Late Payment Regulation: the European Parliament introduces amendments as it adopts its first reading position
On 23 April 2024,1 the European Parliament (EP) adopted its first-reading position and, in doing so, introduced amendments to the European Commission's (EC) proposal for a Regulation on late payment.2 In our update3 from last October, we discussed the EC's proposal and some of the issues that we felt needed further clarification. In this follow-up update, we look at some of the EP's amendments to the EC's proposal and areas where we think gaps remain.
What are some of the main amendments proposed by the European Parliament?
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Adding some flexibility into the 30-day maximum payment period
The EP's adopted provisions allow for the proposed 30-day deadline to be extended up to a maximum of 60 days by contract. The maximum payment deadline for government-to-business (G2B) transactions (where the public authority is the debtor) remains 30 days.
The EP propose allowing for payment terms of up to 120 days for slow-moving or seasonal products acquired by a debtor and the EC will be required to publish technical guidance in relation to this. Also, the EP has recommended that the proposed Regulation not apply to payments related to the distribution and manufacture of books or their "printing, binding or publishing".
These changes recognise the need for balance between limiting the 'fear factor' that small businesses can suffer when they are the creditor in a relationship with a larger entity, and a need to allow for freedom of contract and an ability to negotiate a longer payment period where it is mutually beneficial.
The EP has clarified via the Recitals that the Regulation does not restrict parties from using consignment contracts.
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Prohibiting ban on assignment provisions4
To make it easier for creditors to access receivables-based finance, the EP has added provisions banning the assignment of receivables to the list of provisions that would be null and void under the proposed Regulation – this has been added to the list in Article 9(1). This would mean a debtor would not be able to prohibit, exclude or limit the right of the creditor to assign receivables to third parties for the purposes of accessing financing services. It is not clear whether the reference to "assignment" is intended to only cover the absolute transfer of receivables or also the grant of a security interest over receivables, which we expect will create some confusion as to the applicability of this Article.
In relation to this, we again draw attention to the fact that it is not clear whether the provisions of the Regulation apply to parties of EU-governed contracts only, or if it applies to any EU person or entity selling or purchasing goods or services irrespective of the governing law of the contract. If the latter, the Regulation would in effect attempt to override the laws of non-EU Member States and would be in direct conflict with Article 14(2) of Rome I.5 We must therefore assume that the Regulation only applies to parties of EU-governed contracts, which in our view should be the case but which needs to be clarified in the Regulation.
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Creditor's ability to waive its right to interest
The EP's proposed position is that a creditor will not be able to waive its right to obtain interest for late payment or the flat fee compensation (discussed in the following paragraph) when the debtor is a public authority or a large undertaking,6 whereas the EC's proposal includes a complete restriction on a creditor waiving its right to receive interest for late payment, no matter what size the debtor is.
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How is the new maximum 30-day payment term calculated?
As discussed in our prior update, the point at which late payment interest is calculated is quite confused in the Regulation. The EP has suggested an amendment which seeks to clarify how the payment period for late payment interest is calculated and which makes much more sense. The amendment means that interest for late payment will accrue from the day following the expiry of the contractual or statutory payment period. Where the date of the receipt of the invoice or the equivalent request for payment is uncertain, the payment period shall not exceed 30 calendar days from the date of receipt of the goods or services. In addition, the EC's proposed Regulation includes an additional flat fee compensation of EUR 50 for each late payment and the EP has introduced a ratchet which increases that flat fee up to EUR 150 for late payments in excess of EUR 15,000.
More clarification needed
There are still questions around the proposed Regulation's application. As mentioned above, these include whether it applies to parties of EU-governed contracts, or if it applies to any EU person or entity selling or purchasing goods or services irrespective of the governing law of the contract. It is also unclear if and how the proposed Regulation would apply to an assignee of a creditor of a payment obligation.
The issues that we raised in our update7 from last October related to payments by way of instalments, retention of title and remission of statutory interest all appear to be unresolved for now.
What next?
As there is no provisional agreement on the final text of the proposed Regulation, the file will be followed up by the new EP after the European elections on 6-9 June 2024. The European Council is carrying out its preparatory work in parallel to agree on its position.
The proposed Regulation is being adopted under the ordinary legislative procedure, which means that the EP and the Council, as co-legislators, have to agree on the same final text before the legislation can be published in the Official Journal of the European Union and enter into force. We think there is still work to do to clarify how the proposed Regulation will work in practice.
1 Press release: Combatting late payments in commercial transactions, 23 April 2024.
2 Proposal for a Regulation of the European Parliament and of the Council on combating late payment in commercial transactions (procedure 2023/0323(COD)).
3 The European Commission proposes an updated late payment regime for the EU, 11 October 2023.
4 A ban on assignment is a prohibition contained in a contract of sale or supply (Contract) between a customer and its debtor restricting one or both parties from assigning (whether by way of outright disposal or by way of security) certain or all of their rights (including any rights to receivables) under that Contract.
5 Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations.
6 "Large undertaking" is as defined in Article 3(4) of Directive 2013/34/EU, which reads as follows:
"[…] undertakings which on their balance sheet dates exceed at least two of the three following criteria:
(a) balance sheet total: EUR 20,000,000;
(b) net turnover: EUR 40,000,000;
(c) average number of employees during the financial year: 250."
7 The European Commission proposes an updated late payment regime for the EU, 11 October 2023.
