Author: Tim Wright
Tim Wright, Partner, Fladgate LLP (email@example.com)
The European Parliament recently adopted a Resolution setting out its position on the implementation of Directive 2011/7/EU on combating late payments in commercial transactions. The Late Payment Directive, which Member States had to implement into their national laws by March 2013, was put in place to protect businesses, particularly SMEs, from the challenges presented by late payment practices at a time when credit lines and bank loans had become noticeably less available following the financial crisis.
The main provisions of the Directive include:
The Directive covers all B2B commercial transactions, including those with sole traders providing that they are acting in the course of their independent economic or professional activity. In cross border cases, where one party is based outside of the EU, EFTA and Switzerland, its application will depend on the choice of law in the commercial agreement. It does not apply to transactions with consumers.
Because the Late Payment Directive, unlike a Regulation, had to be transposed into national law as well as allowing Member States some discretion, the rules on late payment tend to differ somewhat from Member State to Member State. A few countries went further than required (gold plating) by setting maximum payment terms in their national laws. Germany, for example, set the maximum period to default to 30 days, and although the law considers that a longer period could be negotiated, the emphasis is such that it is likely to be deemed unreasonable in the event of a dispute.
In the UK, the Late Payment of Commercial Debts (Interest) Act 1998 (which was amended to implement the Directive) permits any payment period in B2B transactions provided it is reasonable. Where no payment period is provided and there is no established business custom or practice in the applicable sector (e.g. in some sectors it is an established practice that payment is made at the end of the month following the one when the invoice was raised), the payment period defaults to 30 days; further the contract may specify a rate different from the statutory rate as long as it provides a “substantial remedy”. In other words, buyers cannot avoid the Act by forcing their suppliers to accept a low or nominal rate of interest.
It is probably fair to say that the Late Payment Directive has not been entirely successful and that late payment remains a significant issue across the EU, causing creditors cash flow issues and, on occasion, insolvency. For example, following the insolvency of Carillion in January last year, it was reported that the company owed around £2 billion to approximately 30,000 suppliers, subcontractors and other short-term creditors, a small percentage of which were on 120 days payment terms, and that some of its contracts were on a “pay when paid” basis. It is hard to see on what basis such terms, as applied to a SME, would have stood up to the “fairness” test; however most SMEs simply don’t have the leverage to agree different terms if they want the work.
The European Parliament believes that both the Late Payment Directive and national legislation on late payment should be better enforced, and the Resolution sets out suggestions for preventative and remedial measures aimed at combatting the issue. These measures include:
The Resolution will now be forwarded to the Council of the EU, the Commission and Member States.