Legality of late payment charges under Malaysian law
Updated: Mar 24, 2023
It is common to find that vendors' documents, such as invoices and purchase orders, contain a late payment interest clause, which is often a simple one-liner. The interest rate ranges from 1% to 2% per month, which equals 12% to 24% per annum when calculated. This rate is even higher than the interest rate charged by licensed financial institutions for credit facilities. The validity of this clause and the reasonableness of the rate imposed are questionable.
However, several court cases have shown a willingness to allow late payment interest clauses and the rates imposed, even if they are as high as 24% per annum. In cases such as Tansa Enterprise Sdn Bhd v. Temenang Engineering Sdn Bhd  2 MLJ 353 and Enco Systems Sdn Bhd v. Soon Hin Hardware Sdn Bhd  9 MLJ 535, the courts held that the defendants had full knowledge of the interest as stated in the invoice and did not object to it. Moreover, in the case of Pos Logistics Bhd. v Kumpulan Perubatan Smarthealth Sdn. Bhd.  MLJU 981, the court allowed the late payment interest of 2% per month on the outstanding sum, as stated in the delivery orders, due to the fact that the defendants did not protest and inform the plaintiff of their objection as expeditious as possible.
However, in the case of BHS Book Printing Sdn Bhd v Penerbitan IMT Sdn Bhd  MLJU 1880, the court exercised its discretion and ordered the interest rate to be reduced from 12% per annum to 5% per annum. The court stated, amongst others, that:
- vendors could only claim interest on the price of goods sold if the contract provided for it or if there was no agreement to the contrary.
- vendors could not be equated to licensed financial institutions or licensed moneylenders, and the equitable estoppel principle should not be applied to cause injustice and inequity.
In conclusion, courts have shown an inclination to allow the enforceability of late payment charges clauses, even though interests accrued may be high as 24% per annum! However, as a matter of prudence, it is best for vendors to include such late payment charges in the body of the contract.
From a buyer's perspective, in the event the contract does not contain such a clause, and if the buyer does not agree with the late payment interest clause and/or its rate stated in the vendor's delivery order/invoice, they should object to it immediately.