Say that someone owes you money, and pays late.

Can you charge interest, and terminate the contract? Or are you only allowed either of those options?

This article explores that legal concept: of late payment interest in the context of your right to terminate a contract.

Termination versus late payment

Most modern contracts contain termination clauses, as well as late payment clauses.

What is the difference? Generally speaking:

1. A termination clause enables an innocent party to terminate the contract, if there is default or breach.

2. In contrast, a late payment clause usually entitles an innocent party to claim for late payment interest.

The commercial reality

In modern reality, the distinction above often leads to two questions:

1. Can an innocent party insist on terminating the contract, after imposing late payment interest?

2. Can an innocent party still terminate the contract, even after accepting late payment interest?

The legal authorities seem to answer ‘yes’ to both the above.

Late payment is a separate issue from termination

See first the case of Sparrows and Arrows Sdn Bhd & Others v Pembangunan Cipta Sarana Sdn Bhd [2002] MLJU 496. The plaintiffs here entered into five sales and purchase agreements (SPAs) to purchase five units of shop lots from the defendant.

It was agreed, amongst others, that:

• the purchase prices would be paid by instalments in accordance with the terms of the SPAs;

• late payment interests would be imposed on the unpaid instalments after the expiration of the due dates; and

• the defendant was entitled to terminate the SPAs if the purchasers fail to pay the said instalments punctually, or if late payment interests were incurred.

The plaintiffs then failed to pay promptly. They claimed that the defendant could not (‘was estopped’) terminate the SPAs, because they had imposed late payment interests instead. The High Court dismissed the plaintiffs’ claims - the learned judge held that the defendant could still terminate the SPAs, although late payment charges had been imposed.

“…Pada pendapat saya defendan mempunyai pilihan untuk mengenakan faedah kepada pembayaran yang masih tertunggak mengikut budibicaranya (klausa 8) ataupun memberikan notis penamatan dan seterusnya menamatkan perjanjian (klausa 9). … defendan pada awalnya tidak menggunakan pilihan di bawah klausa 9 … Ini memberi peluang dan masa kepada plaintif untuk mendapatkan sumber kewangan untuk membuat pembayaran. Sungguhpun plaintif diberi peluang sedemikian, plaintif tidak berikhtiar untuk mencari jalan untuk membuat pembayaran kecuali sebanyak 10% sahaja lagi. … Pada pendapat saya defendan berhak memberi notis penamatan dan menamatkan perjanjian di atas kemungkiran plaintif membuat pembayaran mengikut notis tuntutan.”

See another instance - the High Court case of Sutures (M) Sdn Bhd v Worldwide Holdings Bhd & Ors [2015] 8 MLJ 659.

In this case, the plaintiff entered into a contract with a German company (one of the defendants) to sell halal surgical sutures to Muslim communities in Southeast Asia. The contract in that case:

1. required the plaintiff to issue a letter of credit from any bank in Malaysia to the company’s bank in Germany by a given deadline;

2. contained a late payment and a late cancellation clause.

The German company terminated the contract when the plaintiff failed to issue the letter of credit promptly. Disputing this, the Plaintiff brought the matter to court. The High Court held:

“…I am however unable to accept the further argument of the plaintiff that the third defendant by its letter dated 14 September 2009 wrongfully cancelled the contract … It is in my view a right in addition but not in abrogation of the third defendant’s right to terminate the contract.”

Exploring the position

The above cases posit that an innocent party’s right to claim late payment interest adds to, and does not take away, from one’s right to terminate the contract.

Commercially, this makes sense.

Sometimes late payment charges are warranted – merchants and sellers may want to give time in good faith, or try to to preserve the business relationship. But doing so should not stop him at law from terminating the contract outright; similarly, he should not be made to resort to termination when sometimes charges for late payment is the better option.

Note however that, as it always is in law, it all depends on the terms of your particular contract.