New EC law on payment terms

The European Commission has published its new directive (2011/7/EU) which seeks to tackle late payment in commercial transactions.

Changes under the new directive

Payment period

• Parties may still specify payment periods in their contracts, but they must not be "grossly unfair" (see below). The maximum potential period for payment is 60 days, although this can be extended by express agreement and any longer than 60 days seems likely to fall foul of the "grossly unfair" test.
• If the contract is silent then a 30-day payment period from date of receipt of invoice is applied.
• Where the buyer is in the public sector the maximum payment period is reduced to 30 days from either the date of invoice or delivery (whichever is earlier). This can be extended by each member state in national law to 60 days in healthcare or where the public authority carries out economic activities of an industrial or commercial nature.
• There is also some wording in the directive which suggests payment periods are deferred where there is an acceptance process. It will be interesting to see how this will be implemented.

Rate of interest for late payment

• In the UK the default interest rate will be the Bank of England base rate plus 8%.
• In the Eurozone the default interest rate will be the European Central Bank plus 8%.
• Parties can agree a lower rate of interest but only to the extent that it is not "grossly unfair".
• Parties cannot agree to no interest at all being due for late payment - that will be deemed to be "grossly unfair".

Compensation for recovery costs

• A creditor is entitled to recover a minimum fixed sum of €40 as compensation for its recovery costs.
• A creditor may also recover reasonable compensation from the debtor for any recovery costs. This can include expenses incurred in instructing a lawyer or employing a debt collecting agency.

"Grossly unfair"

• If a contract term or practice related to payments, the interest rate, the period of payment or compensation recovery costs is "grossly unfair" to the creditor then it is unenforceable.
• The directive hints that payment terms longer then 60 days are probably grossly unfair.
• Excluding entirely a right to interest or compensation for recovery is automatically unenforceable.
• The criteria for considering if the provision is "grossly unfair" includes:
  • Gross deviation from good commercial practice
  • Nature of product or service;
  • Whether the debtor has an objective reason to justify deviation.

Our previous alerts on this subject include 'charging interest for late payment' and The Late Payment of Commercial Debts Act - what constitutes "substantial"?