Recent changes in the statutory protection for late payment of commercial debts have brought about a tightening up on how quickly commercial debts should be settled and have also provided the opportunity for the invoicing party to recover costs. However, businesses wanting to use the legislation need to make sure their contract terms do not over-ride the terms of the Act.
The updated legislation – made under Directive 2011/7/EU – aims to strengthen provisions to tackle the culture of late payments in commercial transactions within the European Union. A number of the measures contained in the Directive were already in force in England, under the Late Payment of Commercial Debts (Interest) Act 1998 as amended. However, the legislation did introduce some additional measures and introduces the right for businesses to pursue interest on debts throughout the EU.
The changes came into force on 16 March 2013 for contracts entered into after that date. One key change is that commercial businesses will be expected to pay their supplier invoices within 30 days, unless they have both agreed a longer time limit, of no more than 60 days.
In addition, all public bodies will now be required to pay their suppliers within 30 days, except for some healthcare and economic activities.
The legislation is also intended to stop any abuse of negotiation power and a party to a contract will have opportunities under the Directive to challenge grossly unfair contractual terms and practices.
Statutory interest will now be a minimum of 8% above the European Central Bank’s reference (or the Bank of England’s base rate for English debts) and interest will start to run automatically if the period for payment is not specified, or where it is deemed to be “grossly unfair”. The interest charges will automatically kick in at 30 days from the latest date of either receiving the supplier’s invoice, or of receiving or accepting the goods or services. And unless a ‘reasonable’ longer period is agreed, any purchaser must confirm that goods or services conform with the contract within 30 days.
Another important change is the right to claim compensation for reasonable costs incurred in recovering a debt, when the amount exceeds the established fixed charge sum. The new legislation provides that ‘If the reasonable costs of the supplier in recovering the debt are not met by the fixed sum, the supplier shall also be entitled to a sum equivalent to the difference between the fixed costs and that sum’.
Commercial litigation and debt recovery expert Andrew Shipp of Gardner Leader explains “It is important that businesses recognise the new provisions will not apply to contracts entered into before 16 March 2013. They also need to be sure that their own contract terms, or the terms imposed by the customer, do not override the legislation if they want to make use of it.”
“If the contract provides for a different rate of interest, then that is what will apply. The statutory rate is quite generous and therefore, it is quite possible that it will be higher than the contractual rate stated. If this likely to be the case, then it would be sensible for businesses to consider amending their standard contract terms to provide for an either/or scenario.”
For more information, contact Andrew Shipp
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