Obligation of member states to ensure that the period for payment imposed on public authorities entering commercial transactions does not exceed 30 or 60 days
In its judgement on 28 January 2020, delivered in the names of European Commission (the “Commission”) vs the Italian Republic, in front of the Court (Grand Chamber) (the “Court”), the European Commission requested the Court to declare that, by not having ensured and by continuing not to ensure that its public authorities avoid exceeding the period of 30 or 60 calendar days applicable to the payment of their commercial debts, the Italian republic has failed to fulfil its obligations under Directive 2011/7/EU of the European Parliament and of the Council of 16 February 2011 on combating late payments in commercial transactions (the “Directive”) and in particular, its obligations set out in Article 4 of that Directive.
Legal background:
The recitals to the Directive hold that many payments in commercial transactions between economic operators and public authorities are made later than agreed in contract with invoices being paid well after goods are delivered or services performed. This leaves a negative impact on the liquidity and complicates financial management of undertakings. It also affects the competitiveness and profitability when the creditor needs to obtain external financing because of late payments. As a general rule, public authorities benefit from more secure, predictable and continuous revenue streams than undertakings and can obtain financing at more attractive conditions than undertakings.
Late payment constitutes a breach of contract which benefits and is financially attractive to debtors in most Member States through low or zero interest rates charged on late payments and/or slow procedures for redress. The Directive aims at achieving a decisive shift to a culture of prompt payment, including one in which the exclusion of the right to charge interest should always be considered to be a grossly unfair contractual term.
The aim of the directive is to combat late payment in commercial transactions, in order to ensure the proper functioning of the internal market, thereby fostering the competitiveness of undertakings and in particular of SMEs.
Article 4 (3) of the Directive holds that Member States shall ensure that in commercial transactions where the debtor is a public authority, the period for payment does not exceed any of the following time limits:
30 calendar days following the date of receipt by the debtor of the invoice;
Where the date of the invoice is uncertain, 30 calendar days after the date of receipt of the goods or services; and
Where the debtor receives the invoice earlier than the goods or the services, 30 calendar days after the date of the receipt of the goods or services.
Article 4 (4) of the Directive holds that Member States may extend the time limits referred to in Article 4(3) up to a maximum of 60 calendar days for any public authority which i) carries out economic activities of an industrial or commercial nature by offering goods or services on the market ii) provides healthcare services which are duly recognised for that purpose.
Directive 2011/17 was transposed into the Italian legal system in 2002 and among measures adopted by the Italian Republic to guarantee the punctuality of the payments of public authorities, they introduced Decree-Law No 35 which laid down urgent provisions for the payment of the outstanding debts of the public administrations for financing rebalancing of local and regional authorities and for the payment of taxes by local authorities. These laws provide, inter alia, for the allocation of additional financial resources for the payment of debts established as certain, of a fixed amount and due, held by undertakings against public authorities.
Pre-litigation procedure:
A series of complaints were received by the Commission from Italian economic operators and associations of economic operators and the Commission subsequently sent the Italian Republic a letter of formal notice alleging that it had failed to fulfil its obligations under the Directive.
The Member State replied to the letter of formal notice, informing the Commission that it had implemented various measures to combat late payment in commercial transactions between public and private entities.
These included the early transposition of the Directive, actions to eliminate the stock of overdue public debt and the creation of a new regulatory and administrative systems intended to encourage payments within the prescribed periods. However, the Italian Republic admitted that notwithstanding the measures applied, the existence of late payments could not be ruled out.
The Commission requested that the Italian Republic send bimonthly reports on the actual duration of the public authorities’ payment periods in 2014. After various correspondence, the Italian Republic provided these reports in 2016. From such reports it was established that the average payment time for the first half of 2016 was that of 50 days.
On 16 February 2017, the Commission, taking the results of the reports into consideration, concluded that the Italian Republic was not in conformity with the Directive and issued a reasoned opinion within the meaning of Article 258 TFEU and requested that the Member State complies within two months.
The Italian Republic did not remedy the infringements within the stipulated timeframe and thus the Commission brought an action against the Italian Republic. Subsequently the Italian Republic, pursuant to Article 16 of the Statute of the Court of Justice of the European Union, requested the Court to sit in a Grand Chamber.
