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So farewell then, 90 day payment terms?

The 2011 EU Directive on “combating late payment in commercial transactions” is the EU’s second attempt at solving the perceived problem of late payment in the EU.  It is intended to reduce economic loss to suppliers, particularly SMEs.  It was implemented in the UK by the Late Payment of Commercial Debts Regulations 2013  and applies to contracts made on or after 16th March 2013.

The main effect is to make a debtor who does not pay for commercial goods or services on time liable to pay interest (at 8% over base unless otherwise, and justifiably, agreed) and reimburse the reasonable recovery costs of the creditor.

Agreed credit periods

The Regulations provide that debts payable under B2B supply agreements must be paid within 60 days.  The parties can agree to extend the period beyond 60 days, provided the extension is not “grossly unfair” to the creditor in all the circumstances.  A grossly unfair extension would be unenforceable.

Will this make any difference in practice in the UK trade?

Between producers and their UK distributors

Probably not as between wine producers and their current UK distributors.  If they have agreed payment on 90 day terms, which might well be regarded as the norm in the UK market, then for as long as the relationship is cordial the producer will be happy to accept payment at 90 days.  If and when they fall out, the producer is unlikely to gain very much from demanding payment at 60 days and arguing that the 90 day period he agreed to, and was content with until then, was actually grossly unfair to him.

As regards new relationships, producers may want to propose a maximum 60 day period, citing the Directive in justification.  But it will not, as might be suggested, be “in breach of EU law” to propose a longer period.  It will still be a matter of negotiation, and the parties will be free to agree 90 days, 120 days, or even longer. Perhaps, over time, there will be more frequent questioning of whether a 90 day or longer period is objectively justifiable, or is it just about who should bear the extra working capital burden.

Producers supplying directly to the major UK supermarkets or retailers

It may make no difference here either, with 90 day or longer periods continuing to be the norm. Producers who supply to the “Designated Retailers” (the ten largest UK supermarkets defined as such by the Groceries Supply Code of Practice) might have a bit more traction, especially if they presented a united front.  But when did suppliers competing for substantial volumes of business ever do that?

Who will the legislation help?

It is really aimed at changing the behaviour of public bodies and large corporates who habitually pay later than they should, ignoring whatever period may have been expressly agreed in the contract.  But the sanctions provided for are not automatic – they have to be claimed by the creditor.  So in practice they will only be relevant when there is no ongoing relationship between the parties, and no goodwill or future business to be taken into account.