On 8 August 2000, Directive 2000/35/EC of the European Parliament and of the Council on combating late payment in commercial transactions was published in the Official Journal L 200, page 35. The Directive will enter into force on 8 August 2002.

Why a Directive?

The Commission proposed this Directive in March 1998. The economic rationale behind the Commission's proposal lies in the fact that one out of four insolvencies is due to late payment. This leads to the loss of 450 000 jobs each year, adding to the high level of unemployment in Europe.

In addition, outstanding debts worth EUR 23.6 billion are lost every year through the insolvencies caused by late payment. What will be the advantages for SMEs? Every year, the European Union's enterprises lose around 450 000 jobs due to late payments.

In addition, EUR 23.6 billion worth of receivables is lost through insolvency cases. The basic purpose of the Directive is to combat this situation, and especially address the particularly precarious situation facing small and medium-sized enterprises. The Directive will cover all commercial transactions, whether in the private or public sector.

The Directive should have an immediate impact on the way in which contracts are negotiated and agreed between the contracting parties, as for the first time a common basis has been established for the European Union and EEA members. The main provisions deal with the consequences of late payment. In particular, the Directive introduces a statutory right to interest, which should be sufficiently high to compensate the creditor for the loss incurred through late payment.

Payment period

The Directive will give a benchmark of 30 days as a payment period which mainly refers to payment delays. This 30 days reference period runs from the date on which payment is due (i.e. after the period between the dates when the contract is concluded and the payment is due)., which is the date of receipt of the invoice or at the date of receipt of the goods. In cases where the parties have agreed a procedure for acceptance or verification of the goods, it starts after this process has been completed.

SMEs will benefit from a statutory right to interest 30 days after the date of the invoice, unless another payment period has been negotiated in the contract. However, any agreement on the payment period is not enforceable if it is grossly unfair to the creditor. No reminder will be necessary in order to collect interest on arrears since late payment constitutes in itself a breach of contract that should be automatically sanctioned. For certain categories of contract, Member States will be able to fix a period of 60 instead of 30 calendar days after which interest will become due. However, if they choose to do so, they will have to prevent the parties from exceeding this delay, i.e. it will take precedence over contractual payment periods. This will combat long contractual payment periods, which are customary in certain sectors.

Penalty interest

The Directive provides for a penalty interest of 7 percentage points above the ECB rate, or equivalent rates for Member States outside the euro zone or the EEA members.

Compensation of all relevant recovery costs

Furthermore, the Directive gives the right to sellers to claim full compensation for all relevant recovery costs incurred when trying to obtain payment from their customers.

Retention of title

Finally, the Directive allows the seller to retain title to the goods until payment is completed, if that is explicitly agreed before delivery.

Rapid recovery procedures

The speed with which debtors are prepared to pay depends to a large extent on the availability of rapid recovery procedures.

The provisions on a statutory right to interest would make little sense if they were not complemented by provisions permitting speedy recovery. Any lack of efficient implementing procedures would particularly harm small enterprises who are often unable to pursue their claims through lengthy court proceedings simply because the cost of these proceedings exceeds the value of their claim.

This is why the Directive obliges Member States to ensure that the creditor will be able to obtain an enforceable title within a period not exceeding 90 calendar days. This provision will considerably improve the creditor's ability to pursue the debtor throughout the EU and to collect the claims with speed and efficiency.