Introduction: the late payment problem
Late payment of invoices is a problem for any business. Late payment creates cash flow problems and the need for additional revenue to compensate the bad debt incurred. This leads to an increased risk to bankruptcy, uncertainty in business planning, and reduced participation in public procurement.
In the European Union, almost 50% of invoices are not paid on time. Italy is at the bottom of the list leaded by Denmark where 90% of companies paid at 30 days in 2021. Italian companies are slower to pay than French, but less slow than companies in Greece, Bulgaria, Portugal and Romania where only 14% of them paid at 30 days in 2021.
Average terms of payments in B2B transactions vary from 60 to 120 days following the invoice date, which is the most common practice in Italy and a way of business financing.
The overall small size of Italian companies, the limited access to bank loans and the cash flow problems due also to recent emergencies (Covid and Ukrainian war) play a role in the tendency of Italian companies to be slow on payments.
Here you will find the best strategies for getting customers to pay and to avoid defaults on payments.
Common reasons for late payment
The main reasons why invoices are not paid at due date are:
- Cash flow problems: business customers may be deliberately holding back invoices for payment, to the detriment of the less important or the less reactive creditors,
- Dissatisfaction with the service or the goods provided,
- Bad habits and bad organization: sometimes, customers, especially consumers, are not aware of terms of payment and pay only if solicited.
We will focus on the B2B customers delaying payment without any justification to do so and we will see how to deal with them effectively.
Strategies to prevent payment delays
Business information
As an old Japanese say goes: “A customer which does not pay is not a customer”. So, in order to avoid problems, it is important to check the financial situation of any potential customers.
The Italian business register and several rating agencies in Italy provide for extensive financial information on companies, as well as their balance sheets in various languages.
On the Italian Competition Authority’s website, there is the list of many companies (mainly active in the construction sector and/or dealing with the Public Administration) with turnover exceeding 2 million euros which fulfill high standards of legality and should be expected to be good payers.
Clear contract terms
The Latin expression “verba volant, scripta manent” is always true, meaning that “spoken words fly away, written words remain.”
So, it is important to have written contracts or standard terms accepted by the customers, to rely on in case of default payment or any disputes.
Moreover, only the contract may entitle the creditor to retain any sums owed by the debtor or may limit its faculty to claim nonconformity or raise any exceptions before paying.
Last but not least, contract can specify the applicable law and the competent court in case of disputes between the parties. This is helpful in international debt recovery and commercial litigation cases.
LEX IBC assists companies in drafting and revising international commercial contracts and in litigation and arbitration proceedings.
Retention of Title Clause in Italy
Retention of title clause is a contractual remedy which allows the creditor to keep or re-obtain the goods, if the debtor does not pay the full price.
Under Italian law, ownership is transferred to the purchaser with consent, i.e. at the moment when an offer is accepted. Delivery and payment of price are obligations respectively of the seller and the buyer whose performance or non-performance has no effect on the transfer of ownership.
Even in case of instalment sales, a retention of title clause must be expressly incorporated into the written agreement, so that buyer acquires ownership of the good upon payment of the last instalment of the price, but risk passes at the time of delivery (art. 1523 Italian civil code).
The main characteristic of a retention of title clause is that the risk and other burdens such as maintenance, repair costs and fiscal obligations pass to the purchaser, while the title remains with the seller. So, if the buyer does not pay, the seller may keep the goods or machineries and sell them to other customers or re-possess them (for example, if they are in the debtor’s premises or in transit).
Invoicing and successful requests for payments
Invoicing
Invoice should always contain the details of the parties, the total amount of the goods and services, the deadline and the place and way of payment.
Invoices are commercial documents which generally do not contain contractual terms and conditions. This is so because invoices are unilateral acts of performance and not acts of assent.
Where contractual terms are included in invoices, they are not validly incorporated in the agreement between the parties and the seller can not rely on them (see, for example, CISG ADVISORY COUNCIL1 OPINION NO 13 INCLUSION OF STANDARD TERMS UNDER THE CISG, available at https://cisgac.com). So, the companies should send their standard terms along with the offer or the acceptance, without inserting new clauses in the invoices.
We followed a case where an exporter in the Veneto region had its Italian jurisdiction clause printed on its invoices. Since they might not be enforceable, it had to consider to commence judicial proceedings in other European and extra European countries where its unpaying customers had their business places, with relevant extra costs.
Successful requests for payments
Time is of essence in payment and debt recovery.
So, after the expiry of the due date of the invoice, the creditor must put effectively pressure on the debtor. The creditor should not wait, especially when the debtor is trying to gain time with unclear justifications.
If the debtor knows that one creditor will wait, it will postpone payment and give priority to others.
The request for payment should include a reference to the contract and the amount due.
