Late payment interest in invoices valid?

Late Payment Interest stated in Invoice valid?

It’s common for suppliers and service providers to include late payment interest clauses in transaction documents like invoices, delivery orders, and statements of accounts. Typically, these clauses might state: “Payment is due within 30 days from the invoice date. A late payment interest of 2% per month will be applied to any outstanding balance that remains unpaid after the due date. This late payment interest will accrue on the unpaid amount until the invoice is paid in full.”

Validity of Late Payment Interest Clauses

The validity of these clauses when only stated in invoices is often questioned, especially since it is often unilaterally imposed and the interest rates can be higher than those imposed by financial institutions.

Contractual Basis

In Malaysia, especially in a goods sold and delivered case, transaction documents such as invoices and delivery orders collectively form the contract between parties. This was upheld in the case of Caltex Oil Malaysia Ltd v Classic Best Sdn Bhd & Ors [2007], where it was held that these documents collectively constitute a written contract in a goods sold and delivered case.

Acceptance of Terms

Courts often look at whether the recipient objected to these terms. In Tansa Enterprise Sdn Bhd v. Temenang Engineering Sdn Bhd [1994], it was held that the plaintiff could claim interest as stipulated in the invoices, noting the defendant’s knowledge and lack of protest against the interest.

Similarly, in Enco Systems Sdn Bhd v. Soon Hin Hardware Sdn Bhd [2009], it was ruled that objections to the interest clause should be raised promptly, and a late dispute was seen as an afterthought to delay payment.

Recent Judicial Trends

In more recent cases like Pos Logistics Bhd. v Kumpulan Perubatan Smarthealth Sdn. Bhd. [2019], courts upheld the interest clause based on the defendant’s acceptance through their continued dealings and lack of objection. Furthermore, in Agromate (M) Sdn Bhd v Felcra Niaga Sdn Bhd [2022], the Court of Appeal held that failure to charge interest in a statement of account does not amount to a waiver of the right to claim it.

Judicial Discretion

However, in BHS Book Printing Sdn Bhd v Penerbitan IMT Sdn Bhd [2016], the court exercised discretion to reduce the interest rate from 12% per annum as stipulated in the invoices to 5% per annum. The rationale included:

• The absence of an explicit interest clause in the main agreement.
• The need to avoid unjust and inequitable outcomes.
• The distinction between vendors and licensed financial institutions or moneylenders.

Practical Implications

While many cases uphold late payment interest stipulated in invoices, it’s prudent for vendors to include such clauses in a signed agreement to avoid disputes and to set the interest at a reasonable rate. Conversely, recipients should promptly object in writing if they disagree with the interest terms.

Author: Patrick Tan, Partner the firm

patrick@tnhlaw.com.my

Disclaimer:

This article is intended for informational purposes only and does not constitute legal advice. Every situation is unique, and specific legal advice should be sought based on the particular circumstances. Readers are encouraged to contact us at Tang Hong & Lock if they require legal advice or have any questions regarding the content of this article.