Commercial Thinking
Directive 2011/7/EU entered into force on 16 March 2011 (the '2011 Directive'). EU member states have until 16 March 2013 to implement it. The 2011 Directive replaces the Late Payments Directive (2000/35/EC) which was implemented in the UK by the Late Payment of Commercial Debts Regulations 2002. The 2000 Directive has proved inadequate in solving the significant problem of late payments in public-to-business and business-to-business transactions across the EU, which is thought to be responsible for the failure of 25% of small or medium-sized enterprises ('SME's'). The 2011 Directive implements tougher measures as summarised below.
In relation to payment periods, it is still possible for parties to specify these in contracts, but they must not be "grossly unfair" (see below). Payment periods longer than 60 days are likely to be considered "grossly unfair". If the contract does not specify any payment period, then a 30-day payment period is implied. This runs from: (i) the date of receipt of the invoice; or (ii) if the date of receipt of the invoice is unclear or the goods and services are received before the invoice, the date of receipt of the goods or services. Where the debtor is a public body, 30 days is the standard payment period and can only be extended up to 60 days if "expressly agreed" and justified in light of the nature or feature of the contract or if the public body is providing health care.
In relation to interest, suppliers are entitled to claim interest where payments are not paid within the payment period. The default interest rate is 8% above the European Central Bank base rate. Parties can agree a lower rate, but any lower rate must not fail the "grossly unfair" test. Suppliers are also entitled to claim a minimum fixed sum of 40 Euros compensation for late payment in addition to reasonable recovery costs (e.g. legal costs). Any clause which attempts to exclude interest for late payment or compensation is deemed to be "grossly unfair".
Where a provision/practice is "grossly unfair", it is unenforceable. The criteria for considering if a provision/practice is "grossly unfair" include: (i) gross deviation from good commercial practice; (ii) nature of product or service; and (ii) whether the debtor has an objective reason to justify deviation.
It is hoped that, in the difficult economic climate, the 2011 Directive will help keep SME's afloat by reducing the business culture of paying late for goods and services. However, as member states have two years to implement it, it may not have the desired effect soon enough. Also, how much the late payment culture can be reduced depends on the willingness and inclination of suppliers to invoke the new remedies - businesses may be reluctant to do so for commercial reasons, e.g. losing future custom, and the burden on resources to invoke them.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
