What decision-makers and purchasing agents need to know about the new German Act on Prevention of Late Payments.

On 29 July 2014, a new Act on Prevention of Late Payments in business transactions took effect in Germany. For companies this means above all: They cannot agree terms of payment at their own discretion anymore. Those ignoring the new rules or not complying with them run the risk of invalidity of their own term of payment clauses. In this case, extremely short terms of payment may result, possibly endangering a company’s liquidity or even – in extreme cases – its corporate existence. Experience gathered in the first few months after commencement of the Act shows a persistent information and implementation backlog. Below we provide an overview of things to pay attention to and tips on how you can ensure that your agreements are legally watertight.

Regulatory changes for the time of performance: Things to consider

The new Act modified or amended a number of regulations of the German Civil Code (BGB = Bürgerliches Gesetzbuch) and thus made (in some instances for the first time) concrete legal specifications concerning term of payment that can be agreed upon between business corporations. This means that all terms of payment clauses in individual contracts as well as in all General Terms and Conditions must be reviewed and, where necessary, revised – otherwise they threaten to engender inconvenient legal consequences. Only a few cases are exempt from application of the new regulations.

Terms of payment in private contracts: What is deemed “not grossly unfair”?

In compliance with the newly introduced Section 271a BGB, individually agreed terms of payment between corporations must be restricted to a maximum of 60 days after receipt of the contractual services or, respectively, after receipt of the corresponding invoice. Agreements stipulating any later terms of payment are only valid when agreed explicitly, and when they are not grossly unfair with regard to the interests of the creditor of the payment claim in question.

The first criterion (“explicitly agreed terms”) is easy to take care of, since explicit agreements are recommended for the purpose of legal clarity anyway, and have generally been applied in practice in the past. The second criterion, “not grossly unfair”, is a whole different matter. In this regard it is entirely unclear which cases could possibly fall under this category. It is certain, however, that this regulation is formulated as a legal exception to the rule. All depends on whether the debtor has a legitimate interest in terms of an “objective reason” for a later term of payment. This must then be weighed up against the interests of the creditor. Procuring additional liquidity will, in any case, not count as a legitimate reason. In case of conflict, the debtor is constrained to assume the burden of proof for the fact that a term of payment exceeding 60 days is not grossly unfair in a specific case; if the debtor cannot provide this proof, the clause is invalid.

The new regulations apply neither to progress payments or instalments (Section 271a, para. 5 BGB) nor to deferment agreements. It will most likely be inadmissible, however, to evade the new performance regulations by agreeing in advance on a deferment or on instalment payments covering the entirety of the payment claim.

Payment delays in General Terms and Conditions (GTC): Beyond 30 days generally void

In General Terms and Conditions (often referred to as “General Purchasing Conditions”) stipulated by the debtor (recipient of goods or services), such user of the GTC may not stipulate for the concession of unduly long payment delays, as referred to in Section 308 No. 1a BGB. If the user of the GTC is an entrepreneur, it is generally assumed that a term exceeding 30 days after receipt of the contractual services or, respectively, after receipt of the invoice, is unduly long. Whether and in which cases this assumption can be disproved is, again, unclear. As a general rule, GTC clauses stipulating longer terms of payment than 30 days for payments by the GTC user will therefore be invalid.

Legal consequences of undue time of performance: Immediate maturity

Any terms of payment unduly long are invalid, while the remaining clauses of the agreement retain their validity. The undue terms of payment are then replaced by the legal regulations: In line with Section 271 para. 1 BGB, amounts owed are to be paid immediately in case of doubt, and in line with Section 286 para. 3 BGB, a debtor is in arrears 30 days after receipt of invoice at the latest, with all legal consequences associated with the law or the respective contract. By means of a reminder notice, however, the creditor can cause the debtor earlier – immediately upon maturity – to be in default (Section 286 para. 1 BGB). A “reduction to preserve validity”, i.e., a mere reduction of the unduly long terms of payment to the only just valid terms of payment, will not take place. In some cases, this might cause severe liquidity problems to the debtor.

Only few exemptions: Applicability of the new regulations and transitional regulations

The regulations presented herein are already in force since 29 July 2014 and are to be applied, as per Art. 229 Section 34 EGBGB (Introductory Act of the German Civil Code, Transitional Regulation for the Act on Prevention of Late Payments in Business Transactions), to all contractual agreements entered into as from this date. Notwithstanding the foregoing, they are also to be applied to continuing obligations entered into before this date insofar as the corresponding contractual service (goods/services) will be rendered after 30 June 2016. In other words: The previously valid regulations continue to apply to an exchange of services after 30 June 2016 only if they are part of a contract concluded before 29 July 2014 not qualified as a continuing obligation.

Action requirement: What should you do now?

If you haven’t revised your terms of payment clauses in agreements and your GTC to comply with the new regulations, you should do so urgently. Always pay attention that your new wording is legally watertight and clear. Do not rely on exemptions applying, unless you have sound indications. Do ask for legal advice in all cases of doubt.

The author Dr. Thorsten Steinhaus is Rechtsanwalt (German attorney-at-law) and partner of the law firm TRACC LEGAL in Munich. He specializes in business transactions, intellectual property and competition law, consultation and contract design in the field of private and commercial law, and the representation of clients in court and arbitration proceedings in the aforementioned areas. For a personal consultation, please contact him under phone number +49-(0)89-95 44 302-11 or via e-mail: steinhaus@tracc-legal.de.