Opinion of the Economic and Social Committee on the 'Proposal for a European Parliament and Council Directive combating late payment in commercial transactions` (98/C 407/09)

On 15 May 1998 the Commission decided to consult the Economic and Social Committee, under Article 100a of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for Industry, Commerce, Crafts and Services, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 8 July 1998. The rapporteur was Mr Malosse.

At its 357th plenary session (meeting of 10 September 1998), the Economic and Social Committee adopted unanimously the following opinion.

1. Conclusions and recommendations

1.1. Having regard to:

1.1.1. the negative effects of delays and excessively long payment periods, which penalise small and medium-sized enterprises (SMEs) in particular and have a debilitating impact on jobs;

1.1.2. the lack of results following the Council Recommendation of 12 May 1995 ();

1.1.3. the existence of structural causes, particularly a 'late payment culture` in certain member states, and the deliberate attitude of certain public authorities and economic operators;

1.1.4. the disturbances caused to the smooth operation of the internal market;

1.2. The Economic and Social Committee:

1.2.1. Approves the principle of a European directive on payment periods.

1.2.2. Approves totally the draft as regards public procurement. These proposals would be nicely rounded off by an obligation to provide information in notices published in the Official Journal of the European Communities and by provisions to assist sub-contractors and the 'full compensation` of creditors. Eventually the maximum period of 60 days per contract should be reduced to 45, then to 30 days and these measures must apply to the European institutions.

1.2.3. Requests that the proposals be strengthened as regards inter-enterprise relations so as to really attack the root causes of delays and excessively long payment periods. The directive should thus call upon the most exposed member states to provide for specific regulatory provisions applicable to contracts, strengthen their legislation against abnormally long payment periods, recommend transparency in contracts, with an indication of payment periods and conditions, and make it easier for SMEs to transfer the right to interest to third parties.

1.2.4. Proposes a clause stipulating a review of the directive within three years, with the possibility of establishing a maximum payment period applicable to contracts in the absence of cogent results.

1.2.5. Emphasises the importance of redress procedures that are rapid and easily accessible, and calls upon the Commission to flesh out its proposals in this direction.

1.2.6. Proposes the setting-up of an advisory committee open to interested parties, which could operate with ESC support.

2. Presentation of the Commission proposal

2.1. Introduction

2.1.1. The Commission justifies its proposal by pointing out that late payment of contractual debts is a crucial factor in the mortality of businesses, especially SMEs. It rightly points out that this has a negative impact on jobs.

2.1.2. In view of the persistence of late payments and debtors' disregard for their contractual obligations, the Commission feels that the measures taken by member states to resolve this problem are inadequate, despite the recommendation adopted by the Council on 12 May 1995.

2.1.3. The Commission has therefore decided to propose a directive, to be applicable to late payments between businesses in the private sector and public purchasing transactions.

2.2. Effect on the single market and the principle of subsidiarity

2.2.1. Late payments and the differences in the laws relating to them (statutory right to interest on late payments, redress procedures, compensation for the costs of recovering debts) may hamper the free circulation of goods and services within the internal market and can distort competition.

2.2.2. The Single Market Action Plan announced in the conclusions of the European Council in Dublin identified reducing late payments as a key priority for ensuring that the full benefit of the single market is achieved before the beginning of stage III of EMU, and proposed that a draft directive on late payments be tabled.

2.2.3. Given the insufficient action taken by the member states and the persistent damaging effects of late payments, intervention by the EU, in the form of a directive, is justified in accordance with the principle of subsidiarity set out in Article 3b of the Treaty, so as to better achieve the goal of combating late payments in the single market.

2.2.4. The proposed directive does not aim at full harmonisation of national laws but at compliance with some minimum requirements and the mutual recognition of certain provisions in line with the principle of proportionality that guides application of the subsidiarity principle (Article 3b, § 3).

2.3. The impact of late payments on SMEs

2.3.1. SMEs are the main victims of late payments because of their fragile financial situation and their competitive capacity (economic dependence on a limited number of suppliers and weakness vis-à-vis the large firms that they supply). This causes SMEs to incur major financial costs when taking action to meet cash flow needs (short-term bank loans or overdrafts with high interest charges) and high administrative costs when pursuing debts.

