Delayed Payment Penalties:

Question:When is a late fee on a debt contract illegal in Ontario and Canada?

Answer:A late fee may be illegal if it functions as disguised interest that pushes the effective annual charge beyond the legal maximum under Criminal Code, R.S.C. 1985, c. C-46, s. 347, and courts can treat “late fees” as interest because it’s really the cost of extending credit on an overdue balance.  For example, a flat $10 late fee on a $100 payment that is only a week overdue can translate into a very high annual interest rate and be unenforceable when first imposed.  Garland v. Consumers’ Gas Co., [1998] 3 S.C.R. 112 confirms that overly high interest terms are unlawful, and courts may also uphold a contract’s clause only if a severability term and the facts support splitting lawful from unlawful parts.  There is also a limited exception if the charge genuinely correlates to actual disbursement costs for collecting the debt rather than marking up the debt itself, as described in De Wolf v. Bell ExpressVu Inc., 2009 ONCA 644.  If you’re dealing with an allegedly unlawful late fee or contract penalty, Vescio Legal Services (paralegal debt and repayment assistance) can review your contract and numbers quickly, call (416) 400-8255.

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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 Vescio Legal Services by phone at: (416) 400-8255 to discuss any specific questions that you may have.

Although a business may try to disguise interest by labeling an interest charge as a late fee, courts will carefully review whether the late fee is indeed an interest charge as additional monies due from the providing of credit on the balance overdue.  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 a business that imposes 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.