On 12 September 2023 we had our first chance to consider the European Commission's plan to reform the EU's late payment regime1 when it published a proposed new Regulation designed to modify and replace the Late Payment Directive (2011/7/EU) (the Late Payment Directive)2. The proposed Regulation on combating late payment in commercial transactions3 (the Proposed Regulation) is intended to tighten up the late payment regime across the EU and introduce stricter enforcement measures.
A Regulation to replace the Late Payment Directive (and the national laws applying it)…
A fundamental feature of the European Commission's proposal is a calculated decision to replace the current Late Payment Directive with a Regulation. Importantly, an EU Regulation applies automatically and uniformly in all EU Member States as soon it enters into force without needing to be transposed into national law – the wording in the Regulation has 'direct effect'. Conversely, an EU Directive generally lays down certain results that must be achieved but each Member State is tasked to adopt legislation to transpose them into national law in order to achieve the objectives set by the Directive.4
This approach reflects the Commission's view that late payments affect all Member States and that facilitating prompt payment requires strict and coordinated rules, whereas implementing 27 national solutions under a Directive would likely result in a lack of uniform rules. This distinction is important when considering the drafting of the Proposed Regulation: you cannot copy and paste the wording of a Directive and expect it to work as a Regulation.
Although the existing Late Payment Directive sets out a series of objectives that needed to be achieved, it was the relevant Member States' national laws that adopted it and which added the necessary detail and context to make it work. Unfortunately, the Proposed Regulation appears to be a cut and paste of the Late Payment Directive and does not include the level of detail necessary for a Regulation which would take direct effect throughout the EU. We discuss this in further detail below.
So, what are some of the main changes being proposed?
- In commercial transactions, a maximum payment period of 30 days from the date of the receipt of the invoice or an equivalent request for payment, provided that the goods or services have been received. This will apply business to business and between businesses and public authorities.
- Removal of the right for contracting parties to agree to extended payment terms as long as doing so is not "grossly unfair" to the creditor (i.e. the supplier). Indeed, the term "grossly unfair" does not appear in the Proposed Regulation at all, as it was felt to be too ambiguous.
- Late payment interest will be automatically payable by debtors on overdue amounts and there is a prohibition on contracting parties agreeing to waive late payment interest.
- Late payment interest accrues at 8% above base rate.
- Member States are to designate authorities responsible for the enforcement of the Proposed Regulation. Those authorities are to perform their duties in an objective and fair manner and ensure equal treatment of private undertakings and public authorities.
Are there any issues that need further clarification?
As mentioned above, the Proposed Regulation is currently drafted in a style more akin to a Directive and lacks detail and clarity in several areas. These deficiencies in the drafting would likely be a source of litigation if the Proposed Regulation were to be adopted in its current form. We should note at this stage that this is just the first step in the legislative process and, in our view, there is plenty that needs further consideration if this Proposed Regulation is to replace the existing late payment regime in the EU.
To whom or what does the Proposed Regulation apply?
There are clear questions around the Proposed Regulation's application. For example:
- What contractual relationships does it apply to? The Proposed Regulation refers to "commercial transactions" without defining this important term. From the context, the reader can derive that the intention is for the Proposed Regulation to apply to contracts for the sale and purchase of goods and services, but this should be expressly set out in the Proposed Regulation.
- Does it apply to parties of EU law governed contracts, or does it apply to any EU person or entity selling or purchasing goods or services, irrespective of the governing law of the relevant contract between them? The background notes to the Proposed Regulation imply the former, but the body of the Proposed Regulation gives no direction and so we have to assume that it may apply more widely. This would clearly interfere with the freedom of EU persons and entities to choose what law governs their contractual relationships, as set out in Rome I5.
- Does it apply to an assignee of a creditor of a payment obligation? The current drafting would indicate not, however if this was the case then this would create some rather perverse situations where a creditor may have assigned a payment obligation to an assignee but the debtor is only obliged to pay any late payment interest that accrues to the original creditor and not the assignee. This would not only disregard a whole body of laws in Member States dealing with the effects of an assignment of a payment obligation, but would again potentially interfere with the conflict of laws position set out in Rome I.
By way of comparison, and although we appreciate that the Proposed Regulation will not apply to the UK, the existing late payment laws implemented in the UK pursuant to the Late Payments of Commercial Debts (Interest) Act 1998 (as amended to comply with the Late Payment Directive)6 (the Late Payments Act) addresses these points in detail and we assume the national laws of all the Member States do the same.
How is the new maximum 30-day payment term calculated?
The Proposed Regulation states that "the payment period shall not exceed 30 calendar days, from the date of the receipt of the invoice or an equivalent request for payment by the debtor, provided that the debtor has received the goods or services"7. Noting that pursuant to the Proposed Regulation, late payment interest arises automatically, we have concerns with the payment period being calculated by reference to the date of receipt of the relevant invoice, as this is conceivably hard to determine and may vary under different laws. We envisage this will lead to confusion and increased litigation.
How does the accrual of interest for late payment work?
