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Interest Percentage

Posted on May 1, 2000 | Posted in Construction

We imagine that, on many occasions, you have seen an invoice that contains, usually at the bottom and in fine print, words like these: “The balance due must be paid in 15 days, otherwise it bears interest at 2% per month.” You might even use this wording on your own invoices. You figure that these words mean that you take the balance every month, multiply by 2%, and keep adding the interest to the balance. You figure that this is equivalent to 24% interest per year. You figure that this is a great incentive for the debtor to pay. You figure wrong.

General Proposition 

First, just because you slip an interest amount into an invoice does not mean that the debtor has agreed to pay that interest. You cannot unilaterally foist an interest rate on another contracting party unless the rate is part of the contract. If this is a one-time contract, you may look only at what is in the contract; what you attempt to demand in interest, after you perform your end of the contract, is ineffective. You may have an argument to support your position, if you have done business with the debtor on a number of occasions and, on each previous occasion, you have supplied invoices that contain the contested words. You might, in these circumstances, be able to argue that the clause has been imported into the present contract because of past usage; this, however, is no more than an argument. We suggest that if you want interest at a particular rate and calculation, you specify it in the contract itself.

Interest Act 

Second, even if you have managed to slip the clause into the contract, you will find, to your dismay, that the clause is ineffective. The federal Interest Act stipulates that an interest rate, if not set out as an annual rate, shall be no higher than a simple rate of interest of 5% per year. The latest case to highlight the provisions of the Interest Act is Ecuacan v. Empress Garden, a 1999 Ontario Superior Court decision.

Accordingly, you would need to specify an interest clause that complies with the Interest Act. One such clause is contained in CCDC 2, which has been interpreted as a compound interest clause based on the prime rate. An example of another alternative is as follows: “The amount owing in this invoice bears interest at the rate of 24% per year, compounded monthly.”


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