Insights

This latter Directive has been recast for reasons of clarity and rationalization. It is now replaced by Directive 2011/7/EU of the European Parliament and of the Council of 16 February 2011 on combating late payment in commercial transactions Text with EEA relevance. Its aim remains that of encouraging enterprises and public authorities to comply with payment deadlines in commercial transactions in order to ensure the smooth functioning of the single market.

Upon the Directive being recast, Maltese law needed to be amended accordingly. This brief article  concerns the latest legislative changes affecting this Sub Title which were introduced through Legal Notice 13 of 2014 entitled “Commercial Code (Amendment) Order, 2014”.^[1] By means of this Order, Sub Title IA of the Code was replaced in its entirety and this article is intended to highlight the rules as amended.

The focus of the rules is the establishment of rates of interest payable in case of late payments in certain defined commercial transactions and to fix the time from when the interest starts to run.

A. Scope of Applicability

The circumstances when the rules are to apply are established in the Commercial Code. If a particular transaction does not fall within the set of circumstances contemplated, these rules will not apply and the traditional Civil Code rules on interest will instead prevail. The parameters of the rules are as follows:

1. They apply with effect from the 1^st March 2012.^[2]
2. These rules shall apply only to payments made as remuneration for commercial transactions carried out between (a) private and public undertakings or (b) undertakings and public authorities or (c) main contractors and their suppliers and subcontractors.^[3]
3. The transaction must be one that leads to “the delivery of goods” or to the provision of services, in either  case,  for  remuneration.^[4] Sale and its  various  permutations  are expected to  be captured in the phrase “delivery of goods” that is to be understood in a wider sense.
4. The rules will apply only if payment is late, that is if an amount of money is still due after the contractual or statutory period established for payment.^[5]  If no date is fixed, refer to the applicable rules further below.
5. The new rules will not apply to:

• transactions between consumers;
• interest in connection with other payments such as payments under the laws on cheques and bills of exchange;
• payments made as compensation for damages including payment from an insurance company.^[6]

For the purposes of applicability and in connection with the parameters mentioned in paragraph 2 above, it is useful to note that Article 26A provides the following definitions:

“public authority” means the Government of Malta, the Local Councils or bodies governed by public law, associations formed by one or several of such authorities or bodies governed by public law and “a body governed by public law” means a body which:

(a) is established for the specific purpose of meeting needs in the general interest, not being of an industrial or commercial nature;

(b) has legal personality; and

(c) is financed for the most part by the State, or Local Councils or other public bodies, or is subject to

management supervision by those bodies, or has an administrative, managerial or supervisory board more than half of whose members are appointed by the State, Local Councils, or other public bodies; and

“undertaking” means any organization, other than a public authority, acting in the course of its independent economic or professional activity, even where that activity is carried out by a single person.

Prior to amendment in 2012 these rules distinguished between traders, public authorities and liberal professions. Now the distinction is simpler in that it is only between undertakings and public authorities with the reference to liberal professionals having been eliminated as they now appear to be subsumed within the definition of undertakings.

B. Applicable time Periods

The creditor is entitled to interest for late payment to the extent that:^[7]

(i) the creditor himself has fulfilled his contractual and legal obligations; and

(ii) the creditor has not received the amount due on time unless the debtor is not responsible for the delay.

As regards transactions between undertakings, in those cases where a date for payment is contractually stipulated, interest will be payable from the day following the date or the end of the term for payment fixed in the contract.^[8]

In the case of transactions between undertakings where the date  or  period  for  payment  is  not  fixed  in  the  contract and in the case of transactions between an undertaking as creditor and public authorities as debtor,  the creditor is entitled to interest for late payment upon the expiry of the following time limits:^[9]

(i) thirty (30) calendar days following the date of receipt by the debtor of the invoice^[10]; or

(ii) if the date of the receipt of the invoice is uncertain, thirty (30) calendar days after the date of receipt of the goods or services; or

(iii) if the debtor receives the invoice earlier than the goods or the services, thirty (30) calendar days after the receipt of the goods or services; or

(iv) if  a  procedure  of  acceptance  or  verification  by  which  the  conformity  of  the  goods  or services with the contract is to be ascertained applies at law or in terms of the contract and if the debtor receives the invoice earlier than or on the date on which such acceptance or verification takes place, thirty (30) calendar days after the latter date.