2.3.2. SMEs stand most to gain from effective EU late payments legislation. The Nordic countries' example of imposing a high interest rate on late payments shows that SMEs benefit from such laws, since generally they are owed far more money than they themselves owe to large firms.

2.3.3. To gain full advantage from the internal market, SMEs must be able to use simplified and speeded-up debt recovery procedures.

2.4. The public sector

2.4.1. Late payments by the public sector (administrations, territorial authorities, public institutions) are frequent in some states. Such behaviour is unacceptable from operators who, because of the economic impact due to the volume of their purchases, have a duty to encourage all economic players to improve their payment practices.

2.5. Recent initiatives

2.5.1. Following the Recommendation of 12 May 1995 on payment periods in commercial transactions, which proposed that member states should make settlement deadlines more transparent, a Communication of 9 July 1997 () concluded that, although a limited number of states had adopted measures to improve the payments situation between firms, payment times had actually lengthened (with payments being 15 days late on average in 1996).

2.5.2. The Commission therefore proposed that a directive be drawn up, following a line taken by the European Parliament from 1996 onwards and by the Economic and Social Committee in 1997 (), when it called for maximum payment periods and interest on late payments by public sector bodies.

2.5.3. Some member states have adopted laws to combat late payment and excessively long payment periods. Among these are the French law that sets a maximum payment period for perishable foodstuffs, the Italian law that lays down a maximum payment period for relations with sub-contractors, and the Spanish law that imposes payment guarantees on the purchaser for settlements exceeding 60 and 120 days. Very recently, in 1998, the UK government adopted a law that introduced some interesting innovations, such as allowing the courts to declare an abnormally long payment period as being a late payment or allowing SMEs that are owed money to transfer their right to interest to a third party.

2.6. Consultation

2.6.1. Following the written consultation and the public hearing organised by the Commission on the Communication of 9 July 1997, the idea of EU legislation on late payments was welcomed by the majority of national and European trade associations representing businesses, lawyers and debt collection agencies.

3. General comments of the ESC

3.1. The ESC approves the principle of a European Commission initiative to combat excessively long payment deadlines and late payments.

3.2. Previous ESC positions: In an opinion on the Commission staff working paper on the problem of the time taken to make payments in commercial transactions () the ESC already set out a position that may be summarised in three points:

3.2.1. Support for recommendations to the member states, subject to contractual freedom, concerning such matters as: transparency of payment conditions; compliance with those conditions; strict application of agreed deadlines without the need for notification; application of delay interest immediately the deadline has passed; freedom to fix that interest at a level corresponding to commercial interest rates; validity of penalty clauses; resort to arbitration; introduction of summary procedures for payment injunctions.

3.2.2. Concern over the difficulties involved in obtaining in one member state the execution of an enforceable decision taken by the legal authorities of another member state.

3.2.3. Desire for binding regulations, in the form of a European directive, on late payments in connection with public contracts.

3.3. This position was confirmed, as far as public contracts were concerned, by the opinion adopted by the ESC on 29 May 1997 on the green paper entitled 'Public procurement in the European Union: Exploring the way forward` ().

3.3.1. In that opinion the ESC came out clearly in favour of maximum deadlines being laid down, with penalties for late payment by public authorities. The Commission referred to the opinion in the fourth recital of its proposal.

3.4. As regards private transactions, the Commission responded to the ESC's concerns in a Recommendation adopted on 12 May 1995 (). However, the most recent statistics indicate that since 1996 the payments situation has got worse instead of better. According to the Commission's surveys, payment times lengthened in that year. However, questions must be asked, not about the reality of such a trend, which has been confirmed indirectly by surveys among business heads, but about the comprehensiveness of the most recent study quoted by the Commission (). Moreover, this study does not go into the real causes of the decline.

