Late payment interest clause: setting a rate that holds

Sample clause

a retainer between Kestrel Digital, a five person agency in Newcastle, and a regional equipment hire company that pays its suppliers slowly

9. Late payment 9.1 If an amount payable under this Agreement is not paid by its due date, the Client must pay interest on the unpaid amount at the rate of eight per cent (8%) per annum. 9.2 Interest accrues daily from the day after the due date until the amount is paid in full, and is calculated on the unpaid amount only. Interest does not compound. 9.3 Interest under clause 9.1 does not accrue on an amount the Client has disputed in writing under clause 5.4 while the dispute is being resolved in good faith, and accrues from the original due date if the dispute is resolved in favour of Kestrel Digital. 9.4 Kestrel Digital may recover its reasonable costs of collecting an overdue amount, including fees charged by a collection agent. 9.5 Interest is payable without the need for a demand and is not a fee for the extension of credit.

Sample wording, not legal advice.

Variants

What to negotiate

• The rate itself

  Suppliers ask for a headline number that stings, often eight to twelve per cent. Customers push it toward the cost of short term borrowing. The common settlement is a benchmark plus a margin, which both sides can defend in three years, rather than a fixed figure chosen because it looked firm on the day.

• Grace days before accrual

  Customers with a monthly payment run ask for seven grace days so an ordinary cycle never triggers interest. Suppliers accept a short grace period if accrual then runs from the original due date rather than the end of the grace period, which stops the grace days becoming a free extension of the term.

• Compounding and recovery costs

  Compounding turns a modest rate into a large number over a long default and is usually resisted. Recovery costs are the opposite: customers rarely fight a clause that lets a supplier recover a collection agent fee, because a paying customer never triggers it. Simple interest with recovery costs is the usual landing point.

The risk of leaving it out

With no interest clause, an Australian supplier is left arguing for damages or statutory interest from the date proceedings begin, which is a much later date than the due date and a much harder conversation than pointing at a number in the contract. The practical effect is that slow paying customers are financed at zero per cent, and the supplier's own overdraft covers the gap.

Whether the rate is enforceable

An interest rate that genuinely compensates for late money is a legitimate contractual term. A rate set far above any plausible cost of funds starts to look like a punishment for breach rather than compensation, which is where the penalty doctrine becomes relevant, and in a standard form small business contract it can also be attacked as an unfair term. Two things keep a rate defensible. It is tied to something observable, and it is close to a rate a court would recognise as commercial.

Common mistakes

The rate is stated per month in one clause and per annum in another, so nobody knows which governs. Interest accrues on the whole invoice while part of it is legitimately disputed, which gives the customer a reason to dispute more. The clause charges interest and a flat fee and collection costs for the same delay, stacking three remedies for one breach. And the accrual start date is left as after the due date, which is one day of argument on every invoice.

Where it sits in a generated document

Late payment normally follows the payment clause so the due date it refers to is already defined. In a generated agreement the interest wording arrives as its own numbered clause with sub numbers for the rate, the accrual and the disputed amount carve out, which matters because a reminder letter will quote the number. The AI chat panel can rewrite the text of that clause, and only its text, so a rate change is an edit rather than a rebuild.

Documents that carry this clause

Tax invoice template with GST, terms and a due dateLantern Creative bills Meridian Property Partners $19,437 for six branding and website lines. Both ABNs are printed, the buyer’s purchase order PO-8842 is quoted, and the due date is 14 days after issue. Everything an accounts payable team checks before paying sits in one block above the table, and the bank details sit under it.Overdue payment noticeA plumbing business is owed $4,763 across three invoices, the oldest sixty six days past due. This is the last letter before the debt leaves the business, and it is written to be acted on rather than to sound threatening.Letter of demand template that can go straight to the tribunalA letter of demand is the last letter that is not a court form, and it works because it is specific: what is owed, for what, since when, and what happens on day fifteen. This one itemises two invoices, lists the reminders already sent, gives fourteen days and names the court and the amounts that will be claimed.Bookkeeping services agreement with a monthly scope tableBookkeeping goes wrong when nobody wrote down which tasks are monthly, which are weekly, and who has to hand over what before a statement can be lodged. This agreement settles all three in a scope table and a lodgement calendar, then prices the whole year so the cafe can see what it is committing to.

Questions people ask