Delayed Payment Penalties:

Question: What happens if my contract includes a late fee that works out to more than 60% interest per year in Ontario?

Answer:   A late fee may be illegal and unenforceable in Canada if it effectively charges interest beyond the Criminal Code limit, which sets out that charging an annual interest rate above sixty (60%) percent per annum can be a criminal act under Criminal Code, R.S.C. 1985, c. C-46, section 347. Courts look at the substance over the label, so a “late fee” that increases when credit is extended for an outstanding balance can be treated as interest, even if it is framed as a penalty, and Ontario courts may also assess whether the charge truly matches disbursement costs rather than adding a profit-like amount; for related authority see Garland v. Consumers' Gas Co., [1998] 3 S.C.R. 112 and De Wolf v. Bell ExpressVu Inc., 2009 ONCA 644. If you are in Ontario, you can have Marketing.Legal™ help you review your contract language and payment terms for risk, plain-language issues, and what to fix in your billing process for Digital Marketing for Lawyers, Paralegals, and More, and you can talk with the team at (800) 551-5751.

When Is a Late Fee An Illegal Penalty

Business owners often attempt to encourage prompt payment by imposing delayed payment penalties (late fees) upon those who fail to pay on time.  Unfortunately, contracts may be deemed unlawful and therefore unenforceable when the contract is written in such a way as to impose, or appear to impose, an improper late fee.  Commonly, the late fee calculates to an amount that violates the Criminal Code, R.S.C. 1985, c. C-46, section 347, whereas charging an interest rate beyond sixty (60%) percent per annum is deemed a criminal offence.  Any contract that prescribes an interest rate in excess of the maximum allowable sixty (60%) percent is therefore an illegal contract; Garland v. Consumers' Gas Co., [1998] 3 S.C.R. 112.  Do note that a severability clause may save the entire contract from becoming void.

While a business may attempt to disguise interest as a late fee, courts will view a late fee for what a late fee is - an interest charged as an additional amount of money due, and arising from, the extension of credit for an outstanding balance of monies owed.  An exception applies if it is shown that the late fee genuinely correlates to the recovery of a disbursement cost incurred in the collection of the debt rather than as an additional fee correlated to the further advancement of the debt; De Wolf v. Bell ExpressVu Inc., 2009 ONCA 644; Garland, supra.

As an example, consider a business that imposes a ten 00/00 ($10.00) dollar late fee when a monthly payment of one hundred 00/00 ($100.00) is overdue by seven (7) days.  This late fee actually calculates as a ten (10%) percent additional charge upon the actual amount due.  This ten (10%) percent late fee imposed upon a one week overdue account produces an exorbitant, and unlawful, five hundred twenty (520%) percent annual interest rate.  Note that the fact that this interest appears lower, and actually does calculate lower, over a greater period of time, it is the trigger date that causes the unlawfulness.  While the $10.00 late fee charged on the 7th day is unlawful, it might appear that if six months later the same $10.00 is still outstanding that the amount, by then, is a lawful twenty (20%) percent interest; however, the very fact that the amount was unlawful when originally imposed continues to make the amount unlawful.  What was at first unlawful fails to become lawful.

Conclusion

When an agreement contains a clause for late fees or other form of delayed payment penalty, such is viewed as an attempt to charge interest on monies due.  Where the late fees, as a disguised interest, calculate to an interest rate beyond the legally allowable interest rate, the late fees are viewed as unlawful.  Furthermore, even if the interest rate may be legal, late fees or a payment penalty that goes beyond the costs of recovering the genuine amount due are, generally, deemed unenforceable.