Does the government have a payment problem?

The European Court of Justice rendered an important judgment on 20 October 2022 regarding Directive 2011/7/EU on combating late payment in commercial transactions. In this judgment, the Court ruled that national legislation cannot generally provide for a payment period of 60 calendar days for all commercial transactions. The Court thereby relies on the rules of the aforementioned directive.

In this article, we briefly discuss the content of the judgment and elaborate on its consequences.

Brief summary

The judgment addresses a dispute between a Spanish debt collection agency and a Spanish health authority. The collection agency had obtained rights of action from 21 companies regarding the payment of goods and services that these companies had provided to medical centres between 2014 and 2017, all under the responsibility of this health authority.

The collection agency had demanded payment from the health authority of a principal sum, plus default interest and a 40 EUR recovery costs for each unpaid invoice.

As the health authority failed to pay, the collection agency initiated a claim before the competent Spanish court. To know how to interpret Directive 2011/7/EU in the context of this case, the court referred three prejudicial questions to the ECJ. Indeed, a “prejudicial” question is a legal question from a court to a higher court on the interpretation of a rule of law before rendering a judgement.

Prejudicial questions

The Spanish court put the following three questions to the Court:

  • Can recovery costs of 40 EUR per invoice be demanded in accordance with the provisions of Directive 2011/7/EU, even if those invoices are recovered together with other invoices?
  • Is a payment period of 60 calendar days in all circumstances and for all contracts, the first 30 calendar days of which serve for approval and the remaining 30 days for payment, compliant with Directive 2011/7/EU?
  • Does the question of whether the VAT specified in the invoice should be taken into account as “amount due” depend on whether or not the creditor has already paid this amount to the tax authorities at the date when the delay in payment arises?

Analysis and judgment of the Court of Justice

To the first question, the Court answers in the affirmative, provided that there is a late payment per commercial transaction. A late payment occurs when a payment for a commercial transaction has not been made within the contractual or statutory payment period. A collection agency may therefore claim 40 EUR recovery costs for each invoice separately.

On the second question, the Court answers that the aim of Directive 2011/7/EU is to impose stricter obligations on public authorities with regard to their transactions with businesses. Indeed, the directive recognises that the income streams of public authorities are characterised by greater certainty, predictability and continuity than those of undertakings. As a result, these public bodies can obtain financing on more favourable terms than undertakings and governments are less dependent on maintaining stable commercial relationships to achieve their goals. A longer payment period in favour of these public services, together with payment delays, can therefore entail unjustified costs and potential liquidity problems. This is detrimental to the competitiveness and profitability of those enterprises, as they need external financing due to those payment delays.

The above considerations, read together with the provisions of Directive 2011/7/EU, lead the Court to consider that a verification period cannot be regarded as inherent in commercial transactions.

As a result, national legislation providing, in a general manner and for all commercial transactions between undertakings and public authorities, for a payment period not exceeding 60 calendar days would be at odds with the provisions of Directive 2011/7/EU. This applies even if that payment period consists of an initial verification period of 30 calendar days.

Finally, on the third question, the ECJ answered that whether the VAT mentioned in the invoice or in the equivalent request for payment should be taken into account as a “due amount” is not determined by whether the creditor has already paid that amount to the tax authorities on the date on which the delay in payment arises.

Concrete consequences of the judgment

Belgian law has a regime for commercial transactions between companies and public authorities similar to the Spanish legislation. Articles 95, 127 and 160 of the Royal Decree Execution of 14 January 2013 regulate the payment of public contracts for works, supplies and services respectively. By default, these articles prescribe a payment period of 30 calendar days starting from the date of termination of the 30-calendar-day verification period. In practice, this amounts to a standard payment term of 60 calendar days, regardless of the specific public contract.

When the RD Execution of 14 January 2013 does not apply in a contractual relationship between enterprises and public authorities, the rules of the Act of 2 August 2022 on combating late payment in commercial transactions apply. This law was recently adapted to Directive 2011/7/EU with entry into force on 1 February 2022 and correctly applies the directive. Specifically, the law provides in Article 4 that a payment period is always 30 (or exceptionally a maximum of 60) calendar days, regardless of whether a prior check or verification is required. If a verification is required, the period for this verification is an integral part of the payment period.

Directive 2011/7/EU and the new ECJ judgment potentially call into question the existing regulations in the RD Execution of 14 January 2013. Ideally, the legislator should act quickly to clarify the existing situation.

In the meantime, it is up to the individual contracting authorities themselves to give appropriate substance to the aforementioned judgment. Because of the general standard of care and the obligation to execute contracts in good faith, contracting authorities should not be able to simply invoke the provision in the RD Execution of 14 January 2013 to defer payment up to a maximum of 60 calendar days. If they do want to invoke this, they will probably have to justify this in the future. In doing so, they would have to show that this arrangement is objectively justified by the particular nature and characteristics of the contract. Just given the obvious importance of payments in public procurement, recommendations or a clarifying circular letter by the competent authorities might be welcome to clarify how procurers should apply this concretely and correctly.

To be continued…