Delayed Payment Penalties:

Question:When are late fees considered an illegal penalty for overdue invoices in Ontario?

Answer:Late fees can be an illegal penalty in Ontario when they effectively operate like interest on credit, especially if the contract structure makes the charge appear to impose an interest rate over the 60% per annum threshold under the Criminal Code, R.S.C. 1985, c. C-46, s. 347, or if the “late fee” is really a disguised interest charge rather than reimbursement of actual disbursement costs tied to collection.  Courts look at how the charge is calculated and what it functionally does, even if the dollar amount is small at the start, and a severability clause may preserve the rest of the agreement without necessarily curing an unlawful late-fee trigger.  If you’re dealing with an invoice or contract late-fee clause that may be unenforceable, White Owl Legal can review your wording and payment history and help you take the next step, call (289) 839-3075.

Add this website to Google Preferred Sources

When Is a Late Fee An Illegal Penalty

Business owners often attempt to encourage prompt payment by imposing delayed payment penalties (late fees) upon those who fail to pay on time.  Unfortunately, contracts may be deemed unlawful and therefore unenforceable when the contract is written in such a way as to impose, or appear to impose, an improper late fee.  Commonly, the late fee calculates to an amount that violates the Criminal Code, R.S.C. 1985, c. C-46, section 347, whereas charging an interest rate beyond sixty (60%) percent per annum is deemed a criminal offence.  A contract prescribing an interest rate that exceeds the sixty (60%) percent is an illegal contract; Garland v. Consumers' Gas Co., [1998] 3 S.C.R. 112; albeit, if the contract contains a severability clause, then such a clause may preserve the complete contract from becoming void.

Note: Please contact White Owl Legal by phone at: (289) 839-3075 to discuss any specific questions that you may have.

While a business may attempt to disguise interest as a late fee, courts will view a late fee for what a late fee is - an interest charged as an additional amount of money due, and arising from, the extension of credit for an outstanding balance of monies owed.  An exception applies if it is shown that the late fee genuinely correlates to the recovery of a disbursement cost incurred in the collection of the debt rather than as an additional fee correlated to the further advancement of the debt; De Wolf v. Bell ExpressVu Inc., 2009 ONCA 644; Garland, supra.

As an example, consider the business that charges a ten 00/00 ($10.00) dollar late fee when a monthly payment of one hundred 00/00 ($100.00) is overdue by seven (7) days.  This late fee actually calculates as a ten (10%) percent additional charge upon the actual amount due.  This ten (10%) percent late fee imposed upon a one week overdue account produces an exorbitant, and unlawful, five hundred twenty (520%) percent annual interest rate.  Note that the fact that this interest appears lower, and actually does calculate lower, over a greater period of time, it is the trigger date that causes the unlawfulness.  While the $10.00 late fee charged on the 7th day is unlawful, it might appear that if six months later the same $10.00 is still outstanding that the amount, by then, is a lawful twenty (20%) percent interest; however, the very fact that the amount was unlawful when originally imposed continues to make the amount unlawful.  What was at first unlawful fails to become lawful.

Conclusion

When an agreement contains a clause for late fees or other form of delayed payment penalty, such is viewed as an attempt to charge interest on monies due.  Where the late fees, as a disguised interest, calculate to an interest rate beyond the legally allowable interest rate, the late fees are viewed as unlawful.  Furthermore, even if the interest rate may be legal, late fees or a payment penalty that goes beyond the costs of recovering the genuine amount due are, generally, deemed unenforceable.