Legal Question in Credit and Debt Law in California
Is the a cap on late payment penalties
We are a National distributor of a countertop material with sub distributors throughout the U.S. When they order material we give them 30 days to pay for it after receipt of goods..
Unfortunately 80%of our customers are paying late..some very late.. In our agreements with them we set the traditional interest accrued at 1 and 1/2 % per month like you would see on a credit card.
My question is once we know someone is a slow pay I would like to set up an agreement with them that on all future orders it are either guaranteed with letter of credit or they sign a agreement where because they have paid late in the past they promise from here on to pay on time and if they don;t they agree to pay a daily late fee penalty of $100 each day past due.
It's not that they don't pay it's that we have to pester them to get them to pay and they are always late. With a simple $100 a day clicking away it would get them a little more motivated to pay on time.
IIs it legal to do this?
2 Answers from Attorneys
Re: Is the a cap on late payment penalties
There is no cap on late payment penalties per se. That having been said, courts are not fond of penalty clauses and, if they feel that a clause is unreasonable, will try to find a way not to enforce it. Remember, the $100 a day (much like the monthly interest charges) only means anything if you're willing to go to court to collect it. That may be more expensive than it's worth. A debtor who is taking advantage of you knows this.
Your letter of credit idea is I think far more practical. Why not also consider putting late pays on a COD basis or prepayment? After all, it's really up to them to have the money to pay you for your goods.
You may also want to screen your subdistributors up front to determine if they are late pays with everyone else. Getting a D&B account should help here, as well as requiring that subdistributors also mainatain a D&B account. This is a standard business practice that should not be a surprise.
I'd be happy to discuss these issues with you further if you wish. Please call or email me.
Re: Is the a cap on late payment penalties
Attorney Gee is right. But what troubles me is, you are an established national distributor and you have to go to LawGuru with your question? Sounds like you need to have a lawyer on your team, someone that you know and whom you can call when a problem arises.
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