Life of debtors becomes uncomfortable

On April 15 the requirements of the European directive on late payments were transposed into Estonian law and the amendments to the Law of Obligations Act came to force. The purpose of the directive is to make the life of a debtor uncomfortable. This is a positive development for Estonian entrepreneurs, because it strengthens the position of creditors in the communication with debtors among companies and public departments.

Pursuant to the amended act, entrepreneurs have to pay for invoices within 60 days and state agencies within 30 days. The time-limit for the reception and examination of delivered goods or services mustn’t exceed 30 days. Special agreements between entrepreneurs (for example longer payment deadlines) are allowed, if these are written down explicitly, i.e. customary practice between entrepreneurs must be in accordance with law. The agreement must not be exceedingly unfair to debtors and of course the principles of good faith and reasonableness must be followed.

As a rule state departments and local authorities (i.e. the contracting authorities in the meaning of Public Procurement Act) are not allowed to agree on longer payment deadlines. As an exception the 60 day payment deadline may objectively derive from the nature or special features of the contract. For example, state departments whose economic activities have industrial or commercial nature or provide duly recognized health care services (for example Estonian Public Broadcasting, universities and Estonian Health Insurance Fund) may extend payment deadlines.

The rate of interest also increases by one to 8,75 percent (i.e. to 8 percent, to which the interest rate determined by European Central Bank is added, which is 0,75 percent at the moment). Entrepreneurs may agree on higher and lower interest rates, but in the case of late payments, the lowest interest state agencies are allowed to pay is prescribed by the law. A higher interest rate also applies to consumers, but it is allowed to agree on a lower interest rate or not to demand interest from consumers at all.

Requirements of the directive simplify the life of entrepreneurs by giving them an opportunity to demand a minimum of EUR 40 as collection costs for every late payment. Costs that might occur and exceed the EUR 40 rate, are also collectable if they are reasonable. Therefore the burden of proof for creditors decreases. When concluding a schedule of payments, a reasonable interest, which should be similar to the penalty of late payment, needs to be added. There isn’t a requirement to send a prior notice to the debtor when demanding interests or collection costs.

Entrepreneurs must bear in mind that interests, costs of collection nor a penalty of late payment can be demanded on penalties of late payments and damages.

Taken into account, that all EU member states must transpose the requirements deriving from the directive, the rights of creditors will soon be identically protected all over Europe.