Interested in Interest: Can I Make Money on Not Getting Paid?

Faegre Baker Daniels partner Brian Clifford authored the following article for the Control System Integrators Association in February 2014.

First, it was great meeting many of you in San Diego at the CSIA Executive Conference! Thank you for your warm reception, and I hope you enjoyed Mark Voigtmann and my performance of The Negotiation (with Jokes). Since we haven’t heard from Broadway yet, I am back this month with another CSIA newsletter legal update.

One provision that I am frequently asked about in control system integration agreements is the “interest clause.” These clauses generally provide the applicable interest rate for delinquent payments — either “upstream,” with respect to an integrator’s payment for work performed and deliverables provided, or “downstream” with respect to amounts owed to suppliers, subcontractors or other vendors. I generally respond to such questions by suggesting a few possible options:

Say Nothing: Despite the rumors, attorneys aren’t usually paid by the word — and sometimes saying nothing is your best option, especially on terms that may cause a difficult negotiation to become even more difficult or when proposing new terms will slow down a fast-moving deal. For example, each U.S. state has one or more “default” interest rates that may apply to amounts past-due on a contract when the parties have not specified a rate in the agreement itself (or in an “incorporated” document, such as an invoice or purchase order, when applicable). The rates vary widely, but generally fall between 5 percent and 12 percent simple interest. Such “default” rates may be sufficient depending on the financing arrangements for the particular deal.

State a Market Rate: In international transactions (where there are mixed opinions on the correct interest rate under applicable international conventions and treaties) or in deals where a stated interest rate is desirable, it is common to state a rate tied to moving average interest rates. For example, many agreements call-out interest at “The Wall Street Journal Prime Rate, plus 2.00%,” or “Libor plus 100 basis points.”

State a Coercive Rate: If you are worried about late (or improperly withheld) payments from the other party to your contract, you may want to “encourage” payment by attaching a high interest rate to such delinquent amounts. By increasing the stated rate, or by increasing the frequency that the interest calculation compounds, you can gain leverage for use in a dispute. If you have looked at the fine print on your credit card disclosures with respect to the interest calculations in the event of a default, you can see how interest can greatly increase the amount due to you after a missed payment deadline. However, be wary — many states and countries have maximum interest rates that apply in a variety of circumstances, especially if you are providing goods or services to consumers rather than business-to-business transactions.