Late payment penalties in business law

LEGAL FRAMEWORK AND APPLICATION

1/ INTRODUCTION TO LATE PAYMENT PENALTIES

We are all familiar with the phrase “Any delay in payment will result in the payment of late payment penalties at a rate equal to XXX, [taux au moins égal à trois fois le taux d’intérêt légal en vigueur en France] and a minimum fixed indemnity of 40 (forty) euros for collection costs, due by operation of law, without the need for a reminder”.

Late payment penalties are financial measures used to compensate for failure to meet payment deadlines in commercial transactions. These penalties include interest for late payment, default damages and penalties linked to penalty clauses.

2/ LEGAL FRAMEWORK AND EXCEPTIONS

Under article L. 441-10 of the French Commercial Code, penalties must be explicitly mentioned in invoices and terms and conditions of sale. However, there are exceptions that allow these penalties to be modulated according to the circumstances, particularly in cases of good faith or specific damage not covered by the standard penalties.

3/ ECONOMIC IMPACT AND CAPITALISATION OF INTEREST

Late payment can have a serious impact on the cash flow of SMEs. Directive 2000/35/EC underlines this economic effect. In addition, the capitalisation of interest (anatocism), which allows interest to generate interest itself, is applicable under certain conditions, potentially increasing the burden for the debtor in arrears.

4/ PENALTIES FOR NON-COMPLIANCE

Breaches of the legal provisions on late payment penalties are severely punished, with penalties of up to €2 million for legal entities, under article L. 441-16 of the French Commercial Code.

5/ CONCLUSION

The legislative framework provides a deterrent mechanism against late payment, while allowing for adjustments based on the specificities of each case.

Too often ignored, late payment penalties can be used as a negotiating tool in amicable discussions with a debtor.