In conformity with the EU Late payment Directive of 2011, now under revision, the creditor is entitled to claim automatic interests for late payment (now 12% in Italy) on the commercial invoices and a fixed fee for debt recovery (now €40). You will find an EU calculator of interests here.
So the amount due to be claimed by the company should include capital, interests for the delay and administrative fees for debt recovery.
The EU Court of Justice clarified recently that default interests are calculated on the whole amount due, including VAT (Judgment of the Court of 20 October 2022 – BFF Finance Iberia (Case C-585/20).
We always request the amount of statutory or contractual interests for late payment due to our clients. Sometimes debtors are not fully aware of the fact that it might be very expensive and counter-productive for them not to pay big invoices for a long time!
Final request of payment and how to send it
A final request for payment should assign the debtor a short term (10/15 days) to pay what it owes, highlighting that in default, the creditor will instruct its lawyers to commence legal proceeding against the debtor.
Any formal notice should be sent either by registered letter with acknowledgment of receipt or by an electronic certified email. In Italy all companies have an electronic certified address (so called PEC email address) that may be checked either on the company’s website or in the Italian business register or in the INI-PEC public database.
Compensation for recovery costs and attorney’s fees
Pursuant to Italian law and EU Late payment Directive of 2011, the creditor shall, in addition to the fixed sum referred above, be entitled to obtain reasonable compensation from the debtor for any other recovery costs incurred due to the debtor’s late payment, including the costs in instructing a lawyer.
In general, our legal fees are fully collectable from the debtor. As an example, in an out-of-court and judicial enforcement proceeding in Italy, our Belgian client received its payment of almost half a million euro, including all default interests and expenses, as well as full compensation for our legal fees.
Customers Relations in Italy
Visiting the customer and checking its financial situation
Visiting or being in touch with Italian customers and checking regularly their financial situation is also advisable, in order to understand the commercial risk and take appropriate steps if payment is delayed. Moreover, as already indicated, business reports and financial statements of Italian companies are easily available.
Suspension of works or deliveries
Subject to contract or applicable law, the creditor may suspend its performance and delivery until the debtor effects payment.
This strategy can be useful against some Italian debtors. Under Italian law, the creditor is entitled to suspend its performance until it receives payment, provided that the suspension is not manifestly contrary to good faith (article 1460 Civil Code). This means that there must be objective proportionality between the performance suspended by the creditor and the debtor’s default (see Civil Cassation, Section III, sentence no. 22626 of 8 November 2016).
Before suspending performance for non-payment, in general, it is advisable to check the contract or the law applicable to the transaction. Actually, the creditor cannot suspend performance if this faculty is expressly excluded in the contract or by the law governing the transaction (as an example, under English law, this faculty should be agreed on by the parties in the contract). In that case, the party whom suspends works or deliveries would be liable for damages suffered by the other.
So, especially when the contract value is significant, we give legal advice to clients desiring to suspend performance.
Repayment plan
Especially if there is a long-lasting commercial relationship, the creditor might consider proposing a repayment schedule.
Both the creditor and the debtor benefit from such agreements: the debtor can safely pay lately at no interest or reduced default interest, while the creditor obtains from the debtor a clear commitment and a written recognition of the full debt; this will facilitate significantly judicial recovery, should the schedule be disregarded by the debtor.
We assist companies seeking to reach an agreement with their counterparts and we draft for them repayment schedules and settlement agreements.
Mediation
If the case is complex and/or there is a disagreement between the parties, before going to court, they might evaluate the possibility to start mediation.
In Italy, Decree n. 28/2010, amended in 2022, introduced a mediation model based on a facilitative approach. The mediator is not a judge and has no power to decide: he/she is a professional whom helps two or more parties in finding an amicable settlement to a dispute. If the parties agree, the mediator may submit a confidential settlement proposal to them. Mediation regulated by Decree 28/2010 in Italy requires the participation of the parties and their lawyers.
The advantage of this kind of mediation is that it is fast and, if an agreement is reached, it is directly enforceable in Italy. For international commercial disputes, the Milan Chamber of Arbitration offers mediation services as well.
We advise and assist companies in mediation and arbitration proceedings in Italy and abroad.
Conclusions
In this article we have illustrated effective practices, tips, and tools for businesses to prevent or avoid non payments.
First of all, it is important to verify the financial situation of the potential customers, information and data that are widely available in Italy.
Second, contracts and standard terms aid in protecting the credit, especially in international commercial transactions.
We have also dealt with invoicing and requests for payments, highlighting their content and how to send them.
Finally, in order to get the customer to pay, we have illustrated other effective strategies such as suspension of performance, repayment schedules and mediation proceedings in Italy.
LEX IBC, a law firm based in Italy, specialized in international contracts and debt collection, may support your company in the commercial negotiation and disputes and adopt the more appropriate strategy in your specific case.
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