Late Payment Interest in Malaysia: Guidelines for Invoicing

As a business owner, ensuring timely payment for your products or services is crucial to maintaining cash flow. One way to encourage prompt payment is by including an interest clause for late payments in your invoices. But how much interest can you legally impose? Here’s what you need to know, backed by relevant case law.

The General Rule: Freedom of Contract

In Malaysia, the courts generally uphold the principle of freedom of contract. This means that if both parties have agreed to a late payment interest rate—such as 18% per annum—and it is clearly stated in the contract or invoice terms, it is likely to be enforceable. However, the rate must not be excessive or unconscionable.

Case Reference: In Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors [2008] 5 MLJ 631, the court emphasized that contractual terms, including interest rates, should be honored unless they are deemed oppressive or contrary to public policy.

Why 18% p.a. is Common

An 18% annual interest rate translates to 1.5% per month, which is widely considered reasonable in business practices. Generally speaking, it is a reasonable "arms length" market rate interest rate for unsecured debt. This rate is a reasonable percentage to offset the opportunity cost of late payments and to deter clients from delaying their obligations.

Practical Considerations

1. Clearly State the Terms: Ensure that the interest rate is explicitly mentioned in your invoices and any related agreements. For example, include a clause like: *"Late payments will incur interest at 1.5% per month (18% per annum) from the due date until full settlement."

2. Communicate Upfront: Make sure your clients are aware of these terms before providing your product or service. This can prevent disputes later on. Ideally, insert this clause into a document that is countersigned by your client; e.g. in a Quotation or Service/Sale Agreement.

3. Avoid Excessive Rates: While 18% is generally enforceable, imposing excessively high rates beyond that may be challenged as unconscionable.
   

Case Reference:In Chartered Electronics Industries Pte Ltd v Comsa Properties Sdn Bhd [1998] 4 MLJ 529, the court refused to enforce an exorbitant interest rate, ruling that it was punitive and contrary to public policy.

Legal Recourse Under CIPAA

For contractors and suppliers in the construction industry, the Construction Industry Payment and Adjudication Act 2012 (CIPAA) allows you to claim late payment interest. Under Section 25 of CIPAA, the default interest rate is calculated at the prevailing Bank Negara Malaysia rate, unless a higher rate has been agreed upon in the contract.

Key Takeaway

An 18% late payment interest rate is generally enforceable in Malaysia, provided it is clearly documented and agreed upon. To safeguard your rights:

• Include the interest clause in your invoices and contracts.

• Ensure the rate is reasonable and not excessive.

• Seek legal advice if you face disputes over late payment interest.
  

Proactively managing payment terms can help you maintain healthy cash flow and reduce the risk of bad debts. If in doubt, consult a legal professional to ensure your terms are compliant and enforceable.

AUTHOR PROFILE

Rudi Cheu is the principal of Rule & Co. Advocates & Solicitors; a Malaysian law firm focusing on practical and cost-effective solutions for debt recovery and commercial disputes. With nearly a decade of debt recovery experience under his belt; Rudi is passionate about helping businesses navigate debt recovery challenges and shares insights at www.rulecolaw.com/blog.

He can be reached via Whatsapp: +60102028095 or via email: rudi.cheu.law@gmail.com