There are few things more galling than knowing that your opponent is getting free use of the money s/he owes you. So how do you change that? When can you charge interest, and how much can you charge?
Generally speaking, Pennsylvania law provides that in the absence of an agreement to the contrary, liquidated demands bear interest, while unliquidated demands do not. A sum is “liquidated” when the amount is fixed or certain, such as a specific contract price where there is no genuine dispute as to whether that full contract price is due. A claim is “unliquidated” where the amount due, if any, is uncertain, such as where both parties have claims and counterclaims or offsets, or where a claim is grounded in negligence or other tort, where the amount ultimately owed is indeterminate until the claim is either settled or decided by a court.
In a nutshell then, a claim for an undisputed contract price generally bears interest. A claim for an uncertain sum typically does not bear interest.
To be precise, however, the law does not speak in terms of liquidated “claims.” It speaks in terms of liquidated “demands.” The reason for this is that the interest clock does not start running until the creditor has made a demand for the specific amount due, either by an invoice specifying a due date, or by some other request for payment of the liquidated sum. Thus, if an invoice specifies that payment is due within 30 days, then in the absence of a contrary agreement, interest starts running at the end of that 30 days. If an amount is due under a promissory note that does not contain an interest term, then in the absence of a contrary agreement, interest will generally be due from the date that the lender calls the note or demands to be repaid.
Once it is determined that interest is owing, the next question is: how much?
By statute, the legal rate of interest in Pennsylvania, in the absence of an express contract term calling for a different rate, is six percent per year. While the legal interest rate of six percent currently exceeds (by a lot) the interest offered by most banks over the past few years, the prospect of paying six percent interest on past due obligations still pales by comparison to the interest charged on most lines of credit and credit cards. As a result, the prospect of having to pay legal interest may not be enough to persuade your debtor to pay his or her, particularly where its cost of credit on other obligations is much higher.
This is, in part, why many businesses include on their invoices terms to the effect that all amounts not paid within 30 days shall be subject to a finance charge equal to 1% or 1½ % per month, equating to interest of 12% or 18% per year, respectively. And this is significant because these higher rates of interest provide debtors with a more meaningful incentive to pay off their obligations.
Under Pennsylvania law, six percent per year is the maximum lawful interest on many non-business obligations. However, on business loans, finance charges of 1% or 1½% per month are not prohibited by law. So there is nothing unlawful about charging 12% or even 18% interest on past due obligations between businesses.
But what if the contract or the exchange of purchase order and confirmation say nothing about interest?
Even if the original contract contains no reference to a finance charge, a finance charge of 1% per month or 1½% per month can be effectively imposed after the fact by invoices providing for such finance charges on any bill more than 30 days past due. In other words, when the original contract or the original exchange of purchase order and confirmation is silent on the questions of interest, interest can be tacked onto the contract by an invoice issued after the fact. In effect, this means that if the debtor does not pay the invoice by its due date, that debtor is deemed to have accepted the interest terms included in that invoice.
At the very least, even if a creditor has no intention of charging the debtor with more than the six percent legal rate of interest, the creditor will want to send the debtor some written demand for a liquidated sum before filing suit in order to preserve the option of collecting interest on the claim and thereby provide the debtor with at least some small incentive to pay what is owed.