Does your contract let you charge late payment interest?

November 26th, 2024

In accordance with Civil Code of Québec provisions, if the person you are contracting with has failed to pay you, you may charge interest under certain conditions.

The interest clause in your contract must comply with section 4 of the Interest Act, which sets out that contracts must expressly state the yearly rate of interest rather than just the rate per month.

This means that if the parties set an interest rate for any period less than a year, they must specify the equivalent yearly rate. If they fail to do so, the courts must use the legal rate of 5% per annum as set out in the Interest Act.

In addition, if the yearly rate set out in the contract is abusive, it may be overruled by the courts. The courts have some discretion in assessing the rate set by the parties. They may intervene at the debtor’s request and, in particular, impose the legal rate. To decide whether an interest rate is abusive, the courts assess various factors, including the nature of the contract and any disproportionality between the parties’ respective services. They are more likely to determine a clause is abusive in matters involving consumer contracts, which enable a consumer to get goods or services for personal use from a person carrying on a business.

Bear in mind that under section 347 of the Criminal Code , charging interest at an effective annual rate of more than 60% is a criminal offence. The effective rate is calculated by considering not only the interest rate, but also any fees, fines, penalties or other charges claimed from the debtor. Note that the federal government intends to lower the criminal interest rate to 35%.

In conclusion, unless your contract contains an interest clause, you must use the legal interest rate. In addition, if your contract doesn’t specify the date on which interest starts to run, you’ll have to make sure you send a letter of demand. Unless your debtor is in default by operation of law, interest will only begin to accrue after the payment deadline mentioned in the letter of demand.

Takeaways:

  • If you want to charge interest over the legal rate, all contract parties must agree to it. Merely stating the rate on an invoice does not suffice. A payment deadline must also be stipulated so that interest can start to accrue without having to send a letter of demand.
  • The interest rate must be stated on a yearly basis.
  • Section 4 of the Interest Act does not apply to mortgages on real property or hypothecs on immovables.

To learn more about this topic, feel free to contact us.

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