Quick Tip #7: Beware when a contract is silent on interest
It’s important for parties to a contract negotiation to consider the interest rate that will apply to late payments. This is because if a contract is silent on the interest rate applicable to any late payments, then the statutory position will apply. For example, in England, the Late Payment of Commercial Debts (Interest) Act 1998 prescribes a default interest rate of 8% a year. But when a contract governed by English law has an express interest clause, it is only effective if it provides a ‘substantial’ remedy for late payment. And the substantial remedy, in turn, must be fair and reasonable, and must either deter late payment or give sufficient compensation for it.
The interest rate stipulated in the contract (as the substantial remedy) need not match the rate available under the Late Payment of Commercial Debts (Interest) Act 1998 to be considered fair and reasonable. However, if it is too high or too low, it could be rendered invalid, in which case the rate under the Late Payment of Commercial Debts (Interest) Act 1998 would apply. In South African law, interest is only payable if this has been expressly agreed in the contract, or pursuant to a judgment. If the accrual of interest has been agreed (either expressly or implicitly) but the rate has not been agreed, then the Prescribed Rate of Interest Act 1998 prescribes a default interest rate of the REPO rate plus 3.5% per year.