Articles

Late Charge Update

Contractors and other businesses frequently encounter a statement similar to the following provision on their suppliers and subcontractors invoices: "The sum of 1.5% per month shall be added to any balance unpaid when due."

The question comes to mind: Is this legal?

I.
DOES IT VIOLATE THE USURY LAW?

In 1990 the California Supreme Court answered this question in the negative. The Court concluded that late charges of this nature are not subject to the usury laws because they do not constitute payments for the loan or forbearance of any money.

II.
ARE THERE ANY LIMITS?

The Supreme Court held these charges were not "interest"; however, the Court did not state what they were or what, if any, limits might apply? In other words, future challenges to the charges are still possible. For example, one might argue there is a cap based on reasonableness, e.g., 1.5% per month may be proper, but 5% per month may cross the line.

III.
CURRENT STATE OF THE LAW

In the last seven years the courts have not provided much help or direction. If anything, the issue is more uncertain today. In one case, a Surety challenged a Contractor's right to recover a 1.5% per month additional charge as part of a bond claim by arguing that this charge was not "interest". The Appellate Court, however, dismissed this argument and awarded "interest" at the contractual rate of 18%. According to this Court, at least these charges are "interest" except for purposes of the usury law.

IV.
CONCLUSION

There is still uncertainty regarding the rules that apply to these charges. At this point, the only issue settled is that the charges are not subject to the usury laws. So far, no other successful challenges have been made. Thus, until further notice, a late charge of 1.5% per month on unpaid invoices appears to be proper and enforceable.

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Gary Kershner is an attorney with the Law Offices of Gary Kershner, a member of the Exchange since 1955. The Law Offices of Gary Kershner emphasizes construction law. It also maintains a general litigation, estate planning and business practice as well. The Law Offices of Gary Kershner can be reached at (510) 832-6500.