THE BOTTOM LINE
- A Powerful Shield for Debtors: If your company has a valid cross-claim against a creditor (for example, for damages), you can use it to offset their invoice. This set-off can retroactively cancel not just the principal debt but also the late payment interest and recovery costs that would have otherwise accrued.
- Creditors Must Assess Counterparty Risk: Don’t automatically count on receiving late payment fees if you also owe money to your debtor. The Court’s ruling places the onus on businesses to be aware that their right to these penalties can be nullified by a counter-claim, even one declared long after the payment due date.
- Timing is Critical: The set-off only works from the moment both claims became due and could be offset. Any late payment interest that accumulated before the debtor’s counter-claim was due and payable is still legally owed.
THE DETAILS
The Court of Justice of the European Union (CJEU) has provided crucial clarity on the interplay between the EU’s Late Payment Directive (2011/7/EU) and national laws on the set-off of debts. The case involved a Polish transport company that sued a client for unpaid invoices, plus statutory interest and recovery costs for the late payment. The debtor defended itself by declaring a set-off, using its own pre-existing claim for damages against the transport company. Under Polish law, this declaration had a retroactive effect, meaning the mutual debts were considered extinguished from the moment the set-off first became legally possible, not from the later date the declaration was made.
The core legal question was whether the EU’s Late Payment Directive, which guarantees a creditor’s right to interest and costs when paid late, overrides a national rule that retroactively erases the “lateness” of the payment. The Court sided with the national law, finding that the Directive does not override it. The judgment clarifies that the Directive was never intended to create a complete, harmonized EU contract law. Instead, it sets specific rules that must be integrated into the existing civil and commercial laws of Member States. The mechanisms for extinguishing a debt, such as set-off, remain firmly within the scope of national law.
Ultimately, the CJEU‘s reasoning was that a retroactive set-off does not unlawfully deprive the creditor of a right they already possessed. Instead, the legal fiction of retroactivity means the underlying debt is considered paid on time. As a result, the conditions for late payment penalties—namely, an “amount due” that was not “received on time”—were never actually met for the period after the set-off was possible. The Court noted that any reasonably well-informed business should foresee the possibility of a set-off as soon as it becomes both a creditor and a debtor to the same counterparty, and manage its recovery efforts accordingly.
SOURCE
Source: Court of Justice of the European Union