3.5. The main causes of late payments and long payment periods: Before tackling a problem it is essential to know exactly what are its causes. One must distinguish between cyclical and structural causes. The cyclical slowdown in the economy is a risk factor, as is proved by the most recent findings regarding trends in payment periods, which have moved in parallel with the evolution of the economy (deterioration in 1996, improvement in 1997). In periods of difficulty, firms seek to 'gain time` and credit often becomes dearer, which may lead certain economic players to use delayed payments as a substitute for bank credits. But there are also two structural causes of longer payment periods that are more disturbing: first, the deliberate attitude of certain economic players, which is all the more inexcusable when public authorities or large industrial firms and large distributors are involved, and second, the 'late payment culture` that has unfortunately developed in recent years in certain member states to the extent that it has become an economic behaviour pattern.

3.6. Payment periods must be considered in terms of risk and no longer solely in treasury terms. Inter-firm credit in itself is less perverse than the poor risk control which all too often accompanies it. Moreover, by concentrating on combating late payments, the Commission rightly reserves special treatment for late payments, which are a sign of slackness that is much more unsettling. However, the existence of abnormally long contractual deadlines is also a risk for the economy, especially when the public authorities, at little cost to themselves, ensure they get free credit from firms and thus offload on to the private sector the budget adjustments imposed on them by economic and monetary union. Abnormally long contractual deadlines are also the signs of a laxist cultural behaviour pattern and often result from abuse of a dominant position, the victims of which are small firms. The title of the present proposal should therefore be modified so as to make it clear that reducing payment deadlines is also an objective, alongside the combating of late payments.

3.7. The ESC is concerned at this situation, especially in view of the dire consequences of such practices for SMEs, which often have cash flow problems, and the jobs that depend on them. The ESC is shocked at the lax and irresponsible attitude of the public authorities which impose excessively long payment deadlines or are very late in paying their suppliers. These public authorities, which should set an example, are at the root of an evil that they intend to cure through legislation. The ESC has quite rightly emphasised that if legislation is necessary, the authorities should start by applying binding rules to themselves.

3.8. The present proposal does not take up all the lines developed in the ESC opinion of 1993 () and the Recommendation of 12 May 1995 as regards the aim of improved transparency for rates in commercial contracts. However, it does respect the principle of contractual freedom since, if there are no other contractual provisions, it sets up a reference period for inter-firm relations, after which interest payments can be claimed.

3.9. The example of the Scandinavian countries shows that in the medium term a measure of this type leads to a general fall in the number of late payments and a shortening of payment periods, especially for SMEs. But questions must be asked about the possible negative effects in the short term, such as pressure by large companies to impose longer deadlines by contract or cash flow problems for small traders, and about the real effectiveness of provisions that will have no direct effect on contractual relations in certain countries where abnormally long payment periods are general practice.

3.10. Proposal to strengthen the Commission's proposal: The fight against late payments is a response to concerns of a public order nature because of the damage caused to the European economy and of cases of abuse of a dominant position. So, one way or another the aim of this directive must be to reduce payment periods, including those in contracts. Without jeopardising the principle of contractual freedom, it should be possible to make the Commission's proposed directive more effective in combating the structural causes of excessively long payment periods.

To do this, the ESC recommends that the Commission proposal be fleshed out by the following provisions:

3.10.1. In the interests of subsidiarity, the member states most concerned by the problem should be called upon to lay down regulatory provisions applying to contracts to cover areas where excessively long payment periods obviously hamper the smooth operation of the market (e.g. distribution of foodstuffs, relations with sub-contractors).

3.10.2. In the interests of efficiency, after the directive has been in force for three years (with a review each year), and unless significant progress has been made on reducing payment periods, the present text should provide for the possibility of imposing a maximum period in contracts, which would be applied gradually.

3.10.3. In the interests of transparency, the member states should be called upon to strengthen all provisions relating to the visibility of transactions (in contracts, the general conditions of sale); these should include compulsory indication of payment periods and the interest rates applied in the event of late payment.

3.10.4. In the interests of healthy competition, and to combat unfair commercial practices, the member states should be called upon to enact competition law provisions banning any oppressive provisions that permit abnormally long payment periods exceeding the average sales cycle (i.e. more than 60 days) without legitimate reason. European law could take its cue from the recently adopted British law which calls upon the courts to declare abnormally long payment periods (generally considered to be anything over 30 days) as late payments conferring the right to claim interest.

