Business Law: Change is afoot over late payment rules, says Robert Tiffen

THE UK Government has until March 16 to implement the EU’s Late Payment Directive. The Department for Business Innovation & Skills (BIS) is consulting with a range of interested groups on how the Government can meet its obligations under the new directive, and draft legislation should be produced some time in the New Year.

The aim is to harmonise late payment regimes across the European Union. It has been recognised that in many parts of the EU, the UK included, there can be a culture of late payment with potentially calamitous effects on a wide range of SMEs. As part of their consultation paper, BIS has statistics that suggest in 2008, 4,000 companies became insolvent because of late payment. They also suggest that in 2012, 124,100 SME employers nearly went out of business as a result of it. The European Parliament recognises cross border trade is discouraged due to SMEs’ fear of late payments.

For businesses in England, the proposed changes are not too onerous, so long as they are already acting in line with existing UK late payment legislation. One difference the new directive will bring to English law is that in business to business agreements, parties should generally make sure contractual payment terms do not exceed 60 days, which would be deemed “grossly unfair”. “Grossly unfair” is a new concept to English contract law which is defined in the directive as a “gross deviation from good commercial practice, contrary to good faith and fair dealing”. The directive will also implement a mandatory 30 day maximum payment term for any party contracting with a public authority with any contractual payment term longer than 30 days subject to the “grossly unfair” test (with limited exceptions).

The directive will bring a punitive interest regime on late payments roughly comparable to the existing UK regime. The proposed compensation that is recoverable if the debt is late could shift to a fixed sum of 40 euros, which would be a worse position for a UK creditor (under existing UK legislation, compensation of �40, �70 or �100 is recoverable, depending on the size of the debt).

Aside from the issue of compensation, the changes proposed by the Late Payment Directive should, overall, be a welcome help to hardworking SMEs who struggle to ensure that their cash flow remains strong in these difficult economic times. Given the UK Government’s focus on export trade, and the cross border opportunities for businesses in East Anglia that are growing month by month, the new legislation should provide some peace of mind to SMEs engaged in cross border supply work.

: : Robert Tiffen is an associate at law firm Ashton KCJ.

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