Tough measures have been implemented with the aim of reducing cash-flow problems responsible for putting one in four EU small and medium sized enterprises (SMEs) out of business. The measures were made EU law on 24 January 2011 with the adoption of the Directive on combating late payment in commercial transactions (2011/7/EU). This replaces the current Late Payments Directive (2000/35/EC).

Many payments in commercial transactions between businesses or between businesses and public authorities are late. The European Union believes this is why 25 per cent of SMEs fail. Under the new Directive, unless the purchaser is not responsible for the delay in payment, a supplier can charge interest for late payment, without sending a reminder, if, having fulfilled its contractual obligations, it has not received the amount due on time.  

The supplier will be entitled to the interest for late payment from the day following the date, or the end of the period, for payment as fixed in the contract. The European Commission will publish on the internet the statutory rate of interest for late payment. Essentially this will be the reference rate of the relevant Central Bank plus 8 per cent; the reference rate in the United Kingdom is the Bank of England base rate. If the date or period for payment is not fixed in the contract, the supplier is entitled to interest after 30 days following the date of receipt of the invoice. If the date of the receipt of the invoice is uncertain or the purchaser receives the invoice earlier than the goods or services, interest will run from 30 days after the date of receipt of the goods or performance of the services.

The Directive allows for periods of acceptance or verification of goods or services according to which their conformity with the contract can be ascertained. However, it requires that the maximum duration of a procedure of acceptance or verification should not exceed 30 days from the date of receipt of the goods or services, unless otherwise expressly agreed in the contract and provided it is not grossly unfair to the supplier (which depends, among other things, on the nature of the product or the service).

The Directive stipulates that in transactions between undertakings, the period for payment fixed in a contract must not exceed 60 days, unless otherwise expressly agreed in the contract and provided it is not grossly unfair to the supplier. The Directive allows Member States to extend the payment period up to a maximum of 60 days for public hospitals and health care institutions and any public authority that carries out economic activities of an industrial or a commercial nature by offering goods or services on the open market.  

When interest becomes payable, the supplier is entitled to a minimum fixed sum of €40 as compensation for recovery costs. Suppliers are also entitled to reimbursement of other expenses incurred due to the purchaser’s late payment, i.e., lawyer or debt collection agency fees. Member States will be allowed to impose fixed sums for compensation of recovery costs that are higher. The Directive does not prevent payments by instalments or staggered payments, although each instalment or payment will be subject to the same rules under the Directive.  

Article 7 of the Directive provides that a contractual term or a practice relating to the date or period for payment, the rate of interest for late payment, or the compensation for recovery costs is either unenforceable or gives rise to a claim for damages if it is grossly unfair to the supplier. Whether a contractual term or practice is grossly unfair will depend on all the circumstances of the case but guiding principles are set out in the Directive. The recitals to the Directive recognise that extensive payment periods may in some circumstances be appropriate, for example when undertakings wish to grant trade credit to their customers. Nonetheless, any contractual term that excludes interest or recovery costs for late payment will always be considered grossly unfair.