Don’t assume you’re due interest on unpaid invoices

James Manson

Contractual interest provisions can be critical in the trucking industry because the amount of claimed interest — according to the rate indicated on an invoice or some other document — often far exceeds the actual amount of owed debt.

Many trucking companies issue invoices containing terms that look something like this: Payment terms net 30 days from date of invoice; past-due accounts will be charged interest at 2% pre month or 24% per annum.

Yet during a lawsuit against a customer for breach of contract, it might not be possible to actually recover interest at 2% per month in the event of non-paid invoices.

crippling interest costs
(Illustration: istock)

This is because of basic contract law principles. One such principle states that parties must agree on all of the important terms of a contract for that contract to be binding. Another related principle is that if one party wants to hold another party to a certain term (for example, in the event of non-payment of an invoice, then interest will be charged at the rate of 2% per month), then both parties need to agree on that term before the contract is agreed to and performed.

If the parties do not actually agree on interest at 2% per month before the work is done and the invoice is sent out, it could be difficult to convince a judge to award that amount at trial.

Some might argue that they send out multiple invoices to a customer over many months, and that those invoices all have the same language concerning interest at the bottom of the document. They might argue that the customer received hundreds of such invoices and never complained or challenged the language, so they should be held to it. This argument — that a course of conduct between the parties can result in acceptance of a given term — is often advanced by a party seeking to enforce that term. That argument can succeed, however, it does not guarantee success.

The wording of the “fine print” is also critically important, even for seemingly straightforward terms like entitlement to interest.

Consider the impact of someone changing “Past-due accounts will be charged interest…” to “Past-due accounts may be charged interest”. The change of “will” to “may” results in a totally different meaning.

In one case, the court disallowed interest entirely because the word “may” had been used. The evidence was that the company had not overtly charged any such interest on the customer’s overdue account.

Courts generally consider all of the circumstances of a case when deciding whether to award interest at the rate shown on an invoice. This will involve considering the facts of the case and the nature of the business relationship between the parties. However, even where there is an established relationship, it might not be appropriate to infer the existence of an agreement between the parties to the application of any particular interest rate.

The bottom line? Trucking companies must not assume they will be entitled to interest at a certain rate, even if it is indicated on an invoice.

To maximize the chance of recovering that amount, consider taking the following steps:

  1. Be clear at the beginning of the relationship (before any loads are moved) that interest (at whatever rate) will be charged on overdue accounts. A signed acknowledgement from the customer would be ideal. Failing that, an e-mail acknowledgement would also help. At the least, consider putting boilerplate language to this effect in employee e-mail signatures.
  2. Ensure that the interest provision states that interest “will” be charged (and not “may” be charged).
  3. In the event of non-payment of an invoice, actually charge the customer. Present an invoice or statement of account reflecting the amount of interest that is due. This does not mean someone needs to actually collect in the event that the customer pays the invoice late. However, it will certainly help if later it must be shown to a judge that a plaintiff company should be entitled to the interest.

Taking these steps will go a long way to ensuring that interest is actually recovered at the end of a lawsuit.

 

 

 

 

 

 

 

 

James Manson

James Manson of Fernandes Hearn LLP can be reached 416-203-9820, or jmanson@fernandeshearn.com. This column is intended for information purposes only and does not constitute legal advice.

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