Interest Provisions Are Enforceable

The California Supreme Court has definitively upheld contractual obligations for payment of interest charges on late payments. Southwest Concrete Products v. Gosh Construction Corp., 51 Cal.3d 701 (1990), involved a dispute between a contractor and its pipe supplier. The supplier sued the contractor when it failed to pay after alleging the pipe was of poor quality. The supplier’s invoices contained an interest provision on late payments at the rate of 1 ½% per month (18% per year). After the jury found in favor of the supplier, the trial court awarded the supplier prejudgment interest at the contract rate of 18% per year rather than the 10% legal rate for prejudgment interest.

The issue of whether the interest charges violated the usury law establishing maximum rates of interest reached the Supreme Court.  In upholding the interest charges, the Supreme Court ruled that the law of usury applies only to a “loan or forbearance.” The contractor did not claim that the contract involved a loan, but argued instead that the interest charge provision amounted to forbearance.

The Supreme Court disagreed. Forbearance is when the creditor agrees to refrain from enforcing the debt immediately and gives the debtor more time to pay. The supplier’s invoices required the contractor to pay the interest charges on any unpaid balance after the tenth day of the following month of the date of purchase. The supplier did not agree to forbear enforcement, and the fact that it filed suit was proof that it did not agree to refrain from enforcing the debt.  Therefore, the Supreme Court found the usury law did not apply to the interest charges and upheld the trial court’s award.

If you provide services or materials, then you should include an interest provision in your contracts or invoices.

Here are two examples:

  1. Late charges will be imposed on any balance remaining unpaid after 30 days computed at 1.5% per month (18% per year). Your unpaid balance is determined by taking the beginning balance of your account for each month, adding any new charges and subtracting any payments and credits made to your account. We will then multiply this amount by the applicable monthly periodic rate of 1.5% to compute the late charge for your account for that month.
  2. Net 30; Interest at 1.5% per month after 30 days.