A new EU Directive 2011/7/EU came into effect on 16 March 2011 which will make significant changes to the rules on late payment in commercial transactions. The purpose of the Directive is to "combat late payment in the internal market" by imposing deadlines for payment of bills for goods and services.
For business to business contracts, unless otherwise agreed the bill must be paid within 60 days from the date of receipt. If the date of receipt of the bill is unclear, the period will run from the date of receipt of the goods or services. For contracts involving public authorities, the deadline is even shorter: payment must be made within 30 days. The supplier will be entitled to charge interest from 30 days of receipt of the bill, without the need to issue a reminder.
It will still be possible for the parties to contract out of these terms, however, any contract term that excludes interest or compensation for late payment will either be unenforceable or will entitle the creditor to claim in damages if it is grossly unfair.
The Directive also gives suppliers the right to charge compensation of a minimum fixed sum as soon as interest becomes payable. The sum proposed in the Directive is €40, although a higher figure could be set when the Directive is implemented in member states - which will be before March 2013. The changes could be introduced in the UK by amendment to the Late Payment of Commercial Debts (Interest) Act 1998, which already allows suppliers of goods and services to charge interest at 8% above the Bank of England base rate on overdue debts. It also allows suppliers to charge compensation of between £40 and £100, depending on the size of the debt. It remains to be seen whether these fixed sums will stay the same or increase when the Directive is transposed into UK law.
It is hoped that in the present difficult market conditions, the changes introduced by this Directive will help keep small businesses afloat by bringing an end to the business culture - particularly in the public sector - of paying late for goods and services.