Pay up! – New rules on commercial contract payment terms


Author: Eddie Powell, Alan Wetterhahn


By 16 March of this year, the UK must implement an EU Directive (1) which sets out tighter rules about what payment terms can be agreed between parties to a commercial (or B2B) contract, such as supply of goods or provision of services. This is aimed at tackling the problem for SMEs caused by public sector bodies and other large organisations taking a long time to pay suppliers.

The UK implementing rules have not yet been published, but the key points of the Directive are fairly simple and, in fact, the Directive is designed to extend provisions of the current UK law (2).

Key points of the new rules

  • The new rules will apply to any contracts between businesses (including sole traders) relating to the sale of goods and/or the supply of services. The rules also govern contracts with public sector bodies. However, they do not apply to consumer (B2C) contracts.
  • Interest will automatically be payable on overdue amounts (without a reminder).
  • If no rate is set in the contract, the applicable interest rate will be 8% over the Bank of England base rate (fixed for six months on 1 January and 1 July each year) (no substantive change in the current law).
  • Interest will run from the payment date fixed in the contract. If none is stated:
    • a. from 30 days after receipt of the invoice by the customer;
    • b. where the customer receives the invoice before receiving the goods or services, or if the date of invoice receipt is uncertain, from 30 days from the customer’s receipt of the goods or services; or
    • c. if the contract provides for an acceptance period (for the customer to check the goods or services), and the invoice is received before it ends, from 30 days from the end of the period.
  • Where interest for late payment is due, the supplier will be automatically entitled to a minimum of €40 compensation for late payment, plus any actual costs of recovery incurred (such as lawyer’s fees or debt collection agent’s commission). Current UK law provides for this already, with a tiered fixed charge depending on the unpaid amount – this may remain.

Effect of contract terms

The parties can agree to different terms in their contract but:

  • customers who are public bodies cannot contract out of the above rules;
  • although payment schedules providing for payment by installments are permitted, any other payment period agreed can only exceed 60 days if it is:
    • a. expressly agreed; and
    • b. not “grossly unfair” to the supplier;
  • any acceptance period specified can only exceed 30 days from receipt of the goods or services if it is:
    • a. expressly agreed; and
    • b. not “grossly unfair” to the supplier;
  • any contract term will be unenforceable or give rise to a damages claim if it tries to:
    • a. exclude the supplier’s right to interest or to recover compensation for late payment; or
    • b. otherwise vary the above rules relating to time for payment, interest or late payment compensation in a way which is grossly unfair to the supplier.

There are two concepts that will undoubtedly give rise to uncertainty for the parties when looking at contracts:

  • When is a term “expressly agreed”? If there is a negotiated contract, it will clearly be “express”, but the big question is where a customer’s purchase order refers to standard terms which try to vary the rules. The UK legislation may contain some further stipulations about what will or will not be sufficient and may well provide that standard terms fall outside what can be regarded as “express”.
  • When would a term be “grossly unfair” to the supplier? The current UK law already allows the court to strike out “contracting out” where it does not satisfy a test of “reasonableness” and we can expect this approach to continue. The Directive does, however, identify some factors to take into account, although the list is not particularly illuminating:
    • a. any “gross deviation” from “good commercial practice contrary to good faith and fair dealing”;
    • b. the nature of the product or service;
    • c. whether the customer has an objective reason to deviate from the rules.

Territorial issues

It is likely that the current rules regarding contracts with a non UK element will remain in place. The current rules apply to all contracts governed by English law, unless English law only applies because it is stipulated in the contract and otherwise the law of a non UK jurisdiction would apply. Of course, if that other jurisdiction is in the EU, the same rules will still apply in any event.

What should you do now?

This will apply to virtually every business in the UK: (a) as a customer – purchaser of goods or services; or (b) (except for businesses only handling consumer sales) as a supplier.

It is unlikely to apply to contracts concluded before 16 March, but will automatically apply to those concluded after that date, including, we suspect, new orders under an existing framework contract.

As a customer, you should watch out for the credit terms that you require from your suppliers. If the terms extend beyond 30 days from receipt of invoice, this would in many cases take you outside the rules, and certainly anything pushing payment beyond 60 days would do so, so any terms need to be justifiable as reasonable and should be expressly accepted by the supplier. Clauses in terms which exclude the operation of the existing late payments legislation should be removed, and you need to remember that a supplier could claim interest and compensation for late payment regardless of the contract terms.

As a supplier, these rules will not alter the imbalance, in practice, that most suppliers do not want to upset or offend valued customers by claiming sums over and above the invoice amount, especially when they have been paid (however late). But these rules should help to pressurise recalcitrant customers and remove further contractual obstacles to quick payment and the recovery of genuine compensation for late payment.

Eddie Powell, Partner, Fladgate LLP (epowell@fladgate.com)

Alan Wetterhahn, Associate, Fladgate LLP (awetterhahn@fladgate.com)


(1) Directive 2011/7/EU of 16 February 2011 on combating late payment in commercial transactions.

(2) The Late Payment of Commercial Debts (Interest) Act 1998 (as amended).

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