Interest on Late Payment in Commercial Contracts in Malaysia

The Importance of Interest Clauses in Commercial Contracts

When a customer fails to pay an invoice on time, the creditor business suffers a real financial loss. Money that should have been received and put to work is instead tied up in an unpaid debt. Interest makes up for the cost of that delay.

Unlike some other jurisdictions, Malaysia does not have a general statute that automatically entitles a creditor to interest on overdue commercial debts. This means that if your contract is silent on interest, you have no automatic right to charge it. You would need to pursue the matter through the courts and seek an award of interest at the court's discretion.

For this reason, every well-drafted commercial contract should include a clear late-payment interest clause. This gives the creditor a contractual right to interest from the due date, without needing to rely on the court's discretion.

Contractual Late-Payment Interest

Agreeing on a Rate

Parties to a commercial contract can agree on the interest rate that will apply to late payments. Common approaches include specifying a fixed percentage per annum, or linking the rate to a reference such as a named bank's published reference rate (for example, its base rate) plus a margin.

The agreed rate should be clearly stated in the contract, along with the date from which interest begins to run and whether it compounds or accrues as simple interest.

Limits on Contractual Interest

While parties have freedom of contract, Malaysian courts retain the power to refuse enforcement of terms that are penal in nature. An interest rate that is extravagant or unconscionable compared to the greatest loss that could flow from the breach may not be enforced in full.

Section 75 of the Contracts Act 1950 limits recovery to a reasonable amount not exceeding the sum stated, and its Explanation says that a stipulation for increased interest from the date of default may be a penalty. Interest rates that are commercially reasonable and reflect the creditor's cost of funds or opportunity cost are generally upheld.

Practical Drafting Points

When including an interest clause, consider the following:

• State the interest rate clearly, whether as a fixed percentage or by reference to a benchmark.
• Specify when interest begins to accrue, typically from the due date of the invoice.
• Clarify whether interest compounds and, if so, at what intervals.
• Ensure the clause covers interest both before and after any judgment, to avoid arguments that contractual interest ceases once proceedings are issued.

Pre-Judgment Interest Awarded by the Court

Where there is no contractual interest clause, or where a creditor wishes to claim interest in addition to pursuing the principal debt, the court has a discretionary power to award pre-judgment interest.

The Legal Basis

Section 11 of the Courts of Judicature Act 1964 allows the court, if it thinks just, to include in the judgment interest at such rate as it thinks fit on the whole or part of the debt or damages, for the whole or part of the period between the date the cause of action arose and the date of judgment. This is commonly referred to as pre-judgment interest.

The power is discretionary. The court will consider the circumstances of the case, including the nature of the claim, the conduct of the parties, and whether it would be just to award interest.

The Rate of Pre-Judgment Interest

Where the court exercises its discretion to award pre-judgment interest and the contract does not specify a rate, the rate is in the court's discretion. Five per cent per annum is commonly awarded, but the court can apply a different rate where the circumstances justify it.

When Pre-Judgment Interest May Be Refused

The court may decline to award pre-judgment interest if, for example, the creditor delayed unreasonably in pursuing the claim, or if there were genuine disputes about the amount owed that justified the debtor's withholding of payment.

Post-Judgment Interest

The Statutory Framework

Once judgment is entered, interest on the judgment debt is governed by Order 42 rule 12 of the Rules of Court 2012. Except where the parties have agreed otherwise, every judgment debt carries interest from the date of judgment until it is satisfied, at the rate set by the Chief Justice.

Practice Direction No. 1 of 2012 sets that rate at five per cent per annum. Unlike pre-judgment interest, post-judgment interest is set by the rules rather than left to discretion. It applies automatically to judgment debts.

Interaction with Contractual Interest

A question sometimes arises as to whether a contractual interest rate continues to apply after judgment, or whether the statutory rate takes over. The answer depends on the wording of the contract and the terms of the judgment.

If the contract clearly provides for interest to continue at the contractual rate until actual payment, and the court's judgment reflects this, the contractual rate may continue, as Order 42 rule 12 allows for a rate agreed between the parties. The court will want to see the clause before allowing it. Otherwise, the five per cent rate applies from the date of judgment.

Practical Steps for Businesses

To protect your position as a creditor, consider the following:

• Include a clear late-payment interest clause in all commercial contracts, specifying the rate, the trigger date, and whether interest compounds.
• Issue invoices promptly with clear payment terms and due dates.
• Keep records of when invoices were sent and when payment was due, as this evidence will be needed to calculate any interest claim.
• If a debt becomes overdue, do not delay in taking steps to recover it. Delay may affect your ability to claim pre-judgment interest.

Summary

Interest on late payment is not automatic in Malaysia. Businesses that wish to claim interest on overdue invoices should ensure their contracts contain appropriate interest clauses. Where no contractual provision exists, the courts have discretion to award pre-judgment interest under section 11 of the Courts of Judicature Act 1964, and post-judgment interest is governed by Order 42 rule 12 of the Rules of Court 2012. A well-drafted contract remains the most reliable way to secure your right to interest on late payments.

Common questions

Can I charge interest on an overdue invoice if my contract does not mention interest?

You have no automatic right to charge interest without a contractual clause. You would need to pursue the debt through the courts, which have discretion to award pre-judgment interest under section 11 of the Courts of Judicature Act 1964.

What interest rate do Malaysian courts typically award?

Five per cent per annum is common. Post-judgment interest is five per cent under Order 42 rule 12 of the Rules of Court 2012 and a Chief Justice's practice direction; pre-judgment interest is at the court's discretion.

Can a very high contractual interest rate be challenged?

Yes. Yes. Under section 75 of the Contracts Act 1950, a court allows only a reasonable amount, and increased interest from the date of default may be treated as a penalty. Commercially reasonable rates are generally upheld.

When does post-judgment interest start to run?

Post-judgment interest runs from the date of judgment until the judgment debt is fully paid, as provided by Order 42 rule 12 of the Rules of Court 2012.

Should I include interest provisions for the period after judgment in my contract?

Yes. Specifying that the contractual interest rate applies until actual payment can help ensure the agreed rate continues after judgment, rather than defaulting to the five per cent rate.