Thanks for asking!
Invoice late fees in California are a somewhat cloudy issue, as the
excerpts below will illustrate. When in doubt, you should consult a
legal professional with a thorough grounding in California contract
and business law. I've located two sources of information which
explain current California legal doctrine at the business person's
level, plus provide bibliographical references to actual case law,
should you be inclined to personally pursue the search further at that
level.
Barker Walters is a Business, Corporate, and Real Estate Law practice
located in San Diego, California. They offer an online FAQ which
addresses the question of maximum late fees, adding this cautionary
note: "All information is offered as general information. It is not
intended as legal advice applicable to any specific situation and
should not be taken as such."
Barker Walters Frequently Asked Questions:
Q. "Our company sells construction materials. We require all
customers to sign a credit application that includes a service charge
provision. What is the maximum amount of service charges that we can
charge for past-due invoices?"
A. "Unfortunately for materialsmen, there is no clear answer to this
question. Two legal principles affect this issue. First,
California's usury laws cap the interest rate on any loan at 10% per
annum. However, it has been consistently held that a sale of goods to
a buyer on credit is not a loan, and therefore such a sale is not
subject to California's usury laws. While this is the current state
of the law, there is always the possibility that this may change such
that a materialsman may not assert anything more than 10% interest.
Second, under California law, the amount of service charges charged by
a creditor must be reasonably related to the actual damages suffered
by the creditor. California courts have recognized that accounting
and collection expenses are actual damages suffered by a creditor when
a customer does not timely pay its invoices. On that basis,
California courts have consistently upheld service charge, also known
as delinquency charges, late fees, and finance charges, provisions as
high as 18% per annum (or 1.5% per month) when the creditor could show
that non-payment by the customer created administrative costs for the
creditor. While it would be inaccurate to say that any creditor would
be allowed to charge 18% per annum, most creditors probably would be
capable of persuading a court that their administrative costs
resulting from non-payment of invoices justify an 18% per annum
service charge. Any amount greater than 18% would be more likely to
be disallowed by a court.
Within the context of a collection lawsuit, a debtor may argue that a
service charge provision is unenforceable as a liquidated damages
provision that is not reasonably related to the actual damages that a
creditor would suffer as the result of non-payment (or late payment).
Should a court ever rule in favor of the debtor and hold that the rate
of service charges asserted by a creditor is too high, the court would
then hold the service charge provision unenforceable, but may still
award the creditor 10% interest on the amount owed. California Civil
Code § 3289 allows any party prevailing at trial on a contract dispute
to recover 10% interest on the amount owed under the contract from the
date of the breach of the contract through the date judgment is
entered.
In summary, a materials supplier should consider including a service
charge provision in its credit application allowing for service
charges of greater than 10% to be charged. It appears right now that
most courts in California are more likely than not to allow service
charges at 18% per annum. However, there is no set rule-a 12%
provision may be disallowed, and a 24% provision may be allowed. The
standard applied by the courts involves an analysis of the actual
damages that might be suffered by a creditor if a customer fails to
pay an invoice, and a comparison of those actual damages to the amount
that would be recovered by the creditor as service charges."
Barker Walters FAQ
http://www.barkerwalters.com/articles/faqs.html
An article published by the Los Angeles County Bar Association also
touches upon the maximum allowable late fees within the state.
"The time-price doctrine applies when a seller makes a bona fide
credit sale for which payments are extended over time. Then usury laws
do not apply because there is no loan or forbearance involved. The
time-price doctrine also applies to interest charges imposed when a
buyer fails to pay off an account within a specified period of time.
In 1927 the California Supreme Court noted that in such cases, the
owner of the property or commodity may "sell at a designated price for
cash or at a much higher price on credit, and a credit sale will not
constitute usury however great the difference between the two prices."
However, in assessing the validity of such transactions, courts look
to their substance and not their form, and rarely hesitate to strike
down transactions that appear to be structured by the seller primarily
for the purpose of lending money at a usurious rate.
The California Supreme Court recently extended the scope of the
time-price doctrine by holding that it applies even to a credit-sale
debt-restructuring settlement, in which the purchaser agreed to extend
the time for payment of the debt in exchange for an increase in the
interest rate and an additional $100,000 fee. Although at some level
the credit restructuring would appear to be a forbearance to which the
usury laws would apply, the court held that since the original
transaction was a bona fide credit sale, any subsequent modification
to that transaction was also exempt.
Even though interest rate limitations do not apply in the realm of
credit sales, these sales are frequently governed by other statutes.
For example, the Unruh Act applies to the financing of retail
installment sales contracts relating to consumer goods, that is,
contracts in which a buyer agrees to pay a service charge in return
for paying for consumer goods and services in installments. The
Automobile Sales Finance Act regulates the maximum finance charges
that automobile sellers may charge, although third-party financing
arranged by the automobile seller is not subject to the act."
See the full text of the article for the entire discussion of
California's usury law.
Los Angeles County Bar Association
Taking Interest - By Gary L. Dickson and Jonathan M. Jenkins
http://www.lacba.org/showpage.cfm?pageid=749
Google search terms:
california "business contracts" late fees maximum
california invoice late fees "legal maximum"
Should you have any questions about this material, please feel free to
ask.
- larre - |
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