Law against Default: Main aspects

It has been 15 years since  the Law 3/2004 on combating late payment in commercial transactions was implemented.

Since then, What is the status of the application of this law? Has progress been made in favor of SMEs, the business sector that was originally expected to benefit? Has the Law managed to freed companies from the financial burden of non-payment or  Has it reduce collection deadlines?

In this blog we have already dealt with the issue of the deadlines provided for in the Law against late payment. We did so on the occasion of the aforementioned reform of 15/2010 and its reflection in the STS 688/2016: “Payment to suppliers, 60 days, not one more“.

Now we will delve more deeply into the content of the Law, its application in Courts and its impact on commercial reality.

Origin of the current regulation on the fight against late payments

Law 3/2004, as amended by Law 15/2010, is the transposition of Directive 2000/35/EC (LCEur 2000, 2084). This law, as its name indicates, establishes measures to combat late payment in commercial transactions.

The Directive sought to avoid the financial burdens of late payment and excessive payment periods for companies. It also sought to unify the different regulations and practices in the different Member States, equalizing their commercial practices.

What is the scope of application of the Dilatoriness Act?

The Law applies to payments made in consideration for commercial transactions between:

1. Companies,
2. Companies and the Administration, and
3. Main contractors and their suppliers/subcontractors.

Therefore, one of the most important points is that it is applicable to both the Private and Public sectors.

The following are outside the scope of application of this Law:

1. Payments made in commercial transactions involving consumers.
2. Interest related to checks, promissory notes and bills of exchange and payments of compensation for damages. (Including payments by insurance companies).
3. Debts subject to bankruptcy proceedings initiated against the debtor, which shall be governed by the provisions of their special legislation.

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Consequences of late payment according to the Supreme Court.

The 4th Section of the Contentious Chamber of the SC establishes an interpretation of Art. 8 of the Late Payment Law. It ruled that creditors will have the right to collect 40 euros for each invoice paid late. It will be applicable to all debts related to the Administration.

What are the payment deadlines determined by the Law?

The Law establishes the following payment terms to be met by the debtor:

1. Sixty days after the date of receipt of the goods or rendering of the services. This term may not be extended by agreement between the parties.
2. If the invoice/request for payment is received before the goods/services, the sixty days shall be counted after delivery of the goods/services.
3. If there is a procedure for acceptance/approval of goods/services, the sixty-day period also applies. In this case the creditor must receive the invoice before the end of the verification period. The sixty day period is counted from the date of receipt of the goods/services. Therefore, payment deadlines cannot be extended under the cover of goods or services verification deadlines.
4. The term for the Administrations is reduced to thirty days. It is reduced in Article 198.4 of the Public Sector Contracts Law (In Spanish: Ley de Contratos del Sector Público: “LCSP”). The procedure for claiming payment is regulated in Article 200bis LCSP.

Indemnification to the creditor for collection costs:

When the debtor incurs in default, the creditor shall be entitled to indemnification for the collection costs that it accredits.

This indemnity may in no case exceed 15% of the amount of the debt. Except in cases of debts of less than 30,000, in which the limit will be the amount of the debt.

Interest for late payment established in the Law against Delinquency:

The interest for late payment to be paid by the debtor shall be that resulting from the contract.

In the absence of an agreement, the following legal rate will be applied: The sum of the interest rate applied by the European Central Bank, plus eight percentage points.

The Ministry of Economy and Finance publishes every six months in the “Official State Gazette” (In Spanish, Boletín Oficial del Estado: “BOE”) the interest rate resulting from the application of the rule contained in the previous paragraph. (For the first half of 2019, the interest rate is 8%, as published in the BOE 308 of 22/12/2018).

This legal rate of late payment interest, applies during the six months following its fixation.

And this subsidiary interest, also applies to the public sector, art. 200.4 LCSP.

Abusive Clauses: How does our jurisprudence interpret them?

Abusive clauses are regulated in article 9 of the Law. And it indicates that they will be null and void the agreed clauses that differ from:

1. the date of payment established by the Law;
2. the consequences of delay; or
3. the legal rate of subsidiary interest established in the Law.

