Late payment – European intervention?

29 July 1998



Jonathan Sinclair reviews what is happening on the late payment of bills front.


From a European perspective, the practice of late payment hinders the development of trade between Member States and the overall smooth functioning of the internal market. The question is, how best can the problem be tackled? Countries that have legislation to deal with the problem have allegedly seen a significant reduction in their average overdue payment period.

In March 1998, the European Commission adopted a proposal for a European Parliament Council of Ministers Directive to combat late payment in commercial transactions. If implemented it would remain up to the individual Member States to decide how they would incorporate the provisions of the directive into each Member States national law.

In the UK, steps have already been taken to introduce a legislative solution to the problem of late payments in commercial debts, in the form of the Late Payment in Commercial Debts (Interest) Act 1998, which is expected to come into force later this year.

The question that has now arisen is, will the UK legislation need to be amended if the EC directive proposals are to be implemented?

Amendment of the UK legislation?

The provisions of the Act are as follows:

• A right to claim statutory interest on invoices which remain unpaid after payment is due, subject to a reduction if the conduct of the supplier is such that a reduction would be fair;

• Interest will accrue from the day payment should be made under the contract, if no date has been agreed then a 30 day credit period is assumed;

• The provisions of the Act can only be excluded if the parties have included in their contract another remedy for late payment which satisfies a reasonableness test set down in the Act;

• The provisions of the Act cannot be avoided by a change in identity of the parties or an assignment of the debt.

The Bill also included the following proposals which may yet be enacted under future legislation:

• A minimum amount of money which must be outstanding before interest can be added;

• Interest on recurring small debts to be rolled into a bigger claim;

• A deadline for claiming interest;

• A duty on government, local authorities and public bodies to pay on time; and

• A duty on companies to publish in their accounts details of how many of their bills they paid late in the previous year.

The proposed directive will require a right to claim statutory interest. This has already been incorporated into the new UK Act. Another provision under the proposed directive is for a 21 day credit period to be implied into contracts that do not expressly deal with the length of the credit period.

Under the UK legislation the period is 30 days. It is suggested that this is one area where the directive will be altered before it is implemented and brought more into line with the UK position. Some European countries have credit periods of up to 70 days - a drop to 21 days is likely to be met with some resistance.

The proposed directive suggests that Member States will be required to implement an accelerated debt recovery procedure for the recovery of undisputed debts and simplify legal procedures for small debts.

The proposed directive will also require that the public sector automatically pay interest owed on late payments made by the public sector, without any need for a claim by the supplier of the goods.

The proposed directive envisages a right for a seller of goods to retain title to the goods, and if necessary seek to recover them, until the buyer has paid for them – in other words a “retention of title” provision.

Finally, the proposed directive envisages compensation for a seller who has suffered a loss due to the buyers late payment. This provision could be particularly crippling to small businesses as they too would have to pay compensation if they are late in paying for goods supplied to them.

Will the legislation be effective?

Although late payment is acknowledged to be a problem, this form of legislation has been questioned, not least by the CBI and British Chamber of Commerce. Proposals along these lines risk damaging small businesses, could add extra expense and are unlikely to prove to be a panacea.

In raising statutory interest during negotiations or in seeking to rely on any such provision, trading relationships may be jeopardised. Even if this is not the case, firms will need to devote additional accounting resources to credit control and interest calculations; smaller business will probably be the least well equipped to do this and late payment is by no means an exclusive domain of large businesses.

Any small operations which currently take advantage of the prevailing late payment culture will themselves face increased expenses in meeting statutory interest.

The proposed EC directive would have to be implemented in full by 31 December 2000 and there are no provisions for it to be phased in. However, the UK legislation allows for a period of transition which should allow small businesses time to put their affairs in order.

The anticipated measures may well fail to achieve an improvement because the right to claim interest on invoices which remain unpaid after the due date is potentially available already in the UK without the need for legislation.

  As previously mentioned, harmonisation is valuable, and should enhance the ability of UK businesses to chase payment from foreign customers, but the benefits for business conducted within this country may be limited.

Any business which is in a position to negotiate terms with its customers, ought to impose its own standard terms and conditions, and already include a requirement for payment within a certain time frame, with interest accruing on any unpaid amounts after that. The legislation arguably would add little to the position which already exists under basic contract law.

It would be tempting to think that a statutory provision for interest would add muscle to the smaller party in a deal. The hard nosed reality is that this is unlikely. If a party cannot already impose its own terms for payment and interest, a statutory right to incorporate such a term is not going to help its negotiating position as parties would still be free to expressly agree a different interest rate in their agreement.

It is not difficult to envisage a situation where a dominant customer could insist on a current 30 day credit term being extended to 60 days. If he runs the risk of having to pay interest to a smaller supplier for late payment, the legislation may prompt the dominant customer to insist on this.

There may be management benefits in focusing the minds of small suppliers, at the outset of a deal, on the effects of such payment terms on their cash flow.

However, even if this proves to be the case, credit is all too often extended without penalty because of the relative power of the parties. This is harsh commercial reality and is unlikely to be altered by the likely legislation.

Enforcing a claim

Even where businesses are successful in incorporating a provision for interest, whether negotiated or statutory, or a business makes a claim for compensation for damage caused by the late payment or elects to repossess the goods under the retention of goods provision they will, as now, still have to enforce the judgment for repossession or payment.

The proposals for an accelerated recovery procedure for undisputed debts and a simplified procedure for small debts may go some way to make an enforcement of the debt easier but it has not yet been decided as to what methods would be used to facilitate these proposals.

  It remains to be seen as to whether or not these proposals would provide any practical help to the business community.

If the culture of late payment needs changing, to a great extent it is for business itself, rather than politicians, to change. Late payment is often a management problem, although not an insoluble one.

Businesses which have good credit management, which make available time and resources for credit control do get paid more quickly. Properly drafted terms and conditions of business can also improve the position without the need to wait for legislation.

So, while late payment is a growing problem, there are steps which you can take now to create at least as strong a position as the legislation is likely to offer. Solutions rest with business rather more than Westminster and Brussels.

• Jonathan Sinclair is a partner in the commercial litigation department of Eversheds, the national law firm.



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