the relevant internal review procedures you may pursue the matter in the appropriate court in the usual way for pursuing contractual debts.
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8 Late payments for criminal work
Under both the Unified Contract 2007 (Criminal) (as amended) and the Standard Contract 2010 (Criminal), lower crime is paid under the Standard Monthly Payment (SMP) system and questions of late payment will not routinely arise.
If an SMP payment is not made on schedule, it is likely that it would attract statutory interest pursuant to the 1998 act from the day after payment was due pursuant to section 4(3).
Crown Court payments under the Litigators' Graduated Fee Scheme (LGFS) are made under a statutory scheme, the Criminal Defence Service (Funding) Order 2007 rather than under the Criminal Contract. As the late payments legislation only applies to contractual arrangements, it does not apply to the LGFS.
However, you may have a claim for a statutory debt in the case of payments which have not been made within the LSC's stated target payment timetable in either the County Court or High Court (depending on the sum at issue). The reasonableness of the delay in payment would be subject to public law principles of reasonableness and fairness rather than commercial contract law principles.
Such a claim is arguable, although not without difficulties. If you are considering a claim on this basis, you may wish to obtain legal advice.
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9 More information
9.1 Legal and other requirements
9.2 Further products and support
9.2.1 Practice Advice Service
The Law Society provides support for solicitors on a wide range of areas of practice. Practice Advice can be contacted on 0870 606 2522 from 09:00 to 17:00 on weekdays or email practiceadvice@lawsociety.org.uk
9.2.2 Professional ethics helpline
The Solicitors Regulation Authority's professional ethics helpline for advice on conduct issues.
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