Payment terms & the freedom to contract
Paul B. Fogo is a senior attorney with Miller, Canfield, W. Babicki
and Partners.
"The objective of combating late payments in the internal market cannot be sufficiently achieved by the Member States acting individually and can, therefore, be better achieved by the Community"
- Council Directive 2000/35/EC.
Citing Council Directive 2000/35/EC, the Sejm recently adopted a new set of regulations intended to transpose the EC Directive on Commercial Payment Terms into local law. In effect, it will restrict the right of parties to a commercial agreement to freely contract the terms and conditions of payment. This new Polish law, referred to as the Act on Commercial Payment Terms (the "Act"), will take effect on January 1, 2004. On the pretext of protecting small-and medium-size businesses from the unfair trading practices of big business, the Sejm has succeeded in chipping away at the freedom to contract. Unlike the Directive that calls upon Member States to enact legislation to combat late payments, the Sejm has taken the Directive one step further.
In transposing the Directive to Polish law, the Sejm has not only codified the right of a creditor to seek statutory interest on overdue debts, but has also extended the right to assess statutory interest, in certain instances, on payments that are not overdue at the rate of 13 percent. And to make matters worse, any attempt to contract around this right is illegal. Fortunately, consumer contracts will not be subject to the Act's provisions.
Hang on just a minute. Surely the Sejm would not draft a law that imposes a penalty on a debtor who pays on time. Would it? Yes, it certainly would. "If the payment due date in an agreement is more than 30 days, the creditor may impose statutory interest on the amount due (from the debtor) beginning on the 31st day"- Article 5. In other words, even if the parties to a commercial contract agree that payment is not due until 90 days after delivery of the goods or performance of the contracted service, the creditor will retain the right to assess statutory interest against the outstanding balance beginning on the 31st day until such time as payment is made on the 90th day. Further, if for some reason the payment due date is not specified in the contract, the creditor may assess statutory interest on the amount due beginning on the 31st day after performance of the contract. Any attempt to limit the creditor's right to assess statutory interest on balances older more than 30 days is void. Fortunately, Article 5 states that the creditor "may impose statutory interest." To put it differently, the creditor has the option (but not the obligation) to impose statutory interest on balances older than 30 days, but which have not yet become due. In comparison, the EC Directive only provides for the imposition of statutory interest if the payment is overdue or "if the payment date is not fixed in the contract...30 days after the receipt of the goods or services" - Article 3.
Is this legal under EU regulations? Unfortunately, the answer is yes. Article 6 of the EC Directive permits Member States to "maintain or bring into force provisions which are more favorable to the creditor than the provisions necessary to comply with this Directive." I'm not sure if the European Council realized how much liberty the Polish legislature would take with this right.
What if payment is overdue? Does the creditor still retain the option not to demand statutory interest? No. If payment is made beyond the due date, the imposition of statutory interest is now automatic. According to Article 7: "If the debtor fails to make payment when due...the creditor is entitled, without the need to make a separate demand, to interest at the rate equal to the rate of interest established by the tax authorities." The rate currently used by the tax authorities on past due tax obligations is 13.5 percent. The parties, however, are free to agree on a higher rate of interest.
How exactly can a creditor seek payment of statutory interest? According to Article 7 of the Act, the creditor does not have to face the debtor alone. Local and national organizations, which are mandated to promote and protect the interests of small-and medium-size businesses, may intervene on behalf of the creditor and demand payment from the debtor.
What type of transactions are subject to this Act? In general, any agreements entered into between two commercial entities for the delivery of goods or services, including sole proprietorships, limited liability companies, joint-stock companies and skilled professionals (yes, this applies to attorneys and their clients too). Until the point in time that Poland joins the EU, public hospitals and rehabilitation centers will be exempt from the Act. Upon entry to the EU, however, public hospitals and rehabilitation centers will be subject to this Act. According to paragraph 22 of the Directive's Preamble: "The Directive should regulate all commercial transactions irrespective of whether they are carried out between private or public undertakings...having regard to the fact that the latter handle a considerable volume of payments to business." In other words, EU law does not permit Member States to differentiate between the private and public sectors in transposing the provisions of the Directive.
Any other exemptions? Yes, as mentioned in the beginning, consumer contracts are exempt. A consumer installment agreement, such as my monthly car payment, will continue to be subject to the terms of the contract (5.5 percent per annum in Swiss Francs).
