Following the Government response to the consultation on the implementation of the Late Payment Directive earlier this year, the Late Payment of Commercial Debts Regulations 2013 (SI 2013/395) (the “Regulations”) took effect on 16 March 2013. The Regulations are not applicable to any contracts which were entered into before that date.
The EU Directive 2011/7/EU (the “Directive”) was intended to provide a set of minimum standards regarding the payment of commercial debts across the European Union, with the objective of “combating late payment in commercial transactions.” The Regulations serve to implement the Directive.
Several of the Directive’s provisions have been part of UK law since 1998 under the Late Payment of Commercial Debts (Interest) Act 1998. The new Regulations amend the 1998 Act. The Explanatory Note states that the “legislation is intended to create an environment for driving payment on time”. In the UK, the main effect has been to make the position less clear and the legal wording more convolute. Indeed, the Government has already had to revise the Regulations (with effect from 14 May 2013), as they had the unintended effect of extending payment periods where the purchaser has the option to confirm that the good or services conform to the contract.
Importantly, it will still be possible to exclude the right to statutory interest by way of an express term of the contract which provides a “substantial remedy” for late payment. (Section 8(2) of the 1998 Act). What constitutes a “substantial remedy” largely depends on the particular circumstances. In our experience, most commercial contracts include provisions intended to oust the statutory regime. We do not expect this to change in the UK.
Where the statutory regime does apply, Regulation 2 specifies fixed payment periods in relation to commercial contracts after which interest starts to accrue. It provides that when a public authority, (or a business where a due date for payment has not been agreed), purchases goods or services, the interest on any outstanding payments will begin to run from 30 days after the latest of:
provided that an earlier due date has not been agreed between the parties.
For business-to-business payments where a payment date has been agreed, a business purchaser can agree with its supplier to extend the payment date up to 60 days after the latest of the above trigger events. Parties may agree to extend it even further than this, providing that such an extension would not be “grossly unfair” to the supplier. Similarly, although there is a 30-day limit on the verification or acceptance process, it may be possible for the parties to agree to extend this, subject to the caveat of ‘gross unfairness’.
Regulation 2(5) provides that “all circumstances of the case shall be considered” in analysing the concept of ‘gross unfairness’ and in particular:
The concept of ‘gross unfairness’ is new to English law, and its application is likely to be tested in the courts over time. Businesses may wish to consider a re-examination of their standard terms and conditions, with a view to determining whether any terms could potentially be viewed as “grossly unfair” and consequently exposed to challenge under the new provisions (if they apply).
Regulation 3 delivers a further incentive to settle commercial debts promptly, by adding recovery costs to the compensation that can be claimed. It provides that, “If the reasonable costs of the supplier in recovering the debt are not met by the fixed sum [i.e. the sum of between £40 and £100 specified in the 1998 Act], the supplier shall also be entitled to a sum equivalent to the difference between the fixed sum and those costs.”
The Regulations do not alter fundamentally the previous law governing the late payment of commercial debts. However, the Government has chosen not to exercise the discretion provided by the Directive which would permit particular public authorities to benefit from extended payment periods. This should encourage those authorities to improve their speed of payment. Although some statistics suggest the contrary, many of those who deal with Government departments and local authorities regard them as among the worst offenders.
There is hope in some quarters that the implementation of the Directive will bring certainty to the speed of payments to British businesses from other member states. Late payment can interfere with competition through impeding the free movement of goods and services within the EU. The European Commission has estimated that £150 billion could potentially be realised by the implementation of the Directive across all member states. Michael Fallon has said that the Regulations will “give a real boost to UK businesses by providing them with the confidence and certainty they need to work with overseas suppliers.” With respect to the Minister and the Commission, their sentiments may be a little optimistic. Businesses are able easily to side step the Directive and we would question if in a situation where the respective commercial positions of the debtor and creditor do not lead naturally to prompt payment, creditors will wish to use the legislation to put pressure on their customers.
If you have any queries about how the Regulations could affect your business, please speak to Ian Holyoak, Head of Commercial Team on email@example.com.