Is Your Interest Rate Enforceable?

Do you charge interest on your invoices that are paid late, and if so, what is that rate?

Is that interest rate on your invoice a monthly rate or an annual rate?

Did your client acknowledge and accept that interest rate as a term of your engagement?

These are some questions to ask yourself if you sue a client for an outstanding invoice and you claim an interest rate higher than what the Courts of Justice Act (“CJA”) allows, which is currently 2.0% per annum at the time of writing this blog.

If you do not have a signed contract with your client acknowledging and accepting an interest rate higher than the CJA, then you run the risk of a judge only awarding you the CJA rate, despite your invoices indicating a much higher rate of interest.  The main reason being that your client did not accept this amount, and therefore there isn’t a meeting of the minds.

Also, the interest rate on your invoice is unenforceable if you indicate a monthly rate of interest rather than an annual rate.  Section 4 of the Interest Act states that no agreement to pay interest in excess of 5% per year is enforceable unless the rate of interest indicated is an annual rate. 

What does this mean?  If your invoice says 2% per month, one would assume that to be 24% per annum.  However, if you only indicate 2% per month on your invoice, then the maximum the Court will award you is 5%, however, most judges (not all) will only award the CJA rate.

If you want to charge a rate of interest higher than the CJA, be sure your client acknowledges the rate by signing the invoice or even better, have a contract that indicates rate of the interest on late payments, ensuring that the interest rate is expressed annually, or you will be out of luck if they default.

Murray Brown, Licensed Paralegal