European Union: Freedom Of Contract With Regard To Agreement On Payment Periods Restricted

Keywords: freedom to contract, payment periods, Directive 2011/7/EU, Late Payments Directive,

EU-wide implementation of Directive on combating late payment restricts freedom to contract with regard to agreement on payment periods in commercial transactions.

By agreeing a payment period, contractual parties determine at what time the payment obligation must be fulfilled. Agreements on payment periods are relevant in particular for contracts on the delivery of goods or the rendering of services, where the seller or the service provider makes advance deliveries, for instance by delivering goods on account.

Within certain bounds, defined for instance by the laws on terms and conditions and the principle of good faith, the contractual freedom previously allowed the parties to determine their own payment period. Directive 2011/7/EU on Combating Late Payment in Business Transactions ("Late Payments Directive") was issued to counteract an abusive implementation of overlong payment periods by economically strong players or the public sector and to improve the liquidity, competitiveness, and profitability of companies.

Late Payments Directive

By implementing the Late Payments Directive, the EU member states restrict, among other things, the contractual freedom of the parties of commercial transactions to the effect that payment periods exceeding 60 days in connection with the delivery of goods or the rendering of services may be effectively agreed under strict conditions only. Interest for late payment due if the payment period is exceeded may no longer be waived by mutual agreement.

Maximum Terms for Payment Periods

If the contractual parties failed to agree a specific payment period, the right to charge interest for late payment should occur 30 days after receipt of an invoice, an equivalent request for payment, or receipt of consideration, pursuant to the Late Payments Directive; in a number of legal systems, including Germany, this situation already complies with the prevailing legal norms (Sec. 286 para. 3 German Civil Code ("BGB")). If the contractual parties agreed on a payment period, the right to charge interest for late payment should occur as of the date following the contractually agreed end of the payment period.

Pursuant to the Late Payments Directive, an agreement exceeding a payment period of 60 days after receipt of the invoice or delivery is only effective if this was specifically agreed and is not grossly unfair vis-à-vis the creditor.

The Directive only provides a restricted definition of the term "grossly unfair". An assessment under consideration of all circumstances in the individual case determines whether or not a gross disadvantage exists. The aspects taken into consideration for an assessment that are mentioned in the Directive are: any gross deviation from good commercial practice contrary to the principles of good faith; a justification of the payment period by the nature of the product or the service; any objective reason the creditor has for deviating from the payment period. Agreements on payment periods unfoundedly exceeding 60 days may, therefore, be ineffective. Until clarifying case law is available, it is likely that for lack of clear objective criteria, significant legal uncertainty exists on the effectiveness of agreements on payment periods exceeding 60 days.

In connection with negotiations on payment periods, it should be taken into consideration that the burden of proof and presentation for the non-existence of a gross disadvantage of the creditor will, subject to any differing implementation, generally be with the debtor that benefits from the long payment period.

Maximum Terms for Acceptance and Review Procedures

The Late Payments Directive does not only provide for maximum terms of agreements on payment periods, but also for acceptance and review procedures in order to forestall the possibility of payment debtors to circumvent the payment periods for the payment of an amount receivable. In accordance with the Directive, the acceptance and review procedures should not exceed a 30-day time period as of the receipt of the products or the services. Provided that the creditor is not grossly disadvantaged, an express deviating agreement is permissible.

Interest for Late Payment and Entitlement to a fixed Sum

The Late Payments Directive stipulates a minimum statutory interest for late payment of 8 percentage points above the relevant national reference rate. In addition to the interest for late payment, the creditor must be granted the assertion of a fixed sum of EUR 40 as a minimum compensation for recovery costs, without restricting the assertion of any further damage claims. An agreement excluding the claim for interest for late payment is deemed to be grossly disadvantageous, while a gross disadvantage is assumed in the event of a contractual exclusion of the fixed sum. As a consequence of such gross disadvantage, the relevant agreement between the parties may either not be enforceable pursuant to the laws and regulations of the member states, or must oblige a party to pay a compensation for damage.

Status of Implementation in the EU Member States

The EU member states were obliged to implement the Late Payments Directive in their national law by March 16, 2013. Meanwhile, 27 of the 28 member states have informed the European Commission about the complete implementation measures. Germany is the only member state that has not yet implemented the Directive; an infringement procedure has been initiated.

Implementation of Late Payments Directive in German law

The first draft law on the implementation of the Late Payments Directive was launched as early as 2012, but was not implemented in applicable law in the past legislative period. The legislator has now submitted a revised draft which was decided on at third reading in the Bundestag on July 4, 2014. Owing to the urgent necessity, the coming into effect can be expected shortly.