It should also be noted that the creditor may proceed with the claim for late payment against the debtor without reminding the debtor that the amount is due.^[11]

The law makes a distinction between cases of commercial transactions between undertakings and cases of commercial transactions between undertakings and public authorities:

• As regards paragraph (d) above, in the case of transactions between undertakings, the law provides that the parties to a contract may expressly agree in the contract to extend the thirty (30) calendar day period under paragraph (d) to a longer period, so long as the extension of time is not grossly unfair to the creditor. ^[12]  In the case of a transaction between undertakings and a public authority, the law provides that the duration of the procedure for verification cannot exceed thirty (30) calendar days from the date of receipt of the goods or services unless the parties have expressly agreed otherwise in the contract and in all documents relating to the tender document, and provided that it is not grossly unfair to the creditor.^[13]

• As regards transactions between undertakings, the law provides that, irrespective of any other law, the period for payment fixed in a contract may not exceed sixty (60) calendar days provided that the parties may expressly agree for a longer period, so long as the extension of time is not grossly unfair to the creditor.^[14]

• As between undertakings and public authorities, however, the law provides that, unless expressly agreed to between the creditor and debtor in a contract, the period for payment fixed in the contract may not exceed the limits under paragraph (i) to (iv) above, and when such agreement is reached, provided this is objectively justified in the light of the particular nature of the features of the contract, the period for payment fixed in the contract may not exceed sixty calendar days.^[15] The law goes further in stating that in the case of transactions between undertakings and public authorities the time period mentioned under paragraphs (i) to (iv) above shall be extended to a maximum of sixty calendar days for:

(i) any public authority which carries out economic activities of an industrial or commercial nature by offering goods or services on the market and which is subject as a public undertaking to the transparency requirements laid down in Commission Directive 2006/111/EC^[16];

(ii) public entities providing health care which are duly recognized for that purpose.^[17]

• Also, as between undertakings and public authorities, an agreement between the creditor and debtor extending the date of receipt of the invoice is null and void.

The law further allows the parties to reach an agreement on payment being affected periodically by means of installments provided that here an installment is not paid within the agreed date, the payment of interest and compensations will be calculated solely on the basis of overdue amounts.^[18]

C. Other Creditor Rights

The creditor is moreover entitled to recover from the debtor without the need of a reminder:

(a) a minimum of forty euro (€40) as compensation for the creditor’s own recovery costs; and

(b) such other reasonable sum in excess of the forty euro (€40) incurred by him due to the debtor’s late

payment.^[19]

The rules in addition contain a provision laying down that the vendor is entitled to retain title over the goods until the price has been paid in full by the purchaser if the agreement to the commercial transacxtion provides for such retention of title.^[20] This “right of retention of title” clause would have been better placed, in our view, in the Civil Code title dealing with Sale. It is also notable that prior to amendment this clause was limited specifically to movables, however, there is now only a generic reference to ‘goods’.

According to Article 26I, where the amount of the debt or other features of the proceedings are not in dispute, an executive title may be obtained by the creditor according to the provisions of articles 166A to 170, inclusive, of the Code of Organization and Civil Procedure, without prejudice to the conditions established in the said articles.

D. The Rate of Interest

As between undertakings, the  rate  of  interest  for  late  payment  is  the  interest  rate  that  is  agreed between the undertakings.^[21] If there is no such agreement, or if the commercial transaction is between an undertaking and a public authority, the applicable interest rate is equal to the sum of the reference rate and at least 8%. The reference rate is, in turn, defined as the interest rate applied by the European Central Bank to its most recent main refinancing operations, or the marginal interest rate resulting from variable-rate tender procedures for the most recent main refinancing operations of the European Central Bank.

The Commercial Code originally provided that the rate shall be that of seven percent (7%) over the Central Bank’s central intervention rate in force on the first calendar day of the half year during which interest becomes due and will apply for the following six (6) months.  With effect from 2007, the above-described rule was changed to the extent that the European Central Bank’s key interest rates apply in lieu of the Malta Cantral Bank’s central intervention rate.^[22] Although the Law spoke generally of “key interest rates” without specifying which particular key European Central Bank interest rate was to apply, Malta Central Bank representatives had informed us that it is the “Main Refinancing Operations (fixed rate)” that should be selected and applied in such cases. Since 2012 the law expressly refers to the main refinancing operations rate or the marginal interest rate which are both available on the European Central Bank website.

The law also clarifies that the applicable reference rate for:

(a) the first semester of the year concerned shall be the rate in force on 1 January of that year;

(b) the second semester of the year concerned shall be the rate in force on 1 July of that year.^[23]

Caution must, therefore, be exercised when attempting to calculate the interest rate to be applied according to the Commercial Code to late payments in commercial transaction given that the rate will be expected to change over time.

E. Enforceability of Contractual Provisions

According to Article 26G a provision in an agreement or a practice, which relates to the date or period of payment, the rate of interest for late payment or the compensation for recovery costs, may be unenforceable or may give rise to a claim for damages if it is grossly unfair to the creditor.^[24]  Provisions excluding interest for late payment and compensation for recovery costs are deemed, at law, to be grossly unfair.

F. Concluding Note

The amended rules on interest rates as they stand today reflect the recast Directive and are aimed at achieving more clarity in this field. Although, in practice, it often appears that it is still the traditional Civil Code (Chapter 16, of the Laws of Malta) that are being applied to transactions, we should all be aware of the provisions of this Sub Title and encourage creditors to make use of them when they are entitled to do so.

For more information about interest on late payments, click here.