Legalese: February 2014

Let’s take a look at charging interest on overdue accounts. Many businesses choose to charge interest to their clients who fail to pay their Invoices on time. You are charged interest by your suppliers if and when you pay one of their Invoices late, so it would seem logical to apply the same policy to your customers. Although charging interest on overdue invoices may seem routine, there are some general guidelines and particular rules that you ought to observe before simply assuming that you are able to recover interest. 

First and foremost, you and the person with whom you are dealing must agree that interest will be due and owing on all overdue accounts. The salient terms and conditions must be clear and unambiguous. You should clearly set out in writing exactly when and how much interest will be due and have the party with whom you are dealing sign the document. The courts have disallowed interest to claimants when there was no agreement to pay any interest. If this were to happen to you, you would most likely be limited in your recovery to whatever the prevailing pre-judgment interest rate of the court in your jurisdiction happens to be. This would vary from province to province, but is generally a very low rate.

Did you know that there is a maximum legal rate of interest in Canada? It is actually an offence under the Criminal Code to charge more than 60 per cent annualized interest. There are two ways that you can run afoul of this law. One is by signing on to an agreement that requires your creditor to pay interest at or above this rate. Another is by actually collecting payments at or above this rate. The second offence is designed to capture agreements where the high rate of interest is permitted, but not required.

One particular rule of law you must abide by relates to the mandatory disclosure of an annual equivalent rate of interest. The federal Interest Act provides that you must always disclose the annual equivalent rate of interest, or else your claim for interest will be limited to five per cent per annum.

Your notice that interest will be added to any overdue account needs to be shown upfront and prior to the sale. Documentation supporting your contention that the person with whom you were dealing agreed to pay interest at the rate claimed will be essential to your being able to recover interest. Simply sending out reminder statements to your clients with something at the bottom stating that interest is due and owing will not necessarily be enough to convince a court to award you interest at the rate claimed. You should be able to demonstrate that the person (or organization) agreed to pay interest at that rate.

From a practical perspective, it is also good practice to have the person with whom you are dealing place their initials beside the interest rate provision in your contract. This is not a requirement but will improve your case in the sense that it will make it that much more difficult for your customers to argue that they didn’t know what the rate was or somehow didn’t agree to the interest rate provision.

No legal advice has been provided in this article. If you have any questions or concerns about your particular situation, I would strongly recommend that you consult an attorney licensed to practise in your own province.

Deryk Coward articles with D’Arcy & Deacon in 1996 and was called to the Manitoba bar in June of 1997. He is a partner with the firm, practising primarily in the areas of general civil litigation, personal injury, insurance, debtor-creditor, labour and employment law. Coward is legal counsel for the Canadian Rental Association.