The Danish Parliament recently voted on the first reading of a bill on periods of payment and interest in commercial transactions. The bill is based on an EU directive and includes a proposal for implementing a ceiling on the periods of payment that parties may agree on.  According to the bill, the statutory amendments will take effect as of 31 March 2013.

On 23 October 2012, the Danish Parliament voted on the first reading of a bill (2012/1 L 14) introduced by the Minister of Justice on i.a. amendment to the Danish Interest Act. The bill implies that traders and public authorities as a general rule are no longer free to agree on the time limit for payment. In addition, the interest for late payment (default interest) is raised, and the parties' access to agreeing on the right to interest for late payment is limited. The rules, with the exception of the interest rate increase, do not apply to agreements between consumers and traders.

Background

The bill is based on EU directive 2011/7/EU, which was adopted on 16 February 2011. The aim of the directive is to foster the competitiveness of undertakings - in particular SMEs (small and medium enterprises), which at present have limited access to financing. Many suppliers of goods and services also experience that larger undertakings and public authorities pressure them into providing extended periods of payment and poor payment terms. The new bill is noteworthy as it involves a quite significant encroachment on the freedom of contract. 

Payment periods in contracts between two traders

The bill proposes that two traders may agree on periods of payment of up to a maximum of 60 days. The 60 days are to run from the time when the creditor sends or submits a request for payment. This means that as a general rule, two traders may no longer agree on the receiver of a given performance postponing payment for e.g. three months.

In addition to the new time limit for payment, the bill includes a new provision in the Interest Rates Act, prescribing that the acceptance or verification procedure for ascertaining the conformity of the performance with the contract may not exceed 30 days.

Payment periods in contracts between traders and public authorities

In agreements between traders and public authorities, the latter will no longer as debtor be allowed payment periods of more than 30 days. The Minister of Justice and the Minister of Business and Growth may, however, allow certain public authorities payment periods of up to 60 days.

Exceptions to the new rules on payment periods

As for agreements between two traders, one exception to the maximum payment period of 60 days applies. The parties may agree on an extended period provided that two conditions are met:

  1. the extended payment period is expressly approved by the creditor; and
  2. the extended payment period is not unfair to the creditor.

As regards the first condition, it will generally not be sufficient that the debtor's standard terms provide an extended payment period. In order for a term on an extended payment period to apply, the term must as a rule be specifically pointed out to the creditor. This may be observed by including it in the individually negotiated contract or by including in the contract a specific reference to the term in the standard terms. It is for the debtor to prove that the term has been expressly approved by the creditor. The unfairness condition corresponds to the provisions in contract law concerning the invalidity of unfair agreements. When assessing whether an extended payment period is unfair, one will have to examine whether there is any reasonable ground for agreeing on an extended payment period.

The said exception also applies to the new maximum time limits for acceptance and verification procedures.

The exception does not apply to contracts between traders and a public authority where the latter is the debtor.

The new maximum periods of payment do not apply to total payment where the creditor has expressly consented to payment by instalments. The periods of payment will, however, apply to the individual instalments.

Changes in the size of the interest rate and the right to charge interest

At present, the interest for late payment is calculated as the lending rate of the Danish Central Bank (currently 0.45%), which is fixed every six months, plus 7%. The bill raises the additional interest from 7 to 8%.

Under the bill, two traders and a trader and a public authority may no longer agree that a creditor will not be entitled to charge interest after the due date. Also, trade usage or any other custom may no longer warrant such deviation from the right to charge interest and/or deviation from the interest rate (8% + the lending rate of the Central Bank). Furthermore, a public authority may no longer as the debtor agree on an interest rate lower than the statutory rate.

Compensation to creditor on late payment

Under present legislation, a creditor may on late payment demand that the debtor bears the creditor's reasonable and relevant costs in connection with out-of-court recovery of the amount, unless the debtor is not responsible for such late payment. The bill proposes that the creditor additionally will be entitled to obtain a fixed sum as compensation for recovery costs incurred due to late payment. The compensation does not affect any claim for payment that the creditor may have under the current rules. The size of the fixed sum will be determined by the Minister of Justice.  The right to this compensation cannot be deviated from by the parties, and no trade usage or other custom can warrant such deviation, notwithstanding that a given sector for an extended period has not in general charged such compensation.

Sanctions

Entering into an agreement that deviates from the above without meeting the conditions for any exception will as a general rule deem the term in question non-binding and unenforceable. Where no circumstances point in a different direction, an agreement between two traders on a period of payment longer than the allowed will most likely result in the assumption that a payment period of 60 days has been agreed. 

Commencement

According to the bill, the statutory amendments will take effect as of 31 March 2013. The new statutory rules will apply to agreements entered into after that date. The new rules on an increase of the default interest and on compensation for late payment will, however, also apply to agreements entered into prior to commencement of the act, but where the claim for payment is made after commencement of the act.