CJEU interprets compensation for recovery costs under Late Payments Directive
On 1 December 2022, the Court of Justice of the European Union (“CJEU”), in delivering a ruling in the case of DOMUS-Software-AG vs. Marc Braschoß Immobilien GmbH (Case C-370/21), clarified that where a single contract provides for periodic delivery of goods or provision of services each requiring payment within a specific period, the fixed minimum sum of compensation for recovery costs due to creditors under Directive 2011/7/EU on combating late payment in commercial transactions (recast) (“Late Payment Directive”) is due for each late payment and not due once for all late payments within the single contract.
Background to the case and judicial proceedings before the German courts
The parties to the proceedings had entered into a contract for the maintenance of software which was acquired by Marc Braschoß Immobilien GmbH (“MBI”). The contract catered for monthly payments which would be payable by MBI to DOMUS-Software-AG (“DSA”) at the beginning of each billing period. Between September 2019 and January 2022, DSA issued three separate invoices which remained unpaid.
DSA instituted proceedings against MBI before the Amtsgericht München (Local Court, Munich, Germany) in order to obtain (i) payment of the principal amount due under the three invoices and (ii) payment of interest and (iii) payment of the minimum fixed compensation for recovery of costs in accordance with Article 6 of the Late Payment Directive. DSA claimed that the latter should amount to EUR 120, i.e. EUR 40 for each invoice due. Although the Amtsgericht München (Local Court, Munich, Germany) decided in favour of DSA in respect of (i) the principal amount due and (ii) interest due, it held that based on the transposition of the Late Payment Directive in German law, DSA would be entitled to only one fixed payment of EUR 40 as compensation for recovery of costs despite the fact that three separate invoices had not been paid.
DSA appealed this decision before the Landgericht München I (Regional Court, Munich I, Germany) (the “Referring Court”) and requested that MBI be ordered to pay a further EUR 80 as the fixed sums for compensation of recovery costs for the other two invoices. The Referring Court decided to stay the proceedings and referred the case to the CJEU for a preliminary ruling to determine whether in cases of periodic claims for payment arising from a single contractual relationship, Article 6 of the Late Payment Directive (read in conjunction with Article 3 thereof) is to be interpreted as entitlement to payment of a fixed sum of at least EUR 40 for each individual late payment or whether it is payable only once, irrespective of the number of late payments.
The Late Payment Directive was introduced mainly to combat late payments in commercial transactions. It establishes that a ‘late payment’ subsists, if in commercial transactions between undertakings, the creditor has fulfilled its contractual and legal obligations but has not received the amount due by the debtor within the contractual or statutory period of payment (provided the debtor is not responsible for the delay). Article 3 of the Late Payment Directive establishes that the creditor is in such instances entitled to interest for late payment without the requirement of providing a reminder to the debtor. Furthermore, Article 6 of the Late Payment Directive establishes inter alia that the creditor who is entitled to interest for late payment is entitled also to compensation for the creditor’s own recovery of payment costs which as a minimum is a fixed sum of EUR 40 (but which may be higher if costs exceed EUR 40).
CJEU’s Legal Considerations
The CJEU considered various provisions within the Late Payment Directive and made reference to a similar judgement which was decided a couple of months earlier.
The CJEU held that Article 6 and Article 3 of the Late Payment Directive do not make any reference to whether payments which have not been made arise from a single contract or from various separate contracts. In fact, it referred to Recital 17 of the Late Payment Directive which simply states, “where the creditor does not have the sum owed at his disposal on the due date.”
The CJEU after taking into consideration the definition of ‘late payment’ as well as Article 1(2) of the Late Payment Directive, held that the entitlement to interest for late payment and the entitlement to a fixed minimum sum of compensation (under Article 3 and Article 6 of the Late Payment Directive respectively) are linked to individual commercial transactions, therefore each commercial transaction should be considered individually.
Moreover, the CJEU made reference to Article 5 of the Late Payment Directive and more importantly to Recital 22 thereof which held that each instalment or payment should not only be paid in accordance with the terms agreed to by the parties but should be subject to the rules for late payment. For this reason, the CJEU held that compensation for recovery of costs is payment for each instalment which has not been paid by the agreed date.
Importantly, in order to confirm the above interpretation, the CJEU took into consideration the purpose and aims of the Late Payment Directive. The Late Payment Directive’s scope, as indicated in various Articles and Recitals therein, is to protect creditors whose liquidity and financial management may be prejudiced due to late payments made by debtors (especially in relation to SMEs) and to in turn ensure proper functioning of the internal market and competition between undertakings. The provisions introduced by the Late Payment Directive should serve to discourage debtors from paying their creditors late, through the use of interest (which should not be too low) and compensation for the recovery of costs, including administrative costs and internal costs, incurred by creditors in an attempt to obtain payment for services or goods which it has duly provided to a debtor.
Consequently, the CJEU held that Article 6 of the Late Payment Directive would be deprived of any practical effect if it were to be construed as imposing one fixed minimum sum payable by way of compensation for the recovery of costs in respect of numerous delays in payments by a debtor for periodic delivery of goods or provision of services under a single contract. Moreover, this would deprive the creditor from its entitlement to the fixed sum of compensation for recovery of costs without any objective reason and such derogation would in effect be exempting the debtor from the financial burden which the Late Payment Directive intends to impose.
In light of the above considerations and in accordance with the scope of the Late Payment Directive, the CJEU held that where two undertakings enter into a single contract which provides for periodic deliveries of goods or provision of services, each requiring payment within a specified period, then Article 6 of the Late Payment Directive is to be interpreted as imposing an obligation on debtors to pay a minimum fixed sum of EUR 40 by way of compensation for recovery costs to the creditor for each late payment.
The article was first published on The Malta Independent (11 January 2023)