UK government proposes clearer definition of ‘grossly unfair’ payment terms

Out-Law News | 09 Feb 2015 | 11:51 am | 2 min. read

Small businesses in the supply chain will find it easier to challenge their large customers over “grossly unfair” payment terms and practices if the UK government succeeds in making it clear exactly what that means, an expert has said.

The EU’s Late Payment Directive allows contractor trade bodies to challenge late payment terms and practices which are “grossly unfair” and the UK government is now consulting on how to properly incorporate this power into UK law. Commercial law expert Ben Gardner of Pinsent Masons, the law firm behind Out-Law.com, said that the government’s proposals confirmed its commitment to tackling late payments.

“The government’s decision to refine the definition of what it considers to be ‘grossly unfair’ payment terms and practices should provide businesses with certainty as to how the payment terms they currently have, or intend to put, in place will be construed under the Late Payment of Commercial Debt Regulations, which were introduced in 2013,” he said.

“Both large and small businesses should be alive to the changing late payment landscape in the UK. For small businesses, clarity of what the term ‘grossly unfair’ means should give them confidence to negotiate and challenge exceptionally long payment terms which are imposed on them by customers. Large businesses should also be alive to the increasingly regulated environment surrounding their payment terms and practices,” he said.

In the UK, “representative” bodies currently have only limited powers to challenge payment terms or practices on behalf of small businesses. This is narrower than the right contained in the corresponding EU legislation. The new right would give certain bodies the right to challenge any terms or practices deemed to be “grossly unfair” on behalf of their members. The consultation asks whether and how this right would be used, and whether it should allow bodies to challenge payment terms on behalf of groups of small businesses only, or on behalf of individual businesses.

The consultation also proposes including indicative examples of what is “grossly unfair” in the UK regulations, as is currently the case in Ireland. These could include the relative strength of the bargaining positions of the purchaser and supplier; good commercial practice; the nature of the goods or services; whether the supplier received an inducement to agree to the term; and whether the purchaser had an ‘objective reason’ to deviate from a standard 60-day payment term.

The government said that it was using public procurement to “lead by example” on payment issues, with a commitment to paying 80% of central government invoices within five working days. It is also legislating to require large and listed UK companies to report on their payment practices and performance; a measure included in the Small Business, Enterprise and Employment Bill, which is currently before parliament.

Last week new measures, which would give the Groceries Code Adjudicator (GCA) the power to fine UK supermarkets up to 1% of their turnover for breaches of the Groceries Supply Code of Practice, were also introduced to the UK parliament. The code governs the commercial relationships between the UK’s largest supermarkets and their direct suppliers of food, drink and certain household items. Discussions are also underway to strengthen the Prompt Payment Code, which is a government-backed voluntary initiative promoting good payment practices.

“In addition to the legislative developments the government is currently considering, it appears that it is increasingly looking to hit late payers with more than financial penalties,” said commercial law expert Ben Gardner. “Instead, they are looking to hit large businesses where it really hurts – their reputations.”