If a person buys a car from a car dealer and fails to pay the purchase price on the agreed date, that person has to pay not only the purchase price but also statutory interest (Clause 6:119 DCC), unless otherwise agreed. If a car dealer buys the same car from an importer and fails to pay the purchase price on the agreed date, that car dealer has to pay commercial interest, which is a much higher rate, instead of the normal statutory interest (Clause 6:119a DCC).
The reason for this is that the transaction between the car dealer and the importer qualifies as a commercial transaction: it is a transaction between undertakings or between undertakings and public authorities which leads to the delivery of goods or the provision of services for remuneration. But which interest rate applies if the remuneration to be paid is not the purchase price of a car but interest on a loan? And does it make a difference if the loan is not granted by a financial institution but between group companies? So far, the picture in Dutch case law is mixed. The conditions for overdue interest becoming payable vary as do the interest rates. The statutory interest rate is currently 2% and the commercial interest is 8% (actual rates can be found here). In addition, the provisions with regard to commercial interest contain certain mandatory payment terms that may limit the parties' freedom to agree payment terms in excess of 60 days. Therefore, it is clear to see why establishing whether an overdue interest payment is subject to statutory or commercial interest is important.
In our previous blog on commercial interest on 11 July 2018, we mentioned that the Advocate General in the Licorne case recently advised the Supreme Court on 18 May 2018 (ECLI:NL:PHR:2018:513) that commercial interest can accrue on overdue interest payments on a loan. At the time, our expectation (or perhaps hope) was that the Supreme Court would shed light on the subject. Instead, the Supreme Court in its judgment of 28 September 2018 (ECLI:NL:HR:2018:1811) took a different turn and avoided the subject altogether.
The advice of the Advocate General thus remains a second best but still authoritative source of information about the subject. This blog explores this subject further by first discussing the background of Clause 6:119a DCC and then the Licorne case as presented in the Advocate General's advice.
Background 6:119a DCC – implementation of Directive 2000/35/EC
Clause 6:119a DCC, establishing the duty to pay commercial interest under certain conditions, originally implemented Directive 2000/35/EC into Dutch law. The purpose of this Directive was to combat late payments and thus avoid liquidity problems, particularly for small and medium-sized undertakings, caused by a detrimental payment morale. The scope of the Directive is not limited to small and medium-sized undertakings though. The Directive instructs Member States to ensure that all undertakings are entitled to charge interest for late payments in commercial transactions. The commercial interest is set at a higher rate than the 'normal' statutory interest in an attempt to discourage late payments.
A transaction will qualify as 'commercial' if it is a transaction between undertakings or between undertakings and public authorities which leads to the delivery of goods or the provision of services for remuneration.
The Directive was recast by Directive 2011/7/EU, leading to various changes in Clause 6:119a DCC and to the introduction of a Clause 6:119b DCC on commercial interest in relation to government institutions. Furthermore, Clause 6:119a DCC was amended by the Dutch Act against unreasonably long payment terms.
The Licorne case
Licorne and others (Licorne) claimed damages from the defendants. The defendants, in turn, claimed payment of overdue interest on a (subordinated) loan they had granted to Licorne. Licorne's defence against the counterclaim entailed that it was entitled to suspend or set off of its obligation to pay interest on this loan. The Court of Appeal decided that Licorne was not entitled to suspension and therefore had to pay the overdue interest as well as the commercial interest accrued on the overdue amounts in interest.
The Supreme Court needed to decide on four issues:
- whether Licorne was entitled to claim suspension;
- the principal amount of the loan;
- the calculation of the contractual interest on the loan; and
- whether commercial interest (Clause 6:119a DCC) was due on delayed interest payments on the loan.
This blog will focus on question (4) only.
In its 28 September 2018 judgment (ECLI:NL:HR:2018:513), the Supreme Court annulled the Court of Appeal's decision, but not because of anything related to commercial interest. According to the Supreme Court, the Court of Appeal incorrectly found that Licorne was not entitled to suspend its payment obligations.
The Supreme Court saw no need for any findings on the question of whether commercial interest was due on the outstanding interest payments. If the creditor is in default himself – thus entitling the debtor to suspension – commercial interest is not due anyway (Clause 6:119a under 6 DCC).
The Supreme Court referred the case to a different Court of Appeal for further examination of the issues under (1) and (3).
Advocate General - interpretation of Clause 6:119a DCC in accordance with the Directive
In his advice to the Supreme Court, the Advocate General notes that Clause 6:119a DCC must be interpreted in accordance with the Directive. The Directive itself does not clarify whether a loan can qualify as a commercial transaction in the sense of the Directive. It simply refers to all transactions between undertakings or between undertakings and public authorities which lead to the delivery of goods or the provision of services for remuneration.
Both Licorne and the defendants were undertakings, which left the question of whether the loan qualified as a transaction that led to the delivery of goods or the provision of services for remuneration.
When adopting Clause 6:119a DCC, Dutch Parliament did not discuss this issue, but merely stated that this clause has a wide application range. In search for the boundaries of this application range, the Advocate General referred by way of example to the ECJ case of 3 October 2006 ECLI:EU:C:2006:631 (Fidium Finance). There the ECJ held that granting credit on a commercial basis constitutes a provision of services under the European Treaty.
In the Licorne case, the defendants had not granted the loan on a commercial basis as financial institutions. The loan was a transaction on a purely incidental basis motivated by the relationship between undertakings that at the time were group companies or at least indirectly related. The Advocate General explored whether such a loan can qualify as a commercial transaction as well.
The Advocate General argued that the scope of the definition of commercial transaction under the Direction is very wide and so is the purpose of the Directive. Therefore, in his view, incidental transactions between undertakings qualify as commercial transactions as well, even if these transactions fall outside the scope of the regular business activities of those undertakings.
Against this background, the Advocate General concluded that in the Licorne case overdue interest payments were likely to be subject to commercial interest. On a separate note, he also stated that repayment obligations under a loan are not to be considered a remuneration for the service provided by the lender and therefore not subject to commercial interest.
Are contractually agreed interest payments under incidental loans between group companies subject to commercial interest? The Advocate General's advice to the Supreme Court is a clear "yes".
Group companies entering into loans between themselves should therefore be aware that in cases of overdue interest payments, these payments are likely to be subject to commercial interest. If so, mandatory payment periods may apply.
In their agreement, undertakings can agree on deviating interest rates and payment terms. The freedom to do so is, however, limited due to the protective nature of the Directive and the Dutch Act against unreasonably long payment terms.