From 8 August 2002 UK businesses will benefit from new European legislation, known as the EC Directive. The new ruling was introduced by the European Commission on 29th June 2000 and following a two year consultation period, will be introduced to help reduce the incidence of late payment throughout the European Union.

The new legislation will complement the UK’s existing Late Payment of Commercial Debts (Interest) Act, which was introduced on 1st November 1998. The Act was to have been phased in in three parts, and at each stage, the range of businesses and organisations who could use it has been widened.

The first phase in November 1998 gave small businesses a statutory right to claim interest from large businesses and the public sector on debts incurred under contracts agreed after that date. In November 2000, the second phase allowed small businesses the additional right to claim interest from other small businesses on debts incurred under contracts agreed after that date.

The third and final phase was due to be implemented in November 2002, to allow all businesses and the public sector the right to claim interest from all other businesses and the public sector.

The EC Directive will bring forward this final phase thereby giving all businesses, regardless of size, the right to claim interest on late payment. It also has additional benefits including:

1. A statutory right to interest (SRI) at a rate of at least seven per cent over the European Central Bank base rate for euro area countries. European countries outside the euro area will use their own national bank rate. The UK will continue to add eight per cent to the Bank of England’s base rate;

2. The right to reasonable compensation for debt recovery costs incurred as a result of late payment;

3. Grossly unfair terms and conditions can be challenged where these undermine the terms of the legislation.

The EC Directive was introduced after the European Commission and Parliament recognised the critical importance of the late payment problem to small and medium sized businesses. An extensive consultation conducted by the Commission during 1993 found that there was an increase in the number and seriousness of delays in payments causing problems among small and medium sized businesses. The implications for businesses’ cash-flow requirements and administrative costs were among many of the concerns expressed. The Commission felt that it was vital, for both the competitiveness of businesses and for the success of the internal market, that reasonable payment periods should be maintained throughout the European Union.

Upon the invitation of the European Parliament, the Commission created a Recommendation which aimed to establish common minimum guarantees for all businesses operating within the European Union – which included the right to claim interest on late payment and right for the creditor to be compensated for the cost of pursuing debts. The European Parliament called on the Commission to transform the Recommendation into a Directive in 1997 following further consultation which revealed wide support. The Directive was then adopted in June 2000.
It is hoped that the EC Directive will provide UK exporters with greater certainty in their trading activities with other EU countries.

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