By doing so, Czech lawmakers (although late) fulfilled their duty to transpose the European Late Payment Directive into Czech law. The Directive and the amendment, which took effect on 1 July, seek to tackle late payments and protect small suppliers of goods and services.
Under the previous rules, contracting parties could negotiate payment deadlines and the consequences of late payment, provided they meet the requirements imposed by Section 369a of the Commercial Code (see below). In addition, the parties had to comply with general rules prohibiting abuse of a dominant position and act on arm’s length terms and in line with good morals and the general principles of the Commercial Code.
Complicated Section 369a Deleted
Section 369a of the Commercial Code responded to the previous European Directive on combating late payments in commercial transactions (200/35/EC). However, many problems arose in practice because of the number of terms introduced and the binding nature of Section 369a. Simply put, the section prevented parties from deviating from the default interest and the moment of accrual imposed by the law, i.e. basically prohibiting any payment deadline longer than the statutory 30-day deadline. Contracting parties were free to agree on a different term, unless the arrangement was clearly abusive towards the creditor (depending on the circumstances of the particular case, the standard practice between the parties, business conventions, etc.)
In February 2011, a new European Directive was issued Recital (1) of which reads as follows: “A number of substantive changes are to be made to Directive 2000/35/EC of the European Parliament and of the Council of 29 June 2000 on combating late payments in commercial transactions. It is desirable, for reasons of clarity and rationalisation, that the provisions in question be recast. Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with the Directive.” The Czech Republic achieved this with the amendment to the Commercial Code effective as of 1 July 2013.
Section 369a of the Commercial Code was deleted and the rules applicable to payment deadlines were transferred to the chapter applicable to the terms of performance. The term “grossly unfair covenant” was also introduced. Any such covenants will be deemed invalid, but relatively so. This means that they valid unless and until an entitled party (such as a creditor or a seller or service provider) obtains a court judgment finding that they are invalid. In addition, the Commercial Code provides “parties established to protect the interests of businesses” with a procedural right to seek such a court judgment.
30 Days and Grossly Unfair Arrangements
The basic doctrine is similar: the price for goods or services must be paid within thirty days after the invoice is sent or, where applicable, after the goods are accepted or the services provided. Lawmakers sought to eliminate circumvention of the invoice payment deadlines by prohibiting extensions of the deadlines for accepting goods – any goods delivered or services provided must be accepted within thirty days as well. The acceptance period starts running at the moment of delivery.
However, there are always exceptions. Businesses may agree to pay their invoices within longer periods. Any such period exceeding 60 days, however, may only be agreed if it is not “grossly unfair” to the creditor. This criterion has been transposed from the directive and should be interpreted accordingly. Whether a particular arrangement is grossly unfair or not will be assessed on a case by case basis. Nevertheless, the type of goods or services that are involved, whether there was a gross breach of fair business practice, and any objective reasons for the parties to have deviated from the statutory provisions will all be taken into account. Time will tell how the court will deal with this fairly general term.
In practical terms, debtors (other than contracting authorities) who insist on a more-than-60-day payment deadline should document (in the contract or other documents) why an extended deadline is fair for both parties.
Another exception applies to contracting authorities (within the meaning of public procurement law), which are subject to stricter rules. Contracting authorities may agree on a payment deadline over 60 days in exceptional cases only if justifiable given the nature of the supply (the same applies to a contractor’s sub-contractors in such matters). The text of the act, however, does show a way to get around the 30-day deadline: breaking up the payment into instalments.
No Waiver of Default Interest
Another substantial change is that contracting parties are prohibited from allowing the creditor to waive default interest. Such an arrangement will at all times be deemed to be grossly unfair and, therefore, relatively invalid. Remember that parties to a commercial contract are free to agree on the rate of default interest. While such arrangements have so far only been assessed individually (e.g. whether or not they conflict with good morals), the amendment helps creditors at any time they wish to have a default interest waiver held invalid. In addition, statutory default interest generally increases by 1%. Therefore, as of 1 July, it equals 8% over the Czech National Bank’s base rate.
Moreover, creditors may obtain a fixed amount of CZK 1,200 from debtors as compensation for costs incurred in connection with recovering a late payment; if the costs are higher (typically from legal or court fees), the creditor will have to document the actual amount. While the amendment does not prohibit a contractual reduction of such compensation, a waiver is deemed to be grossly unfair unless disproven by the relevant party.
Transitory Provisions – Old Debts = No Change
The amendment’s transitory provisions set forth that default cases that occurred before 1 July 2013 shall be governed by the laws applicable until 1 July 2013. The new rules will apply to contracts agreed before 1 July 2013 if the default occurs after 1 July 2013.
New Civil Code – Nearly No Changes for the Future
The new Civil Code is due to take effect next year. It will replace the Commercial Code, including the “late payment amendment”. Although the new Civil Code is more liberal in transposing the Late Payment Directive, it is, in essence, almost the same. One deviation is that the new Civil Code gives creditors and parties established to protect small and medium sized businesses the opportunity to have the inadmissible arrangements referred to above held ineffective. However, the practical difference between ineffectiveness under the new Civil Code and relative invalidity under the Commercial Code is not substantial.