Out-Law Analysis | 27 Mar 2013 | 12:15 pm | 2 min. read
If it really wants to protect small and medium sized enterprises (SMEs) from the effects of late payment it should change the law to create an absolute duty to pay invoices within a fixed time limit. A limit of 60 days would be fair.
On 16 March the Late Payment of Commercial Debts Regulations 2013 came into force. The Regulations implement an EU directive and are designed to help smaller companies get paid on time. But they fail in that ambition because they set no mandatory time period within which debts must be paid.
The Regulations say that businesses are still allowed to pay invoices more than 60 days after they have been issued as long as that is what their contract says and as long as the practice is not "grossly unfair".
What this does not recognise is the imbalance in contractual negotiations over payment terms. The reason this is a problem is that large companies have power over small companies - they are often an SME's major or even sole customer and can often more or less dictate the terms of agreements. An SME is then left with the unenviable choice between accepting those terms or losing a major customer.
To really protect SMEs you need to create a non-negotiable time limit for the payment of commercial debts. This is what happens in France, where failure to comply with the Commercial Code can result in criminal prosecution and heavy fines.
Large companies will of course use their commercial clout to get the best deal they can, and if policymakers want payment timetables to be shortened then they must demand that in rules that cannot be avoided.
These Regulations are not those rules. They allow any payment period agreed in a contract provided that it is not "grossly unfair". Not only is "grossly unfair" an untried concept in English law and so not one that SMEs will rush to court to act on, but makes legal "unfair" payment terms, as long as they do not stray into "grossly unfair" territory.
Late payment can have a serious impact on companies, and especially on smaller firms. The ongoing recession exacerbates the problem and means that consistent late payment could be putting companies and livelihoods at risk.
There is, of course, a role here for the larger companies. If they want to avoid the legislative straightjacket of the French model then they should begin to improve their own practices. Doing so might avoid some adverse publicity and could help to stave off further regulation.
Savvy big businesses will be realising that the way in which they manage their supply chain is becoming subject to increasing public scrutiny. This includes what suppliers are being paid and how they are being treated more generally.
Governments, regulators and customers are beginning to care how companies treat the SMEs which supply them, and companies should consider whether or not more favourable payment terms for suppliers will do them more good than squeezing every last drop of advantage from their purchasing contracts.
A number of retailers have recently hit the headlines over their treatment of suppliers. Some imposed compulsory invoice discounts while others extended payment terms to up to 90 days.
None of the activity was illegal but there is a growing awareness amongst consumers that such practices can harm businesses close to home. Small business lobby groups, such as the Forum of Private Business, have been active in highlighting the problems faced by smaller companies.
What is clear is that SMEs remain close to powerless when it comes to late payments. If the Government wants to change that it needs a more robust law, but big companies could steal a march on competitors and win consumer affection from making a virtue out of better treatment of suppliers.
Ben Gardner is a commercial law expert at Pinsent Masons, the law firm behind Out-Law.com