State your interest

Do you charge clients interest on their overdue accounts? Many businesses choose to charge interest to those clients who do not pay their invoices on time. But have you ever considered whether there was a proper procedure that you must follow in order to properly be able to enforce the collection of interest on unpaid invoices? There are a few general guidelines you should follow, before assuming that interest charges to a client will actually be enforced by the courts.

Overall, it is good practice to inform your clients that you charge a set interest rate to all clients who do not pay their invoices on time. Providing this information upfront to all clients will provide you with security should a situation arise in the future regarding overdue accounts. It will also help to avoid making your clients feel they are being treated unfairly. If it is a set amount, then it becomes more like a company policy than a decision to extract extra funds from a client.

Charging a set interest rate also makes it clearer for everyone involved. Incorporating references to the posted interest rates of third parties (example: the BMO prime, from quarter to quarter) only makes matters more confusing. A simple “two per cent, per month” is not only clear, but also generally acceptable practice in most industries.

Clarity is important, but even more important from your perspective is the need for the actual agreement of the client on the applicable interest rate, along with the timing for payment. If clients agree in writing to pay two per cent per month on accounts overdue beyond 30 days, you will enjoy an increased chance of having a court force them to pay you that particular interest rate. Laws in this matter vary from province to province. You should consult an attorney in your own jurisdiction for advice on how to structure your own contracts. Do not take anything here as advice on how to handle any individual account.

If a vendor of services does not inform the purchaser (and get agreement) that there will be an interest amount added to any overdue invoice, the courts have found that the purchaser may not be obligated to pay the listed interest amount (even if the rate is contained on subsequent reminder statements).

Remember, it is always good practice to provide the notice of interest in writing. Documentation will support your cause should the account not be paid and you are required to pursue the client for payment in court. Verbal agreements can be enforced in some jurisdictions, but even in those jurisdictions it makes sense to reduce the understanding to writing so that everyone knows the actual contractual arrangement. Overall, it is good practice to inform the purchaser upfront of any terms and/or conditions you wish to introduce into the contract. It is also best practice to provide those details in writing.

In sum, if you wish to be able to enforce an agreement for interest against a client, it will be important for you to have a written contract with that client for a clearly stipulated interest rate. If these steps are taken, you will stand a better chance of having a court side with you in a future claim. 

Deryk Coward articled 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 area of general civil litigation, personal injury, insurance, debtor-creditor and labour and employment law. Coward is legal counsel for the Canadian Rental Association.