Maximum Terms for Payment, Acceptance, and Review Procedures

Sec. 271a para. 1 BGB-E, to be newly inserted in the German Civil Code, stipulates that an agreement "pursuant to which the fulfillment of a payment request can be demanded only after more than 60 days after receipt of the consideration, or if after receipt of the consideration, a payment request should be fulfilled only after more than 60 days after receipt of an invoice or an equivalent request for payment" is only effective if the agreement "was expressly made and is not grossly unfair vis-à-vis the creditor." The same applies pursuant to para. 3 if the payment request must be fulfilled only after the review or acceptance and an agreement is made "pursuant to which the period of time for the review or acceptance of the consideration exceeds 30 days after receipt of the consideration." The legislator defines maximum terms for agreed payment periods and for acceptance and review terms within the meaning of the Late Payments Directive. An "express" agreement may thus be designed as an individual agreement or be drafted in the terms and conditions (Allgemeine Geschäftsbedingungen, "AGB").

However, with a view to agreements on payment periods in purchase terms and conditions, Sec. 271a para. 5 BGB-E in conjunction with Sec. 310 para. 1, 308 no. 1a and 1b BGB-E make restrictions that go beyond the provisions laid down in the Late Payments Directive. Accordingly, for the purchase terms and conditions used in commercial transactions an unreasonably lengthy period of time is assumed for the fulfillment of a payment request by the contractual partner. In case of doubt, this prolonged period will be ineffective if a period exceeding 30 days after receipt of the consideration is agreed as the payment period and/or if acceptance or review periods exceeding 15 days are determined. Even if the agreement is considered to be an express one, recourse to the fundamental norm of Sec. 271a para. 1 and 3 BGB-E is, therefore, de facto restricted in the scope of application of purchase terms and conditions. Neither the draft law nor the relevant reasoning indicate the circumstances under which more extended terms can be agreed for purchase terms and conditions. The payment debtor, as the user of the terms and conditions, will in any event have the burden of presentation and proof to explain why extended terms are appropriate. An approach by the Bundesrat to admit sector-specific exceptions from this regulation, for instance for the automotive industry, was opposed by the German federal government. The federal government argues that a necessity to exempt individual industries from the application of the provision cannot be recognized; in particular, specifically market-leading debtors across all industries should be prevented from letting themselves grant excessively extended payment, review, and acceptance periods by clauses in the relevant terms and conditions that are detrimental to the debtors' contractual partners.

With respect to supply terms and conditions, payment periods and acceptance and review periods may be agreed within, and beyond, the bounds of Sec. 271a para. 1 and 3 BGB-E, as in the relevant cases, the payment creditor grants these extended periods to its contractual partner.

It should further be noted that in accordance with Sec. 271a para. 6 BGB-E, other provisions remain unaffected that result in a restriction on agreements on the payment, review, and acceptance periods. This specifically includes the monitoring of the content of the laws on terms and conditions pursuant to Sec. 307 BGB, the standard of review of which is always the immediate maturity pursuant to Sec. 271 BGB. Accordingly, agreed periods that are shorter than the newly defined maximum periods may, in individual cases, be deemed to be ineffective.

Further new Regulations

The increase of the statutory interest for late payment from eight to nine percentage points above the base rate constitutes another change. Further, the payment creditor will in future be entitled to receive a fixed sum of EUR 40. Contrary to the provisions of the Late Payments Directive, this lump sum must be counted towards a compensation for damage due insofar as the damage incurs as a result of pursuing one's rights. A newly inserted claim for injunctive relief in Sec. 1a UKlaG-E should facilitate the legal enforceability of the aforementioned regulations in particular as regards individual agreements. Claims for injunctive reliefs against provisions in terms and conditions violating the newly created provisions, are already covered by the existing regulation in Sec. 1 UKlaG.

Scope of Application of the new Regulations

According to the draft law, the new regulations will apply to all contractual obligations that are entered into after the coming into effect of the legislative amendments. In addition, the new regulations should apply to existing continuing obligations provided that the valuable consideration is rendered after June 30, 2016.

Effects and Need for Action

If an agreed payment period is ineffective pursuant to the new regulations, Sec. 271 BGB applies, and a monetary claim is due immediately. In accordance with the new regulations, an overly lengthy payment period can thus become detrimental to the payment debtor.

The new regulations must be observed in all ongoing and future contractual negotiations, in particular when they concern continuing obligations. Model contracts should be adapted accordingly. An urgent need for adaptation exists specifically for purchase terms and conditions.

With a view to existing continuing obligations providing for payment periods exceeding 60 days, follow-up negotiations and legal disputes on the payment due date, if any, must be expected after the coming into effect of the national implementation act.

The legal uncertainty on the application of the "gross disadvantage" or the "gross unfairness" may result in a reduction of agreements on payment periods exceeding 60 days; this corresponds to the regulatory purpose of the Late Payments Directive. In cases where payment periods cannot be simply reduced to 60 days, or to 30 days or less when using terms and conditions, due to the associated liquidity effects, it can be reviewed individually whether or not exceptionally extended payment periods are possible.

Originally published July 11, 2014

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