Insights

Summary

The Court of Justice of the European Union (“CJEU”) delivered a ruling on 6 February 2025 in the case of Przedsiębiorstwo Produkcyjno – Handlowo – Usługowe A. vs. P. S.A., (Case C-677/22) whereby it interpreted the applicability of Article 3(5) of Directive 2011/7/EU on combating late payments in commercial transactions (recast) (the “Late Payments Directive”). Article 3(5) of the Late Payments Directive states that in commercial transactions between undertakings the payment period within such a contract cannot exceed 60 calendar days, unless otherwise expressly agreed in the contract and provided that it is not grossly unfair to the creditor within the meaning of Article 7 of the same directive. The CJEU in the aforementioned ruling examined the two conditions under which the period for payment can exceed 60 calendar days and elaborated on the instances where a derogation from the 60 calendar days for payment can be considered unlawful.

Background to the case and Judicial Proceedings before the Polish Courts

S.A., (“Company P”) had organised a sale by auction on a website and had also issued a tender procedure, following which Company P and Przedsiębiorstwo Produkcyjno – Handlowo – Usługowe A (“Company A”) (collectively the “Parties”) had entered into agreements for the provision of goods by the latter to the former. These agreements had been established and published by Company P and stated therein that Company P had 120 days from the date when the invoices were submitted to it, to pay Company A. While Company P paid the invoices sent to it by Company A, Company A brought an action before the Sąd Rejonowy Katowice – Wschód w Katowicach (District Court, Katowice-East, Katowice, Poland) (the “Referring Court”) whereby it claimed that it was due to receive from Company P, interest for late payment and compensation by way of fixed sum for recovery costs, as established under the Late Payments Directive.

Reference was also made to clauses under Polish legislation which transposed Article 3(5) of the Late Payments Directive into Polish law. Company A claimed before the Referring Court that the 120-days for payment of the contract cannot be considered as expressly agreed in the contract by the Parties, as Company P had a dominant position in the contractual relationship and determined the 120-day payment period unilaterally without Company A being able to negotiate an agreement with Company P.

The Registrar of the Referring Court agreed with Company A and ordered Company P to pay interest, however, Company P objected as it claimed that Company A had agreed to the 120-day period for payment since it concluded a number of contracts with it.

The Referring Court was inclined to believe that in instances where a company agrees to terms of a contract which are generally determined by another party who has drafted the terms and uses a pre-formulated standard contact whereby the former is limited to accept the terms without negotiation, then the condition ‘expressly agreed in the contract’ is not satisfied under Article 3(5) of the Late Payments Directive. It also added that in exceptional cases where there is a derogation from the rule under the Late Payments Directive, the creditor should be made aware of the reasons for the longer period of payment and should have the opportunity to raise its arguments as to why the period of payment should not exceed 60 days.

In view of the above, the Referring Court referred the case to the CJEU to clarify whether in contracts which are comparable to pre-formulated standard contracts, a payment period unilaterally set by the debtor, could be considered compliant with the first condition set out in Article 3(5) of the Late Payments Directive, namely that any payment period exceeding 60 days must be ‘expressly agreed in the contract’.

Legal Context and CJEU’s Legal Considerations

Given that Article 3(5) of the Late Payments Directive applies specifically to transactions between undertakings, the Referring Court confirmed to the CJEU that in accordance with the definitions under the directive, Company P constitutes an ‘undertaking’ and not a ‘public authority’.

The CJEU held that the payment period of 60 days under the Late Payments Directive, can only be derogated from if two cumulative conditions under Article 3(5) of the same directive are satisfied, namely (i) if it is expressly agreed in the contract and (ii) provided it is not grossly unfair to the creditor. The CJEU held that a derogation from the established payment period must be interpreted strictly and a uniform interpretation in accordance with the purpose and objectives of the directive in question must be provided.

The CJEU analysed various recitals and articles within the Late Payments Directive and held that the purpose of such directive is to combat late payments in commercial transactions, to establish a culture of prompt payment and to ensure competitiveness of undertakings and proper functioning of the internal market.

The CJEU held that the first cumulative condition being the expression ‘otherwise expressly agreed in the contract’ requires an express agreement therefore it must be established that the parties to the contract expressed their concurrence of wills to be bound specifically by the term setting a payment period which deviates from the 60 calendar days. This would be determined by taking into consideration all the contractual documents and terms contained in the contract. More specifically the CJEU held that an expression of a concurrence of wills is required by the parties at the time of conclusion of the contract which is beyond a mere express reference to the payment period.

The CJEU went on to note that where the contract is a pre-formulated standard contract or a similar contract, the derogation from the 60 calendar days is satisfied, if the term establishing a longer payment period is highlighted in the contractual documents by one of the parties, in order to clearly distinguish it from the other terms of the contract and to make it evident to the other party that this is a deviation from the rule, so that the latter can choose to adhere to it knowing the full facts.

The CJEU also referred to the second cumulative condition being that the derogation from the payment period must not be grossly unfair to the creditor. Article 7(1) of the Late Payments Directive states that in order to determine whether a contractual term is grossly unfair to the creditor, all circumstances of the case must be considered, including gross deviation from commercial practice, which is contrary to good faith or good dealing; the nature of the product or service; and whether the debtor has any objective reason to deviate from the 60 day payment period. The CJEU also referred to the recitals of the Late Payments Directive which prohibit abuse of contractual freedom to the disadvantage of the creditor. Importantly, the CJEU held that the creditor is to be effectively protected against the unjustified use by the debtor of a term which establishes a payment period exceeding 60 days, even though having regard to all contractual documents and terms, the parties to the contract expressed their concurrence of wills to be bound specially by the term setting a payment period which deviates from the 60 days.

The CJEU noted that the Referring Court is to determine two points: firstly whether the Parties expressed their concurrence of wills to be bound specifically by the term which established a payment period exceeding the statutory 60 days (by taking into consideration all the contractual documents and terms); and secondly whether the derogation from the statutory 60 days is grossly unfair to the creditor.

CJEU’s Ruling

In view of the above and in accordance with the Late Payments Directive and its purpose, the CJEU, in response to the Referring Court’s question concluded that Article 3(5) of the Late Payments Directive and specifically ‘otherwise expressly agreed in the contract’ included therein, does not allow for a contractual term establishing a payment period which is to be longer than 60 calendar days, to be determined unilaterally by the debtor, unless the parties have expressed their concurrence of wills to be bound specifically by such a term and this having regard to all contractual documents and terms contained in the contract.

Disclaimer: Ganado Advocates is responsible for contributing to this law report but was not in any way involved as legal advisor for the parties in the judgement being covered in this law report. This article was first published on ‘The Malta Independent’ on 02/04/2025.