Thursday, July 23, 2009
May I contractually charge a 10% late charge per month?
The California Supreme Court has ruled that late charges are not subject to the usury laws, because they are not interest for the loan of money; however, the Court did not state what limits might apply. There is still uncertainty regarding the rules that apply to these charges.
Late charges of 1.5% per month on unpaid invoices appear to be proper and enforceable at this point. Late charges in the amount shown in your case (especially the "10% each month" part) might very well be subject to attack under Civil Code 1671, which states that a provision in a contract liquidating the damages for the breach of the contract (late charges) is valid unless the party seeking to invalidate the provision establishes that the provision was unreasonable under the circumstances existing at the time the contract was made.
An exception to the above applies to real property rental agreements and retail purchases or rentals personal property or services, primarily for the party's personal, family, or household purposes, where the liquidated damages (late charges) must be the amount of damage actually sustained by a breach thereof or a negotiated presumed amount, when, from the nature of the case, it would be impracticable or extremely difficult to fix the actual damage. No bright lines here.
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