Interest Rates in Contracts

What interest rate to put in your contracts is not straight forward. You may feel the higher the better, after all if someone is late paying you surely the higher you put it the more you’ll get.

This is true to a point however you need to consider how this will affect your future dealings with the other party.

Also of note is that you do not wish to make the clause a penalty clause, a recent Court of Appeal case has shed some light on to what interest rates are acceptable. Taiwan Scott were importers of golf clubs and had a contract with Masters Golf Company, under the agreement an interest rate of 15% is due on late payments.

“One forgets, in these recessionary days, that interest rates were considerably higher in 2001 than they are now. It does not seem to me that a contractual rate of 15% was in any way exorbitant in July 2001.” At the time the interest rate was 5.25% once the statutory rate of 8% is added this would be 13.25% which is not far of the 15% in the agreement.

“It was a rate agreed by two commercial concerns in the economic circumstances of the time and it should not lightly be set aside. In this respect, I disagree with the judge. For my part, I would award interest at the rate of 15%”.

This seems to suggest that the court are susceptible to higher than expected rates, however one would be wise not to exceed the statutory rate of 8% despite the recent ruling, and bearing in mind customer relations I would suggest a rate of up to 5% above the base rate. It is advisable to award fixed rates and instead make them variable depending on the base rate, otherwise you risk the clause being deemed as a penalty clause.

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