And in relation to the term, our Supreme Court pronounced for the first time, in its judgment 688/2016 of 23/November. Judgment mentioned in our above-mentioned article, “Payment to suppliers, 60 days, not one more”, from which it is worth highlighting:

(…) 3. The plea must be upheld.

(…), it should be noted that the option for the imperative nature of the limitation of the term (as a rule of ius cogens) was already exercised by our legislator with the amendment introduced by Law 5/2010, of July 5. This option was reflected not only in the wording of Article 4.1 of said Law, but also in the Preamble of the same in view of the aims and objectives that informed the amendments made with respect to the initial text of Law 3/2004, of 29 December. Imperative nature of the limitation of the term that, in turn, has been respected by the subsequent reform introduced by the LMAE, of 2013, where Article 4.3 clearly states that “The payment terms indicated in the preceding paragraphs may be extended by agreement of the parties without, in any case, a term exceeding 60 calendar days may be agreed.” (…)

Judgment, subsequently invoked in the same sense by our high court, in another issued on May 19, No. 318/2017. In this second one, identical arguments to those stated above in STS 688/2016 were considered.

Cessation and Retroactive Actions

Pursuant to article 9.4 of the Law, in the event of abusive clauses, actions for cessation and retroaction may be brought. For its application, the Delinquency Law invokes the Law on General Contracting Conditions. They can be initiated by:

1. Associations, federations of associations and corporations of businessmen, professionals, self-employed workers and farmers.
2. The Official Chambers of Commerce, Industry and Navigation.
3. Legally constituted professional associations.

But the reality is that this type of action has not been used by the legitimate groups of businessmen. There is an evident fear on the part of the SMEs to lose the “big company” client, and with capacity of purchase.

Is the application of the Law being as effective as the original directive intended?

Neither the aforementioned obligations of time limit, compensation and subsidiary interest, nor the injunctive relief, have been really effective. The reasons are varied, here are some considerations on some of the possible ones.

One of these reasons may be the fact that the objective limitation in the application of the Law. This limitation prevents the maximum term of 60 days from being applied when payment is made through promissory notes. Thus, large companies can bypass the limitation by agreeing to pay through promissory notes. The maturity of which is only subject to the will of the parties and normally of the party that has greater bargaining power.

Another cause was mentioned when dealing with the cessation action. And it is the fact that the entitled entities have not made use of it.  Basically, because there is an evident fear on the part of the employer of losing the client. Also because it is possible that there is some laziness on the part of the entitled entities.

This lack of compliance with the objectives that were intended to be achieved with the Law is known to all. This fact is regularly reported in the press, let’s see some examples:

“Companies circumvent the law in the payment to suppliers”. News from the newspaper “El Periódico” of June 24, 2018.

This publication included data obtained from the Multisectoral Platform against Default (MPAD).

And about the reality of collection deadlines it concludes that: In 2017, the public sector was paying at 65 days, and the private sector at 77. (As we have seen, the legal limitation is 30 and 60 days respectively).

The article, in addition, echoes a complaint made from MPAD, against “confirming”.

Confirming (assignment of payments to suppliers) is a financial service consisting of managing a company’s payments to suppliers. This service includes for the creditor, the possibility of collecting payments prior to their due date. But the latter, against a price paid by the supplier. PMCM denounces that confirming turns suppliers into financial creditors.

Diario 5 Días, provides similar news, whose headlines read:

“The Supreme and the Morosidad: Spain still suffers a chronic problem of non-payments and lack of respect for payment deadlines in commercial operations”. February 13, 2017.

“72% of suppliers have customers imposing illegal payment deadlines”. March 13, 2018.

As a consequence of all this, there are many voices calling for coercive measures.  And in this sense, the parliamentary group “Ciudadanos”, initiated a bill to strengthen the fight against late payment. (Official Gazette of the Spanish Parliament of May 19, 2017).

This proposal endows the Administrations with authority to verify non-compliance with the Late Payment Law. And it includes a sanctioning procedure for those who fail to comply with the obligations of the Law. The proposal provides, for example, that failure to meet payment deadlines is a punishable offense.

In any case, the proposal is still subject to amendments, we will see what happens after the elections.

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