The current drafting of the Proposed Regulation appears to state that late payment interest, if triggered as a result of a late payment, accrues from the later of the date of receipt of the invoice8 and the date of receipt of the goods or services.9 So, assuming the parties have agreed a 30-day payment term and the debtor is one day late in making payment, they would owe 31 days' late payment interest and the parties are not permitted to waive this. We assume that this is not an intended consequence of the Proposed Regulation, but the current drafting states this.
Further, noting that the parties cannot waive accrued late payment interest, to the extent parties forget to collect/pay late payment interest because they consider it operationally burdensome or negligible, theoretically this unpaid late payment interest obligation will exist in perpetuity creating unknown liabilities which will likely not be reported on a debtor's balance sheet. We are not aware of other financial liabilities arising between contracting parties that cannot be written-down or waived by agreement between such parties, and the consequences of this should be reviewed and considered in full.
Payments paid by way of instalments
Article 7 of the Proposed Regulation is a copy of Article 5 of the Late Payment Directive. Its purpose is to make clear that the Proposed Regulation does not affect the ability of parties to agree for payments to be made via instalments, provided each instalment does not breach the maximum 30-day payment term. However, the Proposed Regulation does not provide any detail as to how that would work in practice and therefore conceivably the parties could agree to pay an invoice in two 30-day instalments, with the first instalment being a peppercorn payment and the second instalment being the remainder of the payment, thereby achieving a 60-day payment term. Clearly this is not the intention of the Proposed Regulation, but again demonstrates the issue with converting a Directive into a Regulation without additional detail and context.
Retention of title
It is interesting that a provision has been included in the Proposed Regulation10 that simply confirms a retention of title if the contractual parties have agreed one. This seems innocuous at first and does not seem to add anything from a late payment regime perspective, but it would in fact override national laws relating to the validity of retention of title clauses. To the extent the Proposed Regulation comes into force, points like this are important to clarify as it could unintentionally cut across well-established national law.
Remission of statutory interest
The UK's Late Payments Act includes a section11 which provides that late payment interest shall not be received in circumstances where the conduct of the creditor (i.e. the supplier under the contract) would mean it is contrary to the interests of justice. The Proposed Regulation does not include any flexibility or recognition of a scenario where it may be inequitable or contrary to the contractual parties' needs for late payment interest to be payable in anything other than strict accordance with its terms.
There could be others…
This is not an exhaustive list of areas in which we think clarification is needed before the Proposed Regulation could come into force without causing significant uncertainty around late payments. However, this is the starting point in the process and so hopefully this lack of clarity around the detail of this new late payment regime will be dealt with as the legislative process progresses. One obvious source of clarity would come from carrying out a review of Member States' implementing legislation for the Late Payment Directive and populating the Proposed Regulation with sufficient detail for legislation that is intended to have direct effect.
The Proposed Regulation would be an EU issue, but…
The Proposed Regulation is obviously something that EU Member States will need to review and comment on and it will not have a direct impact on the laws of the UK12, US or elsewhere. However, clearly it will have an impact outside the EU to the extent non-EU persons or entities choose to contract under EU law13 and, in particular, non-EU debtors will have to consider any such choice carefully as a result of the mandatory late payment interest provisions.
What are the potential impacts of the Proposed Regulation outside of the drafting issues?
We understand that the purpose of the Proposed Regulation is to reduce the length of time it takes for creditors to be paid and penalise debtors who pay late. We think this is a laudable objective, but question whether the ramifications of the Proposed Regulation on creditors have been fully considered:
- There may be many reasons why the parties want payment terms in excess of 30 days. For example, a creditor may be shipping goods to a debtor where title and risk to the goods are agreed to be transferred to the debtor at the port of departure but the shipment will take 90 days to reach the destination port and the debtor does not want to make payment until such time. Presumably, this will no longer be achievable and so title and risk will have to be transferred later, resulting in higher costs for the creditor (e.g. insurance premia) and the creditor having to hold the goods as inventory on its balance sheet for longer, which may be unfavourable.
- Debtors often increase payment terms to better manage their working capital needs, and offer discounts to creditors in exchange for early payments. We appreciate that the Proposed Regulation is seeking to restrict this, however, we expect the loss of opportunity to be passed on to creditors in other ways (e.g. decreased prices) in any event.
- Creditors rely heavily on supply chain finance solutions to monetise their receivables. Those solutions can be costly for finance providers to initiate and only work to the extent the finance provider can achieve a suitable return on its investment. Whilst some creditors may reduce their demand for such financing solutions if payment terms are limited to 30 days, we expect that there will continue to be demand from many creditors for financing during such a 30 day period. Those creditors may find that certain finance providers withdraw or limit their product offering, or are required to charge higher finance costs to maintain a viable offering.
The above are just a few examples of potential unintended consequences that may arise from the Proposed Regulation and highlights why it is important to carefully consider any fetter on the ability of contractual parties to have freedom to contract so that they can manage their relationship to their mutual benefit.
1 The EU's late payment regime has been under review for some time: a revision of the Late Payment Directive (2011/7/EU) was referred to by Ursula Von der Leyen in her State of the Union on 14 September 2022 and it was included in the Commission 2023 work programme under the objective "A Europe fit for the Digital Age".