The European Court of Justice (ECJ) has ruled that, in commercial transactions within the internal market, a creditor is entitled to reasonable compensation, in addition to the lump sum of at least 40 euros, when issuing payment reminders.
To ensure that companies within the EU are able to trade throughout the internal market without cross-border transactions entailing greater risks than sales in the domestic market, which could lead to distortion of competition, the EU has established a series of rules aimed at combating late payment in cross-border commercial transactions. According to EU rules, a creditor is entitled to a lump sum of at least 40 euros in connection with debt collection, but the rules also provide for the possibility for a creditor to obtain reasonable compensation. The ECJ has now established that the compensation options are not mutually exclusive.
The background to the case was that the Czech insurance company Česká pojišťovna a.s. (hereinafter “Česká”) and the company WCZ, spol. S r. o. (hereinafter “WCZ”) entered into an insurance agreement in 2012, which was later terminated by Česká in 2015 due to non-payment of an insurance premium. Prior to the termination, Česká had sent a total of four payment reminders to WCZ. In order to assert its claim, Česká brought the case before the Okresní soud v Českých Budějovicích (District Court in České Budějovice, Czech Republic, hereinafter “the District Court”) seeking payment of the outstanding insurance premium, including statutory default interest from 25 February 2015 until the outstanding insurance premium was paid. In addition, Česká also claimed, in accordance with EU law, payment of the lump sum of at least 40 euros, which in Czech law was set at approximately 46 euros, as well as compensation for legal costs, including the costs of legal assistance and payment reminders prior to the lawsuit. The District Court in České Budějovice was uncertain as to whether Česká could obtain compensation for the costs associated with the lawsuit at the same time as the company claimed the lump sum. The District Court in České Budějovice therefore decided to postpone the case and refer the question to the ECJ.
The ECJ initially established that the purpose of EU legislation in this area is to ensure compensation for the recovery costs incurred by a creditor when default interest is paid. The ECJ then carried out a literal interpretation of the relevant EU legal provision, noting that it does not appear from the wording of the provision that costs for payment reminders, which the creditor has sent to obtain payment of its claim, cannot be compensated in addition to the fixed amount of 40 euros. On the contrary, it appears from the wording that the fixed amount of 40 euros is a minimum amount, and the wording directly stipulates that the creditor “in addition to the fixed amount” is entitled to claim reasonable compensation from the debtor for any additional costs. Thus, according to the ECJ, the EU legislator had wished to emphasise that the costs of recovery, regardless of whether they exceed the amount of 40 euros, may be subject to compensation.
The ECJ also noted that the wording of an EU legal provision differs in the various EU languages, which means that the wording used in one of the language versions of the EU legal provision cannot serve as the sole basis for the interpretation of the provision or be given greater importance than the other language versions. Instead, EU legal provisions must be interpreted and applied uniformly in the light of the versions drawn up in all the EU’s official languages.
The ECJ then carried out a teleological interpretation of the rule. The ECJ stated that the purpose of the rule is to combat late payment in commercial transactions, as delay constitutes a breach of contract which may be financially attractive to debtors but unfavourable to creditors. In order to protect the creditor against delays, the creditor should, according to the ECJ, be compensated as fully as possible for the recovery costs incurred. Thus, it would be contrary to the purpose of the provision to interpret the provision in such a way that recovery costs, as a result of a debtor’s late payment, cannot give rise to compensation higher than the fixed amount of at least 40 euros.
The ECJ then included the content of the previously applicable rules in its interpretation of the current rules. Previously, the creditor was entitled to reasonable compensation for “all relevant costs” of debt recovery. According to the Court, there was no indication that the EU legislator, with the adoption of the current provision, wished to reduce the creditor’s protection. It would therefore be inconsistent to interpret the current rules in such a way that the creditor could not obtain compensation that went beyond the lump sum of at least 40 euros. The ECJ clarified, however, that the compensation, as it must be “reasonable”, cannot cover either the part of the aforementioned costs that are already covered by the 40 euros, or the costs that appear disproportionate in the specific case.
The ECJ then concluded – based on the wording and purpose of the provision – that a creditor who claims compensation for costs in connection with payment reminders sent to the debtor due to the debtor’s late payment is entitled, in addition to the fixed amount of at least 40 euros, to obtain reasonable compensation for the part of these costs that exceeds the fixed amount.
With the ECJ’s ruling, it is now clear that companies within the Internal Market, including Danish companies, are not only entitled to a pre-determined amount, but are also entitled to reasonable compensation for recovery costs if payment from a debtor does not take place on time. According to the wording of the provision, the compensation may include costs for engaging a lawyer or a debt collection agency, which must be presumed to give the debtor an incentive to pay on time. Thus, EU law ensures – once again – that companies’ liquidity, profitability and competitiveness are not negatively affected simply because the companies enter into contracts across EU borders.