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Client update - Payment Ethics Law

13.12.20 | 11:01  

The Payment Ethics Law, 5777-2017 ("the Law"), which is intended to regulate the maximum periods for paying suppliers for the sale of goods, provision of services or performance of work, came into force. The payment periods prescribed in the Law meet the standard specified in the European Union Directive in this regard and the principles applied by OECD countries.
The Law is intended to bring forward payment dates and shorten the credit period granted for paying suppliers under a contract for the sale of goods, the provision of services or the performance of work. The law applies, inter alia, to State authorities, Government Ministries, local authorities (including the corporations which they own), higher education institutions, budgeted entities and any business that is an authorized trader.

 

The main provisions of the Law are as follows:

  1. Maximum payment periods:

1.1       A business shall pay a supplier upon terms of current + 45, unless the parties have expressly stipulated in the contract a different payment period, which was prescribed having regard to the special nature of the contract or is not exceptionally unfair. The law does not define which contracts have a special nature or what payment arrangement should be considered unfair. It may be assumed that these terms shall be interpreted by the courts, having regard, inter alia, to the balance of power between the parties, the size and complexity of the transaction, the other payment terms, as well as the purpose of the Law - to shorten the credit period.

1.2       State Authorities, Government Ministries, the Sports Betting Council and the National Lottery shall pay the supplier on terms of current + 30, at the latest, or within 45 days from the date on which the invoice was submitted. In contracts for the performance of construction engineering works, the consideration shall be paid on terms of current + 70 or within 85 from the date on which the invoice was submitted, as the case may be.

1.3       An entity established by law, a budgeted higher education institution or a budgeted entity (other than those mentioned in paragraph 1.2 above) shall pay the supplier on terms of current + 45, unless the parties have expressly stipulated in the contract a different payment period, which was prescribed having regard to the special nature of the contract or is not exceptionally unfair.  (with the approval of the entity's CEO and subject to reporting to the Small and Medium Businesses Agency). When one of the aforementioned entities holds a tender for the purpose of entering into a contract with a supplier for the performance of a transaction, prescribing a different payment period in the contract is prohibited, unless it was specified in the tender.

1.4       A local authority, including a corporation which it owns, shall pay the supplier on terms of current + 45 and in the case of a transaction involving construction engineering works on terms of current + 80. Where the transaction is being wholly or partially funded through external financing (from the State or a budgeted entity), the authority may defer the date for payment of the financed part by up to 10 business days from the date on which the finance was received (provided that the supplier was notified of the possibility of a deferral on the date on which the contract was entered into or the date on which the tender was published, and in any case the payment shall be remitted within 150 days from the date on which the invoice was submitted to the local authority). If the external financing is coming from a government ministry or other local authority, then other than in special circumstances, it must be remitted within 60 days from the date on which the supplier's invoice was received, and statutory linkage differentials and interest must be added for any delay.

  1. The Law stipulates that the consideration shall be paid to the supplier within the time periods specified above, provided that supplier submitted an invoice to the customer which incorporates all the essential details and/or meets all the essential conditions for receiving the consideration under the terms of the contract between them. The Law goes on to specify the period which the customer has to check the invoice and the manner in which the payment deadline may be postponed should errors be found therein.
  2. The sanctions for non-compliance with the payment deadlines: The Law stipulates two sanctions for non-payment by the deadline prescribed therein:

3.1       The Law prescribed that its relevant provisions are part of the contract between the parties. Therefore, non-compliance with the payment terms specified in the Law may activate the sanctions prescribed in the contract and/or by law, for breach of contract. The Law also clarifies that it does not diminish the supplier's rights to any other remedy which he is entitled to.

3.2       In the following contracts, linkage differentials and interest in accordance with the Adjudication of Interest and Linkage Law shall be added to any consideration not paid by the deadline stipulated in the Law, together with arrears interest should that consideration remain outstanding 30 days after the said deadline.

3.2.1       All contracts between a supplier and State Authorities, Government Ministries and the Sports Betting Council; or

3.2.2       A contract between a supplier and a business, a budgeted higher education institution, a budgeted entity or other entity established by law (excluding State Authorities, Government Ministries and the Sports Betting Council) in which that entity or business, as the case may be,   had priority in drafting the terms of the contract.

  1. The parties cannot contract out of the Law unless it favors the supplier.
  2. The Law applies to contracts entered into and tenders published after 30.6.2017.

 

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