The German Law Combating Late Payments in Commercial Transactions - and the corresponding Need for Businesses to Amend their General Terms and Conditions

On 29 July 2014, the German Law Combating Late Payments in Commercial Transactions (Gesetz zur Bekämpfung von Zahlungsverzug im Geschäftsverkehr) entered into effect. This law limits the contractual freedom to agree on the duration within which payments need to be made. It also limits inspection and acceptance periods, on which payment due dates depend. It is consequently advisable that general terms and conditions containing corresponding provisions should be amended to ensure that these comply with the new law.

Lengthy Payment Terms Void

The new law distinguishes between individually agreed durations for payment and such durations, as are set out in general terms and conditions. Thus payment terms of up to 60 days and inspection and acceptance periods of up to 30 days may be individually agreed without restrictions. Longer terms are only valid if they have been explicitly agreed, and are not grossly unfair to the other contracting party. Although such an agreement may be concluded orally, it will usually be capable of proof only if reduced to writing.

General terms and conditions may not place a creditor at an unreasonable disadvantage. In terms of the new law, this can, in principle, only be ensured if the durations for payment do not exceed 30 days and inspection and acceptance periods do not exceed 15 days. Clauses in general terms and conditions providing for longer payment terms are therefore usually void. The same applies in respect of clauses in agreements that have been unilaterally provided by the debtor, and were not individually negotiated. Such clauses are regularly regarded as general terms and conditions.

Higher Default Interest Rate

The new law increases the default interest rate for businesses from eight to nine percentage point above the base interest rate. Agreements derogating herefrom are only valid if they are not grossly unreasonable to the creditor. Having regard to the present low interest rates, a certain limitation will not be considered to be grossly unreasonably, if it permits the creditor to prove additional damages. However, it remains to be seen how the courts will interpret these provisions.

Need for Amendment

Businesses are well advised to amend their general terms and conditions and model contracts to avoid clauses therein being challenged as invalid in terms of the new law. In doing so, the durations for effecting payment will generally have to be limited to 30 days. Compared to the statutory regulations, which provide for immediate payment upon receipt of invoice, this is still advantageous.