Late Payment Fees

Question:

My contract says that I will be charged $15 per day for each day my payment is late. Is that allowed? Can I refuse to pay that late fee?

Answer:

The law permits a contracting party to assess liquidated damages in the event actual damages would be impracticable or extremely difficult to assess. Meaning, if it would be hard to calculate the exact damage caused by payment being a few days late, a set amount in your contract may be permissible. 

In certain consumer cases (like a contract for personal, family, or household purposes – think, rent or cable or food purchases) liquidated damages are rarely allowed and strictly interpreted. So, if you have a late fee on a rental agreement, for example, that will be more strictly interpreted by a court.

Otherwise, “a provision in a contract liquidating the damages for the breach of the contract 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.” Civ. Code §1671(b).

A straight penalty, on the other hand, is arbitrary and not allowed. A penalty is punitive in nature. It is meant to punish a contracting employee for default. It has no (or little) relation to the actual damages suffered by the non-breaching party. Penalties are not allowed. A court will often look to the intent of the penalty to determine whether it is a permissible liquidated damages assessment or an impermissible penalty. Note: that the word “penalty” is or is not used in the contract is largely irrelevant. The court will look beyond the terminology.

Even if a penalty is deemed void by the court, though, you will still be responsible to pay any damages related to a breach of contract. So, if you do not make a payment and are sued for breach of contract, the other side will likely be able to collect that missed payment plus damages sustained as a result of the breach (interest, costs, and – depending on the terms of your contract – possibly attorneys’ fees).

The best bet is to always pay your contractual obligations on time. If you’ve missed a payment, it is a risk assessment on your part whether you want to pay or refuse to pay the late fee. If you do not, you could be deemed in breach of your contract.