Payment terms in business to business transactions
The Directive expressly states that payment terms must not exceed 60 calendar days. The words ‘from receipt of invoice, or if later, receipt of goods/services’ are not included in the text of the Directive, but this must be assumed from the context and provisions in the Directive determining when interest on late payments becomes payable.
Payment terms in excess of 60 calendar days will not be permissible unless:
- they have been expressly agreed by the parties
- they would not be ‘grossly unfair’ to the creditor.
In determining whether a payment term is ‘grossly unfair’ to the creditor, all circumstances will be considered, including:
- any gross deviation from good commercial practice, contrary to good faith and fair dealing
- the nature of the product or the services
- whether the debtor has any objective reason to deviate from the payment period.
A payment term deemed ‘grossly unfair’ to the creditor could (depending on the text of the implementing legislation in the UK), either be unenforceable or give rise to a claim for damages.
The Directive does not make specific provision that payment terms may exceed 60 calendar days if the debtor is not responsible for the delay in payment eg in the case of a dispute. However, a delay in payment in such circumstances (until the dispute is resolved) is normal commercial practice and assuming the dispute was well founded, would be an objective reason to deviate from the payment period, so unlikely to be considered ‘grossly unfair’. It is worthy of note that the Directive does provide that the creditor’s automatic right to interest on late payment will apply unless the debtor is not responsible for the delay in payment.
Although the Directive does not directly impose payment terms where these have not been agreed in the contract, the effect of provisions relating to payment of interest on late payments means that 30 day payment terms will be imposed where the contract is silent on the issue.
Payment terms in commercial transactions with public authorities
Payment terms generally must not exceed 30 calendar days from receipt of invoice, or receipt of goods/services, if later. The parties may agree a period for payment in excess of 30 calendar days if this is expressly agreed in the contract and provided it can be objectively justified in light of the particular nature and features of the contract, but in any event such payment period must not exceed 60 calendar days.
Slightly different rules apply where the public authority is carrying out economic activities of an industrial or commercial nature by offering goods or services on the market or providing healthcare.
Interest for late payment
A creditor will be entitled to interest for late payment from the day following the date or the end of the period for payment fixed in the contract.
Interest will be payable at the rate of 8% above the reference rate (in the UK this will be the Bank of England base rate) or at a rate agreed upon between the parties, provided this is not ‘grossly unfair’ to the creditor. The same circumstances will be taken into account to determine whether an interest rate is ‘grossly unfair’ as for payment terms above.
If, in a business to business transaction, no payment terms have been included in the contract, a creditor will be entitled to interest upon the expiry of 30 calendar days from receipt of invoice or receipt of goods/services, if later. If the contract contains a verification period, requiring payment to be made only after goods have been accepted or verified after receipt, then the Directive provides that verification periods must not exceed 30 days from the date of receipt of the goods or services.
A provision in a contract which excludes interest for late payment will automatically be deemed ‘grossly unfair’. As a result, such provision will either be unenforceable or give rise to a claim for damages (depending on the text of the implementing legislation in the UK).
Compensation costs
If a purchaser defaults on payment terms, then in addition to the payment of interest, a supplier will automatically be entitled to a minimum fixed payment (of no less than EUR 40) as compensation. Such sum will be payable without the need for a reminder.
In addition to the fixed sum, a creditor will also be entitled to obtain reasonable compensation for any recovery costs exceeding the fixed sum, which are incurred due to the debtor’s late payment. These could include expenses incurred in instructing a lawyer or debt collection agency.
Any provision in a contract which excludes compensation for recovery costs will automatically be deemed ‘grossly unfair’. As a result, such provision will either be unenforceable or give rise to a claim for damages (depending on the text of the implementing legislation in the UK).