EU Commission Proposes New Late Payment Regulation

On 12 September 2023, the European Commission (EC) proposed a new EU Regulation on combatting late payments in commercial transactions (COM/2023/533). The proposal is available here. The proposed regulation would revise and replace the Late Payment Directive 2011/7/EU (the Late Payment Directive) and aims to bring fairness in commercial transactions and reduce the significant impact that late payments have on businesses and SMEs by addressing shortcomings in the Late Payment Directive. Setterwalls Adeline Fredriksson and Johan Montan elaborates on the content and impact of the proposed regulation below.

After a comprehensive series of evaluations spanning from 2015, the EC has found that the existing legal framework for late payments in commercial transactions (i.e. the Late Payment Directive) does not effectively address relevant issues. Identified deficiencies include the absence of preventive measures, inadequate enforcement mechanisms, and the lack of easily accessible redress mechanisms for small and medium sized companies. The absence of a fixed maximum payment period for business-to-business transactions is also highlighted by the EC as a shortcoming of the current rules.

The proposed regulation introduces stricter and more streamlined measures to prevent late payment practices, such as enforcement and redress measures that are designed to protect creditors from late payments and will seek to balance asymmetries in the contractual bargaining power between large debtors and small creditors.

Currently, the Late Payment Directive lays down a payment term of 30 days in business-to-business transactions. However, this can be extended to 60 days or more “if not grossly unfair to the creditor”. Corresponding provisions has been implemented into Swedish legislation in the Interest Act (1975:635). The proposed regulation introduces a single maximum payment term of 30 days for all commercial transactions. The payment term is calculated starting from the date when the debtor receives the invoice or an equivalent request for payment, provided that the debtor has received the goods or services.

Once adopted by the European Parliament and the Council, the proposed regulation would become applicable one year after its entry into force. The proposed regulation would apply automatically and uniformly in all EU Member States as soon as it enters into force, without needing to be transposed into national law. Commercial transactions carried out after the date of application of the regulation would thus be subject to the provisions of the suggested regulation, even when the underlying contract was concluded before its entry into force.

The proposed regulation would apply to ‘commercial transactions’, which is defined as payments made in transactions which led to the delivery of goods or the provision of services in exchange for compensation. It applies to business-to-business transactions as well as transactions between businesses and public authorities, provided the public authority is the debtor. The proposed regulation does not apply to payments for transactions with consumers, payments made as compensation for damages and payments in connection with insolvency or restructuring proceedings.

Late payment interest will be automatically payable by debtors on overdue amounts. Contracting parties are prohibited from agreeing to waive late payment interest. Late payment interest accrues at 8% above base rate. Interest for late payment accrues from the later of the date of receipt of the invoice and the date of receipt of the goods or services.

In addition, the proposed regulation stipulates that any contractual terms that limit or exclude the creditor’s right to collect interest for late payment, set a payment period not in accordance with the proposed regulation, extend the verification or acceptance process of goods or services beyond the proposed regulation’s periods, or intentionally delay or prevent the moment of sending an invoice, are automatically considered null and void.

The proposed regulation does not affect shorter payment terms laid down in national legislation. The parties would be able to negotiate any payment term as long as it does not exceed 30 days. The proposed regulation also provides a derogation from the current Directive (EU) 2019/633 on unfair trading practices in the agri-food sector for the supply of non-perishable products, whereas the payment term for such products may not exceed 60 days. However, the UTP-law, implementing the UTP-directive into Swedish law, already provides for a maximum payment term of 30 days in line with the proposed regulation. The proposed regulation also eliminates the current extension of payment terms to 60 days for public entities providing healthcare and for public authorities carrying out economic activities of industrial or commercial nature as a public undertaking.

If, or once, the proposed regulation is adopted and enters into force, it will have a broad impact on virtually all businesses engaged in commercial transactions. Although the proposal is still at an early stage, it’s already now possible to start pinpointing actions that will be required to accommodate the proposed legislation regarding payment periods. Setterwalls will continue to monitor the development of the legislation and are available to discuss and advise how the proposed Late Payment Regulation could necessitate adjustments to your business operations.