Improving business-to-business payment practices in New Zealand
22 September 2020
On 26 February 2020, MBIE released a discussion paper proposing legislation amending business-to-business payment practices in New Zealand in order to improve business cash flow and mitigate the harm caused by extended payment terms and late payments, especially in light of technological developments.
Summary of discussion paper
The discussion paper is split into four key discussion topics:
- The harm to businesses due to poor payment practices
- Introduction of a maximum payment term
- Introducing a right to interest and debt recovery fees for late payments
- Alternative solutions.
Poor payment practices - harm to businesses
The discussion paper identifies that unusually long payment terms, known as 'extended payment terms' are common but can result in businesses facing cash flow issues, waste resources, impede growth and even result in failure.
At present, businesses that freely enter into contracts with extended payment terms have limited recourse. This is especially burdensome on small businesses as they do not have as much negotiating power as larger businesses.
In response to the unfair trade issues, the Government has introduced a Fair-Trading Amendment Bill that would prohibit unconscionable conduct in trade (which would include extended payment terms).
Extended payment terms would be considered unfair if: (a) there was not effective negotiation between the parties over the contract containing the extended payment terms; (b) the term would cause a significant imbalance in the parties' rights and obligations arising under the contract; (c) the term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; or (d) the term would cause detriment (whether financial or otherwise) to a party if it were applied, enforced or relied on.
For a contract term to be prohibited, the Commerce Commission would need to seek a declaration from a court that it was unfair.
Introduction of maximum payment term
The discussion paper proposes to introduce legislation that specifies a maximum payment term of 20 days. The risk with this proposed law change is that businesses may see the maximum payment term as a recommended term.
Several decisions would need to be made in relation to the legislation, including the type of contractual relationship that the maximum payment term would apply to, whether businesses can contract out, the application of the maximum payment term to different sizes of businesses and industries.
Introduction of a right to interest and debt recovery fees for late payments
MBIE is also considering legislation to provide businesses a right to interest in cases of late payments, with the proposal of an automatic entitlement to interest for late payments. This would likely be based on the existing approach set out in the Interest on Money Claims Act 2016.
MBIE propose an interest rate pegged to the Reserve Bank of New Zealand's six-month term deposit rate plus a base rate of five percentage points. MBIE is considering whether this should apply to all sizes and types of businesses.
- Disclosure regime - require large businesses to publicly report on their payment times and/or terms. Overseas regimes will be monitored, the paper noting that compliance costs and ability to monitor efficacy make this proposal unlikely
- Voluntary codes of practice - the paper notes low uptake and scant evidence of efficacy in other countries
- Alternative dispute resolution (ADR) - noting the reluctance of businesses to use formal dispute resolution services due to cost.
On 26 February 2020, MBIE also called for submissions on the discussion paper with an initial deadline of 1 May 2020 (extended from 14 April 2020). This deadline has been further extended for late submission.