Are penalty fees legal?

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Is it legal to charge late payment, penalty or cancellation fees?

With all the Corona and COVID issues at the moment, there’s so many order cancellations, late payments, and customers defaulting on invoicing at the moment – it seems timely to discuss the legalities of charging non-payment, late payment, penalty or early cancellation fees. So how can you charge penalty fees legally?

Please note that this is this is general advice only.

Example 1

You are a gym, offering 12 months membership (on contract) for a fixed price, paid in monthly installments.  A customer has not paid their monthly subscription/ membership, or is asking to cancel their membership early.
Sure you can revoke their access to your facility, but is it legal to charge them an early cancellation or penalty fee?  Or to even include an early cancellation clause in your contract?

What if they agree to pay a monthly membership or subscription, but then stop paying?  Can you charge them a non-payment or penalty fee? Can you charge them the remainder of the contract amount?

Answer:

A breach of a contract does not automatically bring a contract to an end (unless the contract expressly states this). So if your customer breaches their contract by ceasing payment, then you should notify them that you are terminating their contract before you revoke access to your facilities.

Some contracts specify what will be payable if there is a breach by one party of a particular contractual obligation (such as cancellation or penalty fee). For this to be enforceable through court, the sum needs to be an accurate reflection of the cost of damages incurred.  If the amount seems artificially high or unreasonably overinflated, it’s unlikely to be enforced.

Example 2

You are a product business, invoicing for payment. You give a due date, but add a 10% late fee, or charge interest on the overdue amount.

 

Answer:

For small businesses, it is legal to charge a late payment fee or interest, provided the charges are fair and reasonable.  AND the provision to charge a fee/ overdue interest MUST be detailed in the Terms and Conditions that the client agreed to before the goods and services were provided.
If it is not included in the terms of the contract, you cannot impose a charge after doing the work or issuing the invoice. The interest cannot be too high and you must make sure that the due dates are clear on your invoice, and late payments included in your terms.
Large corporations (such as banks) employ this method of late or penalty fees.  They may come under scrutiny as it is questionable whether their imposition is fair and reasonable and represents a claim for real loss or damage.

All of these terms and conditions can be included into your client agreement and customised for your business to make sure you’re covered.  If you’re having difficulty with non-payment from clients, then perhaps it’s time to get serious, and contact me for a chat.

XX Shalini

Disclaimer: This blog is written to support business owners to consider legal requirements and issues that may arise in business. The information provided is for general and educational purposes only. It is not intended as legal advice for your individual circumstances. Please consult your lawyer for advice specific to you and your business.

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