The action:
The Commission argued that the data provided by the Italian Republic itself demonstrates that the Italian public authorities exceeded the payment deadlines of 30 or 60 days laid down by Directive, this exceedance, the existence of which is not specifically disputed by the Member State, concerns all public authorities and covers several-years. The Commission further notes that certain studies carried out by other entities and associations, contradict the bimonthly reports submitted, in that the average payment times ranged from 99 days with regards to certain craftsmen and SMEs, 145 days with regards to the provision of medical devices, 156 days with regards to the construction sector and one case even indicated a delayed payment time of 687 days.
In its reply, the Italian Republic held that the data in question related to the years 2015-2017, which was subsequently updated in March 2018 and clearly showed continuous and systematic improvement in the reduction of payment times. It further highlighted that if the trends were to be confirmed, it would be possible to comply, in the case of invoices issued in 2018, with the periods of payments as stipulated within the Directive.
The Italian Republic further submitted that the analytical procedures adopted by the Commission with regard to the data provided in its bimonthly reports were inappropriate. It stressed that the Commission’s choice to use the indicator corresponding to the ‘average payment time’, rather than the indicator relating to the ‘average delay’, could affect the reliability of the analysis carried out. Given that the first indicator has the ‘standard’ 30-day period as a point of reference in the analysis, this automatically disregards the fact that the 60- day period for payments provided for in Article 4(4) of Directive which can be applied in specific transactions. Furthermore, the Italian Republic held that the Commission made a misleading temporal comparison of the data as it did not take into account the dynamics of making payments, in that the Commission’s findings were crystallised when the last bimonthly report was provided, without taking into account subsequent payments.
The Italian Republic further highlighted the ambiguity of the Directive, in that it does not precisely outline a deadline within which the obligations imposed by the Directive must be fulfilled. The Italian Republic further stated that, the Directive puts the Member State concerned under no obligation to achieve a specified result, but at most under an obligation as to the means employed, the infringement of which can be established only if that Member State’s situation differs considerably from that envisaged by the Directive.
Further to the above, the Italian Republic held that it cannot be held liable for the public authorities’ exceedance of periods for payment. In its view, where a body of a Member State acts on equal footing with a private operator, that body is liable only before national courts for any infringement of EU Law, in the same way as a private operator.
Findings of the court:
The Court highlighted that in accordance with settled case-law, in interpreting the provision of EU law it is necessary to consider not only the wording, but also the context and the objectives pursued.
The literal and contextual interpretation of Article 4(3) and (4) of the Directive is supported by the objectives pursued in that the aim of the Directive is to combat late payments in commercial transactions, in order to ensure the proper functioning of the internal market, whilst increasing competitiveness of undertakings and, in particular, of SMEs.
Based on the foregoing, the Court did not accept the interpretation presented by the Italian Republic that the Directive imposes on Member States only the obligation to ensure that the statutory and contractual payment periods applicable to commercial transactions are in conformity with the Directive or, in the event of non-compliance with those periods, that the right of the creditor who has fulfilled his contractual and statutory obligations to obtain statutory interest for late payment is ensured. The Court did not accept the argument that the Directive does not impose the obligation to ensure that public authorities effectively comply with the stipulated periods.
With regard to the Italian Republic’s argument that the failure to fulfil obligations should be assessed on the basis of the average lateness of payments rather than the average payment time, it is sufficient to state that it is apparent, in any event, that payments still exceed the periods for payment prescribed in the Directive. The court further highlights that the Italian Republic does not dispute the fact that its public authorities, as a whole, have exceeded, on average, those periods, nor does it claim that analysing those data on the basis of other methods would have made it possible to establish compliance with those period.
Referring to the Italian Republic’s argument that public authorities cannot engage the liability of the Member State to which they belong when acting in a commercial transaction, the court held that, if this were accepted, it would render the Directive ineffective and was thus not accepted. In conclusion, the Court held that, notwithstanding that the situation was improving, this could not prevent the Court from holding that the Italian Republic has failed to fulfil its obligations under EU law.