Insights

On 12 December 2024, the Court of Justice of the European Union (“CJEU“) delivered an important ruling in Case C‑725/23 in the name of M. sp. z o.o. I. S.K.A. v. R.W. The case arose from a request for a preliminary ruling by the District Court in Katowice-East, Katowice in Poland. The ruling concerns the interpretation of the term ‘amount due’ under Article 2(8) of Directive 2011/7/EU (the “Late Payments Directive” or the “Directive”), which is aimed at combating late payment in commercial transactions. This Late Payments Directive plays a crucial role in protecting the financial health of businesses by discouraging late payments and fostering fair commercial practices. In delivering this preliminary ruling, the CJEU provides much-needed clarity on whether reimbursable costs, such as utilities or property-related expenses, are included within the scope of the ‘amount due’ in the context of commercial agreements.

The Late Payments Directive: Purpose and Scope

The Late Payments Directive was adopted to address systemic late payment issues in the European Union, which undermine the liquidity and financial stability of businesses, particularly small and medium-sized enterprises (SMEs). Late payments not only complicate financial management but also harm competitiveness and profitability, often forcing creditors to seek external financing during cash flow shortfalls.

The Directive applies broadly to “all payments made as remuneration for commercial transactions”, with ‘commercial transactions’ being defined as “transactions between undertakings or between undertakings and public authorities which lead to the delivery of goods or provision of services for remuneration.” The Directive’s key provisions include:

1. ensuring interest for late payments is due without requiring reminders where the creditor has fulfilled its contractual and legal obligations and has not received the ‘amount due’ on time, unless the debtor is not responsible for the delay;
2. introducing a fixed sum (at least EUR 40) as a minimum amount of compensation for recovery costs; and
3. mandating that payment terms are adhered to unless otherwise explicitly agreed upon and not grossly unfair to the creditor.

A central concept in this Directive is the ‘amount due’, defined in Article 2(8) as “the principal sum which should have been paid within the contractual or statutory period of payment, including the applicable taxes, duties, levies, or charges specified in the invoice or equivalent request for payment.”

However, the Directive does not define “remuneration” for commercial transactions, leaving room for interpretative disputes, as demonstrated by this case.

Factual Background of the Case

The dispute arose from a lease agreement between M. sp. z o.o. I. S.K.A (“M.”) and R.W., two Polish undertakings. Under the lease agreement, R.W. occupied commercial premises and was required to pay:

1. rent plus value-added tax (VAT);
2. utility charges, including heating, gas, and electricity; and
3. a flat-rate monthly contribution covering property-related costs, such as building common charges and municipal taxes.

Following R.W.’s failure to pay 26 invoices, including those for rent, utilities, and flat-rate contributions, M. sought payment and invoked its right to compensation for late payment under Directive 2011/7/EU. This included the EUR 40 fixed sum for each overdue invoice.

The Polish referring court questioned whether Article 2(8) is to be interpreted as including within its scope, in addition to the principal sum for the performance characteristic of the contractual relationship in question leading to the supply of goods or the provision of a service, also the reimbursement of costs incurred in connection with the performance of the contract, which the debtor has contractually agreed to pay.

Key Legal Issues and Question Referred

The central issue before the CJEU was whether the term ‘amount due’ in Article 2(8) of the Directive includes not only the principal payment for the main service (in this case, the lease) but also sums reimbursed by the debtor for costs incurred by the creditor in performing the contract (such as utilities or property-related charges).

The Polish referring court raised concerns about a narrow interpretation that might exclude such reimbursable costs. It argued that this would be inconsistent with the Directive’s objective to combat late payments and prevent financial burdens from shifting unfairly to creditors. Such an exclusion could also undermine creditors’ ability to recover full compensation for financial harm caused by late payments.

The CJEU’s Analysis and Findings

The CJEU emphasised that the wording of Article 2(8) supports a broad interpretation of ‘amount due.’ The use of the term ‘including’ in the definition indicates that the list of items covered—such as taxes, duties, and charges—is non-exhaustive. This suggests that additional amounts linked to the main contractual obligation may also be encompassed.

Furthermore, the inclusion of charges distinct from the principal sum, such as taxes and levies, reflects the EU legislature’s intent to address all amounts contractually due between parties, provided they are connected to the performance of the contract.

The CJEU highlighted that the Directive applies to all payments made as remuneration for commercial transactions. Importantly, Article 1(2) of the Directive does not differentiate between payments intended to remunerate the main contractual obligation (e.g., rent) and those reimbursing ancillary costs (e.g., utilities). This lack of distinction reinforces the Directive’s broad scope in addressing all payment obligations arising from a commercial transaction.

Taking an objective-oriented interpretation, the CJEU explained that the Directive aims to protect creditors from the adverse effects of late payments, including liquidity challenges and financial instability. These effects are not limited to unpaid principal amounts but extend to any contractually agreed costs that the creditor must temporarily bear due to the debtor’s non-payment. Recital 19 of the Directive underscores the need for fair compensation, including recovery of administrative and internal costs incurred due to late payment. The CJEU reasoned that excluding reimbursable costs from the ‘amount due’ would expose creditors to the very risks the Directive seeks to mitigate, thereby defeating its purpose.

The Court’s Conclusion

The CJEU concluded that the term ‘amount due’ under Article 2(8) of Directive 2011/7/EU encompasses both the principal sum payable for the main contractual service or obligation and any additional costs or charges that the debtor has contractually agreed to reimburse, provided they are linked to the creditor’s performance of the contract. This interpretation ensures that creditors are fully compensated for all overdue payments, reinforcing the Directive’s deterrent effect against late payment practices.

This ruling provides clarity for businesses across the EU by confirming that reimbursable costs – such as utilities or property-related charges – are protected under the Directive confirming the comprehensive scope of the Directive. Creditors can confidently claim interest and fixed compensation on all amounts due under a contract, not just principal sums. By affirming this broad interpretation of ‘amount due’, the CJEU strengthened protections for creditors. This is particularly beneficial for SMEs, which are more vulnerable to cash flow disruptions caused by late payments.

Disclaimer: Ganado Advocates is responsible for contributing this law report but was not in any way involved as legal advisor for the parties in the judgment being covered in this law report. This article was first published in ‘The Malta Independent’ on 15/01/2025.