 European Commission: Tackling Late Payments By Llewelyn Mullooly On 12 September 2023 the European Commission released a new proposal for regulating late payments in commercial transactions that aims to standardise supplier payments across the EU. While important legal details are missing, the regulation is sweeping and includes a strict maximum payment term of 30 days. The proposed regulation has emerged in response to shortcomings in the current Late Payment Directive. Among these shortcomings are the significant differences in the enactment by member states, which has resulted in a lack of consistency. Rather than a directive, the new proposal is for EU-wide regulation, which would apply automatically across all member states. While the current directive sets a maximum term of 60 days, it allows for terms beyond this limit where they are not “grossly unfair”. In practice, the ambiguity of this wording has led to payment terms well beyond 60 days. The proposed regulation aims to correct this shortcoming and ensure effective enforcement mechanisms similar to the Directive for unfair trading practices in the food chain. The European Commission has made it clear that the aim of the regulation is to reduce the financial burden of late payments on smaller businesses. The commission believes that shorter, standard payment terms will save EU firms five man-days of debtor-related work, equivalent to almost €9 billion each year. Key Changes in the New Regulation A strict maximum payment term Similar to laws in the Nordic countries and South America, the maximum payment term will be 30 days for all commercial transactions. There will be no allowance for contractual agreements to extend terms beyond this limit. Automatic interest and penalties Late payment interest will become automatic and compulsory, with a flat fee of €50 and an interest rate of 8% above the reference rate. Effective enforcement The new regulation will require member states to set up enforcement authorities with the power to receive complaints, initiate investigations, and issue sanctions. They are also required to promote voluntary alternative dispute resolution. Shorter payment terms in national law will be unaffected by the new regulation. However, the 30-day maximum term will override longer terms set down in laws such as the Directive on unfair trading practices in the food chain. The new maximum will also replace current exceptions for public authorities and healthcare providers. Given the need for member states to review and approve the regulation, the timing for implementation is unclear at this stage. Nevertheless, there are a number of legal details that need to be clarified. According to a report from solicitors Mayer Brown, “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”. While the European Commission expects a limited impact on international competitiveness, there are likely to be some changes in the selection of contract law for countries trading with the EU. The impact on invoice and supplier finance will also be an area to watch. Increased transparency and dispute resolution will likely strengthen supply chain finance programs, yet the 30 day maximum term will undoubtedly reduce the value of European programmes. Many firms will still find value in financing within a 30-day window. Regardless, there will be an impact on the industry as a whole, and where product business models or individual business cases don’t stack-up some SMEs will get paid later than they currently are. Further Information
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