Are Late Payment Fees Legal in Australia?

In Short

• Late payment fees are legal in Australia, but they must be reasonable and clearly set out in your terms and conditions.
• You must show that the fee reflects a genuine estimate of your loss and is not a punishment.
• Clear payment clauses, early reminders, and strong invoicing practices help reduce late payments and support enforcement.

Tips for Businesses

Include clear payment terms and late fee provisions in your contracts, and review them regularly to ensure they remain compliant. Charge fees only when appropriate and be flexible with clients who communicate early or face genuine hardship. Strong invoicing processes, automated reminders, and well-documented follow up steps will help you manage late payments effectively and avoid escalation to legal action.

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Table of Contents

• Terms and Conditions
• Are Late Payment Fees Reasonable?
• Should I Charge Late Payment Fees?
• Best Practices for Invoice Management
• What if the Client Continues Not to Pay?
• Key Takeaways
• Frequently Asked Questions

Late payment fees may seem like an attractive way to ensure that your clients pay their invoices on time; however, it is essential to understand the restrictions surrounding late payments and the maximum amount you can charge for late payment fees. This article discusses the options you have to implement late payment fees in your business model.

Terms and Conditions

You should establish clear terms and conditions that define the relationship between your business and its customers. You should document the goods and services you offer, specifying how you will deliver these services. Terms and Conditions should always include a payment clause that sets out how and when your clients should make payment to you. Typical payment clauses will set out:

• how your customers can make payment;
• how you receive payments;
• when you do not accept or allow payments;
• that your customer agrees to pay the price that you advertised plus any additional charges, such as delivery; and
• the currency.

You must include late payment fee information in the payment clause of your terms and conditions if you want to charge these fees. The conditions should outline how long the client has to pay the invoice once it is issued, as well as the cost of the late fee or interest that accrues due to failure to pay.

You should review and update your payment terms regularly to ensure they remain effective and legally compliant. Consider including specific payment methods you accept, such as bank transfers, credit cards, or online payment platforms.

Are Late Payment Fees Reasonable?

Although late payment fees are legal in Australia, you must charge clients a reasonable amount to cover the loss your business incurs by not being paid on time. If the late payment fee is unreasonable or excessive, then the client may refuse to pay. Courts will not enforce penalty clauses that include exorbitant late payment fees in contracts. 

You must prove that the penalty rate represents a genuine pre-estimate of loss and not just a punishment. Examples of loss due to late payments may include:

• additional time taken to chase up the payment; or
• the cost of paying outside help such as lawyers or debt recovery agents.

Example 1

A business running a monthly food delivery subscription bills their clients after they deliver the food. If a customer does not pay by the date stated on the invoice, then they will incur a $5 per week penalty fee. This fee covers the additional administrative costs incurred to follow up on the late payment. Courts will likely determine this example as fair and reasonable.

Example 2

A separate food delivery business operates under the same model as example one, except it charges $2000 for every day that the payment is overdue. Courts will likely find that this example constitutes a punishment, which is not a genuine pre-estimate of loss and would not enforce this in court. 

Should I Charge Late Payment Fees?

Late payment fees can help ensure that you receive payment on time and recover any additional costs incurred due to late payment. On the other hand, charging late payment fees may discourage your customers. 

It is best to approach late payment fees on a case-by-case basis. Just because you have set out in the contract that late fees may occur, pursuing this without consideration may cause you to lose clients. Before issuing a fee, you may wish to:

• ensure you have provided the invoice with reasonable time for the client to pay;
• regularly remind the client that the payment is due before the due date;
• send the client a letter the first day they are overdue on payment as a reminder; and
• remain open to flexible payment options with your customers.

Best Practices for Invoice Management

You should implement clear invoicing practices to minimise late payments before they occur. Send invoices immediately upon delivery of goods or services, and include all necessary payment details such as your bank account information, payment reference numbers, and clear due dates. You can reduce disputes by providing detailed descriptions of the work completed or goods supplied.

Consider using automated invoicing systems that send payment reminders at regular intervals. You should also establish a clear collections process that escalates from friendly reminders to formal notices. Document all communication attempts with clients regarding overdue payments, as this information becomes valuable if you need to pursue legal action later.

What if the Client Continues Not to Pay?

If the client continues to ignore your reminders for payment, then you may be able to proceed with legal action. This usually occurs in two stages.

1. Send a Letter of Demand

You should send a letter of demand as a more formal notice than your previous reminders. Letters of demand set out:

• the claim you are making against the customer;
• the timeframe the customer has to respond and make payment; and
• the consequences of not making payment.

2. Go to Court

If all other responses fail, you may wish to start court proceedings. Going to court can be a costly and time-consuming process, so you should avoid this route wherever possible. Further, due to the costs of legal fees, you should usually only pursue high-value cases.

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Key Takeaways

Although late fees are legal in Australia, you must still consider the legal and commercial implications of charging these fees. You must make late payment fees reasonable and include them in your terms and conditions. You should charge late fees to incentivise timely payment; you should not use them to punish your customers.

If you are unsure about the enforceability of your late fees or would like assistance with drafting your terms and conditions, our experienced business lawyers can provide support as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions