In spite of established contractual practices, the creditor has the right to late payment interest.
During the summer, the Supreme Court of Finland made an interesting decision regarding the collection of late interest and fixed compensation for collection costs. According to the ruling, established payment practices do not prevent collection.
In the case under review, Company A and Company B had been following a practice since 2009, whereby Company B had one month to pay its debt after the due date without incurring late interest penalties. In 2018, in a lawsuit filed in May 2018, Company A demanded that Company B should be obliged to pay late interest and fixed compensation for collection costs for the period between April 2015 and February 2018, for overdue and late-paid invoices.
The Supreme Court held that the contractual practice observed by the parties regarding late-payment consequences was ineffective under Section 8(1) and 8(3) of the Act on Payment Terms in Commercial Contracts. Company A had the right to claim late interest and fixed compensation for collection costs in its lawsuit.
The case involved the application of the Interest Act and the Act on Payment Terms in Commercial Contracts.
According to Section 2(1) of the Interest Act, the obligation to pay interest is determined by the Interest Act unless otherwise provided in the debtor’s commitment or customary trade practice or unless otherwise provided by law. Section 5 of the Interest Act stipulates that late interest must be paid after the agreed due date.
On the other hand, Section 8(1) of the Act on Payment Terms in Commercial Contracts states that a contractual term denying the creditor the right to late interest is ineffective. According to Section 8(3) of the same law, the creditor is also entitled to compensation for collection costs in accordance with the Collection Act. The case also applied to Section 1(2) of the Act on Payment Terms in Commercial Contracts, which states that what is provided in the law regarding contract terms also applies to contractual practices. The Commercial Terms of Payment Act entered into force on March 16, 2013. According to Section 11(2) of the law, agreements made before the law’s entry into force are subject to the provisions in force at that time.
Section 8 of the Act on Payment Terms is based on European Parliament and Council Directive 2011/7/EU (Late Payment Directive).
Proceedings in Lower Courts
In summary, the District Court and the Court of Appeal concluded that the arrangement between the parties was an established business practice, allowing invoices to be paid within a reasonable time after the due date without incurring late-payment penalties. The arrangement was considered established business practice partly because, even within the framework of mandatory legislation, the companies could be deemed to have the right to agree on the starting point for late interest payments. According to the Court of Appeal, the established practice did not completely eliminate the obligation to pay late interest. Therefore, the lower courts did not consider the practice to be contrary to Section 8(1) of the Act on Payment Terms in Commercial Contracts. Consequently, Company A was not entitled to late interest or collection costs.
The Court of Justice of the European Union’s Preliminary Ruling
The Supreme Court of Finland requested a preliminary ruling from the Court of Justice of the European Union (CJEU) regarding Article 12(4) of the Late Payment Directive, as well as the interpretation of Articles 7(2) and 7(3) in this case. The CJEU addressed whether agreements made before the Directive’s entry into force on March 16, 2013, could be enforced regardless of the Directive. Furthermore, the CJEU considered whether the parties’ practice was such that late interest or collection costs could not be collected.
Firstly, the CJEU found that agreements/practices that existed before the Directive’s entry into force could be enforced regardless of the Directive. The CJEU also stated that the Directive should be interpreted in a way that does not preclude a practice where the creditor does not collect late interest for periods of less than one month, provided that the creditor has voluntarily agreed to waive the right to late interest.
Therefore, EU legislation allows for a mutual arrangement between parties, provided that the party entitled to late interest has voluntarily accepted an arrangement where the due date for payment has been extended by one month from the due date.
Supreme Court’s Ruling
In the Supreme Court, Company A primarily argued that, under mandatory legislation, waiving late interest for one month after the due date was an ineffective contractual term. Company B acknowledged that it had made late payments but argued that none of the delays exceeded the one-month grace period specified in the parties’ agreement. Regarding the existence of the agreement, Company B claimed that it had at least arisen implicitly based on the long-standing practice between the companies.
The Supreme Court held that the parties’ long-standing and established practice regarding late-payment consequences had become binding on the parties before March 16, 2013. The practice and the terms of the orders constituted a whole, determining the late-payment consequences for each individual order. Nevertheless, the Supreme Court considered that such contractual practice could not be regarded as a generally governing framework agreement for the terms of the parties’ orders, nor could individual orders be considered mere implementation of a contractual practice that had arisen before March 16, 2013. Thus, the Supreme Court considered the temporal applicability to be determined based on the time of each order.
Additionally, the Supreme Court addressed whether the practice was voluntary for Company A in accordance with the requirements of EU law. The Supreme Court concluded that, due to the established agreement, Company A did not have the freedom to negotiate late interest and collection costs for individual orders and found that the practice was not voluntary.
In contrast to the lower courts, the Supreme Court considered that the parties’ practice regarding late-payment consequences was equivalent to a contractual term that deprived the creditor of the right to late interest and fixed compensation for collection costs. Therefore, the contractual practice followed by the parties was ineffective under the mandatory provisions of the Act on Payment Terms in Commercial Contracts. Consequently, Company A was entitled to the late interest and fixed compensation for collection costs claimed in the lawsuit.
Established contractual practices play a central role in contract formation. In the Supreme Court’s decision, both lower courts and the Supreme Court agreed that the established payment practice had emerged between the parties. However, the significance of an implicit agreement and whether the practice was in violation of the law differed among the various judicial instances, including the Supreme Court.
The application of the Late Payment Directive to this case also posed challenges for its resolution. The CJEU emphasized that waiving late interest should be based on voluntary acceptance. As evident from the dissenting opinion, it can be argued that the established practice of waiving interest for the first month arose precisely due to voluntary actions. Company A had not completely waived late interest, which is significant because, according to the Act on Payment Terms in Commercial Contracts, a contract that denies the creditor the right to late interest is ineffective. Therefore, it can be concluded that the outcome of the decision was difficult to predict in advance, and it could have been different if the question of voluntariness or waiver of collection had been interpreted differently.