Some years ago, Elsie entered into a contract with Company A. In the contract, Company A agreed to supervise a financial investment Elsie had with another company, Company B. Company A also agreed to act as a property manager for Elsie’s property from time to time, paying mortgage payments and other expenses on her behalf.
In return, Elsie agreed to pay an initial fee, plus annual management fees of $2,000 per year. The annual management fees did not have to be paid until Elsie sold the property or died.
Some years later, Elsie withdrew her investment directly from Company B, without reference to Company A. Company A considered this to have the effect of terminating the contract.
Company A invoiced Elsie for just under $16,000, being the annual management fees (including a proportional amount for the final part year) plus GST, and advised she had five days to pay in full. Company A included the following wording in the invoice:
“Overdue amounts will be charged interest at 24% per annum. All collection costs will be charged to account.”
Company A registered a caveat against Elsie’s property to secure payment of its invoice.
Five years later, Elsie sold her property and sought to remove Company A’s caveat. By this time, Company A had calculated that Elsie owed it just over $51,000, being the annual management fees, GST, and compound interest.
Elsie agreed to pay the annual management fees from the sale proceeds of her property. Elsie also initially paid some of the interest Company A said was due. She did so because her lawyer at first thought that the 24% interest rate was a contractual term. But she later disputed the interest components.
By agreement, Elsie and Company A referred the dispute to FSCL.
Company A’s view
Company A considered that because Elsie had initially paid some of the interest charged by Company A, she had gone along with (and agreed to) this rate of interest.
We reviewed the contract between Elsie and Company A. We noted that the contract did not provide for interest on late payment of annual management fees. This may be because, at the time the contract was drafted, it was only contemplated that fees would become due upon the sale of the property or the death of the property owner, rather than upon early termination of Company A’s services by Elsie. However, the law does not permit interest to be charged if it has not been provided for in the contract.
We assisted Elsie and Company A to reach an agreed settlement of the dispute between them. They agreed it would be a fair outcome for Elsie to pay simple interest at 5% per annum (the statutory rate applicable at the time of invoice). We considered this was fair because of the length of time that had passed since Company A issued its invoice, and also because of the complicating factor that Elsie had initially paid some interest. This meant that Elsie paid approximately $22,000 less interest than Company A had originally claimed from her.
Key insight for participant
If a company wishes to charge interest for late payment of an invoice for services, it should make that clear to the customer before the customer enters into a contract for the services.