3.11. Other questions to be taken into consideration: The ESC notes that the proposal does not yet cover the following:

3.11.1. The difficulties of implementing an enforcement order issued by a foreign member state, despite the terms of the 1968 Brussels Convention, which is still unratified. The Commission has provided a partial answer to this question by proposing an accelerated recovery procedure and a simplified legal procedure for small debts, but it has not resolved the difficulty that SMEs have when seeking legal redress from a court in another member state;

3.11.2. The organisation of debt recovery activities in Europe: freedom to provide services, code of ethics, licences and the right of establishment. Here one could follow the line taken in British law and recommend that member states make it possible, under their legislation, for the right to interest to be transferred to third parties. Such a measure would, among other things, encourage SMEs to use low-cost recovery companies and, by 'decentralising the conflict`, minimise the risks of reprisals by large companies or public sector contracting authorities;

3.11.3. Relations with consumers, which are not within the proposed directive's scope. The ESC recognises that this is a different problem, but these relations may be approached from different angles: protection of the consumer in the event of a firm's bankruptcy, the social consequences of excessive debt, protection of firms from consumers' behaviour or insolvency, delays in the reimbursement of welfare or insurance payments. The ESC calls upon the Commission to plan studies on these issues so as to establish whether certain aspects of consumer relations should be included in the directive or whether specific provisions should be drawn up;

3.11.4. Application of the directive to European institutions, which would be politically appropriate even if they were excluded for legitimate institutional reasons.

4. Specific comments

4.1. Article 1

The draft directive covers late payments in commercial transactions in the private and public sector. The ESC approves this approach inasmuch as it deliberately seeks to impose constraints on all public entities, including contracts for amounts below the thresholds set by European directives on public procurement.

4.2. Article 3.1.a

The solution of fixing a deadline, after which interest is payable unless otherwise specified by contract, enables firms to have a frame of reference which should eventually act as a standard, and should also encourage the setting of payment periods and conditions prior to a transaction.

4.2.1. The reference to 21 days seems unrealistic for countries used to longer periods. On the other hand, a longer period would not be understood in countries where 21 days is the average payment period.

4.3. The setting of an interest rate based on that of the ECB plus a margin of eight percentage points is a stiff proposition, but here too one is talking about a reference, in the absence of any indications in the contract. However, it is still a lot less than the usual overdraft rates set by banks, especially for SMEs, and the ESC feels it is realistic and reasonable (such a reference would currently work out at approximately 1 % per month). All the more so since the parties concerned may lay down more flexible provisions between themselves or the member states may provide for other procedures in their domestic laws.

4.4. Article 4

The defining of a retention of title clause at Community level will have a positive effect on contractual relations because making the transfer of ownership dependent on payment will reduce late payments. Even if the retention of title clause exists in all member states, its application varies. So, it should only be invoked if the parties have agreed to do so or through a simple declaration by the seller if the purchaser does not oppose it. It should also be invoked in the event of a bankruptcy. Finally, the obligation to register a contract, which exists in certain member states, may be considered as an obstacle, especially in cross-border transactions. The directive should also specify the conditions under which the retention of title clause may be applied and used, so as to cover its use in cases where there is a chain of contracts. Article 4(2), which limits use of the retention of title clause to debts payable in a single instalment, should be deleted. Retention of title must apply as long as a debt has not been completely paid, even when payment by instalments has been agreed. The clause in the annex concerning retention of title must therefore read: 'The goods remain the property of the seller until full payment`.

4.5. Articles 5 and 6

The Commission is proposing to improve certain legal procedures. Its proposals on accelerated recovery procedures for undisputed debts and simplified legal procedures for small debts will be a big help to SMEs, as they will make quick and cheap procedures available to firms. To go even further without waiting for enforcement procedures to be harmonised, the ESC calls upon the Commission to propose the principle that entitlements offered by the accelerated procedure should be immediately enforceable in all member states, given that the debtor has not opposed them.

4.5.1. With a view to the long term, and without calling into question the proposals referred to in Articles 5 and 6, the ESC asks the Commission to continue its thoughts on obtaining the enforcement of court decisions as set out in its Communication of 31 January 1998 on improving efficiency in obtaining and implementing decisions in Europe (). One could look into the principle of having an identical procedure in all member states, whereby SMEs would apply to a court in their own country and obtain an enforcement order against a debtor in another member state, even if the debtor opposed such a step.

