What is the Fair Terms Law?
Law 2024 of July 23, 2020, "By means of which payment rules are adopted in fair terms in the commercial field and other provisions on payment and invoicing are dictated", the "Law" or the "the Fair Terms Law” entered into force on January 1, 2021 and provides for legal obligations that came into effect in January 2022. These provisions will have an impact on the obligations of our clients who carry out commercial operations. In this article, the most relevant aspects of the Law are exposed, and in case our clients have not adopted the legal provisions of the Law, the mechanisms of contractual readjustment that our clients can adopt to comply with it are addressed.
The Fair Terms Law was promoted by the Congress of the Republic of Colombia with the aim of balancing the situation of disadvantage in which small and medium-sized companies found themselves when they entered commercial relations with large companies. It was argued that large economic players unilaterally imposed exaggerated payment terms on small and medium-sized enterprises that resulted in damage to their cash flow and, thus, affecting their commercial operation.
The Law establishes that the payment of all monetary obligations must occur within 60 calendar days during the first year of entry into force of the Law -year 2021-, counted from the date of receipt of the goods or after the end-of the purchased services. For the second year of entry into force of the Law -year 2022- the payment must be done during the following 45 days 1 .
Nonetheless, it should be clarified that the Fair Terms Law brings with it the following exceptions to the payment terms indicated above 2 :
- Payments in money for non-commercial contracts.
- Monetary payments of contracts regulated by the financial consumer protection regime 3 , the consumer protection regime 4 and its ancillary contracts.
- Transactions arising by virtue of commercial transactions carried out between companies considered as large companies.
- Obligations contained in securities, except for sales’ invoices.
- Payments from insurance contracts.
- Obligations arising from loan agreements and other contracts in which the terms of the monetary obligation are specific to the contract.
- The payment of obligations subject to bankruptcy, business restructuring or liquidation proceedings.
- The payment of the subscribed capital in the Corporations, Simplified Stock Companies and Limited Companies.
- Commercial operations in international trade.
Therefore, all payment terms of the contracts that were in execution before the beginning of 2022, must be adjusted to a maximum payment period of 45 days following the receipt of the goods or after the end-of the purchased services (the "Fair Term"). Furthermore, for the contracts that were agreed in 2022 and that are subject to the Law a 45 days payment clause must be agreed between the parties.
However, if our customers still have in their contractual relations a payment period greater than 45 days from the receipt of the goods or from the termination of the provision of the contracted services, it is important that they know that these payment conditions would be ineffective by express provision of the Law. The ineffectiveness of clauses establishing payment terms greater than 45 days implies that such a provision will not have any legal effect 5 . On the other hand, the payment that is made exceeding the Fair Term established in the Law, will result in default, and will enable the counterparty to claim a compensation (the "Compensation") for all costs incurred, through an executive process or through alternative dispute resolution mechanisms 6 .
Mechanisms to adjust contracts in accordance with the Fair Term obligation and to reach an agreement before the request for Compensation
It is important that, if the adjustment to the Fair Term has not yet been made in the contract, the corresponding modifications are advanced.
Hence, it is recommended that our clients correct the contract through an addendum. The addendum should contain the reasons why the payment clause is readjusted along with the wording of the new payment clause and the Fair Term. It should be noted that there is a duty of the parties to collaborate with each other based on the principle of good faith, which justifies the modification of the Fair Term according with the provisions of the Law.
On the other hand, if damage has already been caused by the payment of the obligation under terms other than those established in the Law, and the affected party claims the Compensation, the parties can celebrate a transaction contract. In said contract, an agreement that satisfies both parties must be accorded, and it must be indicated that the party claiming the Compensation undertakes not to resort an executive process. As an alternative, and in case of not being able to achieve a direct settlement with the counterparty, it is advisable to turn up to alternative dispute resolution mechanisms (such as a conciliation or mediation process) to reach an agreement regarding the amount and term of payment of the Compensation.
Finally, it is worth mentioning that, if differences arise in any contractual scenario, correct legal advice becomes important when it comes to avoiding a litigious scenario and reaching an amicable agreement with the counterparty. Therefore, if you require accompaniment in this regard, do not hesitate to contact us.