4.6. Articles 5 and 6

Bearing in mind that the introduction of binding provisions is not always sufficient to avoid late payments between firms and that legal action is often abandoned, it would have been interesting, still within the framework of the Commission communication referred to above, to develop solutions that encourage contractual negotiation, such as extra-legal mediation or arbitration, in view of the many advantages they offer in business relations (speed, confidentiality, cheapness, process control, informality, consensus). Moreover, such a solution would have responded to the wish expressed by the ESC in its opinion of 30 June 1993 that arbitration should be encouraged.

4.7. Articles 7 and 8

The Commission proposes mandatory measures concerning payment periods in public procurement contracts. At present the obligations laid down by the public procurement directives are sufficiently general to enable the member states, when all is said and done, to duck out of this principle of transparency. The obligation to specify, in public procurement contracts, payment periods and deadlines and the imposition of a mandatory deadline for payment of 60 days counting from the date of the invoice, without prejudice to shorter deadlines agreed to by the parties involved, responds to the wish expressed by the ESC in its opinion of 29 May 1997 on the green paper entitled 'Public procurement in the European Union: Exploring the way forward`, namely that the contracting authorities should be subject to stricter obligations in their dealings with firms submitting tenders: payment periods should be reduced and maximum periods should be laid down, with penalties for late payment.

4.7.1. The ESC wanted such a clause inserted into the framework of European regulations concerning public procurement. The present proposal for a directive has the advantage of covering the whole field of public purchasing, including small purchases that are not covered by the public procurement directives. The ESC approves this approach but wants European public procurement policy, especially as regards information for firms submitting tenders and training for contracting authorities, to take account of the need to reduce payment periods. Thus it could be made compulsory for notices of public procurement contracts published in the Official Journal of the European Communities to announce contractual deadlines for payments. This would be an excellent way for firms and the EU authorities to monitor the practices of public sector purchasers.

4.7.2. As regards large public procurement contracts and contracts for large European networks, provision must be made for performance guarantees and approval before payment. Moreover, the directive's conditions of application, especially the benefit of protective measures (interest charged on late payments etc.) must be extended to cover the whole chain of sub-contractors involved in projects.

4.8. The directive should also state that for public purchasing the period of 60 days should take into account both the procedure of authorising payment (which is applicable in certain countries) and actual payment. In all cases the maximum period of 60 days from reception of the invoice should be binding.

4.9. The ESC insists that contracting authorities in the public sector must be bound by the same rules and obligations as private sector businessmen. It is intolerable that businessmen should be made to suffer the consequences of problems caused by public authorities that are badly run or have budget difficulties. Articles 7 and 8 in the directive must therefore entitle the creditor to claim 'full compensation for any other prejudice` (Article 3.1.g), as in the provisions planned for inter-company transactions. As regards payment periods, while 60 days for contracts is to be considered as a realistic objective for the least virtuous countries, the directive must also contain review clause so that eventually this period will be reduced to 45, then to 30 days.

4.10. Article 9

Instead of a committee of member states' representatives, whose objectivity is in doubt simply by the fact that they are both judge and party, the ESC calls for the creation of an advisory group made up of representatives of interested parties (industry, SMEs, the crafts, commerce, banks, consumers, lawyers, etc.) installed alongside the Single Market Observatory set up by the ESC. Among the tasks of such a group would be that of joining the member states and the Commission in assessing the impact of the directive, especially as it might be strengthened after three years.

Brussels, 10 September 1998.

The President of the Economic and Social Committee

Tom JENKINS

() OJ L 127, 10.6.1995, p. 19.

() OJ C 216, 17.7.1997.

() OJ C 287, 22.9.1997.

() OJ C 249, 13.9.1993, p. 21.

() OJ C 287, 22.9.1997, p. 92.

() Recommendation: OJ L 127, 10.6.1995, and Communication: OJ C 144, 10.6.1995.

() 'European payments habits survey 1996` intrum justicia, April 1997.

() OJ C 249, 13.9.1993, p. 21.

() OJ C 33, 31.1.1998, p. 3.