Ohio Supreme Court Limits The Permissible Interest Rates on Invoices Absent a "Written Contract" Between Both Parties to the Transaction
John P. Maxwell | Matthew P. Mullen |
It is not uncommon for businesses that provide goods or services to their customers on an invoiced basis to include language in their invoices indicating the interest rate that will be charged on any unpaid balance. For example, a business might state on their invoice that the charges will bear interest at the rate of 2% per month after thirty days.
However, on March 26, 2008, the Ohio Supreme Court issued a unanimous opinion that declared that such arrangements are unenforceable if they impose an interest rate that is higher than the rate imposed by statute, unless the business and its customer have otherwise entered into a written contract specifically agreeing to a higher interest rate. The case is Minister Farmers Coop. Exchange Co., Inc. v. Meyer, 2008-Ohio-1259 (2008). In the case, a business sued two separate customers on invoices that included substantial amounts for unpaid interest. The business’ invoices to these customers included language such as: “Net due last day of the month. 2% finance charge per month after 30 days.”
When the business sued the customers, the customers argued that they could not be forced to pay an interest rate higher than the standard rate for contracts as imposed by Ohio Revised Code § 1343.03(A). However, both the trial court and the court of appeals rejected the customers’ argument, holding that the business had a right to impose an interest rate on its open accounts that was openly stated on its invoices and not objected to by the customers.
The customers then appealed to the Ohio Supreme Court, which overruled and reversed the lower courts in its unanimous decision. In its decision, the Supreme Court relied on the language of Section 1343.03(A), which provides that “when money becomes due and payable upon . . . any book account, . . . the creditor is entitled to interest at the rate per annum determined pursuant to section 5703.47 of the Revised Code, unless a written contract provides a different rate of interest in relation to the money that becomes due and payable, in which case the creditor is entitled to interest at the rate provided in that contract.”
As explained by the Supreme Court, a “book account” is “a detailed statement that constitutes the principal record of the transactions between the creditor and debtor arising out of a contract . . . A book account ‘begins with a balance, preferably at zero, or with a sum recited that can qualify as an account stated, but at least the balance should be a provable sum. Following the balance, the item or items, dated and identifiable by number or otherwise, representing charges, or debits, and credits, should appear. Summarization is necessary showing a running or developing balance or an arrangement which permits the calculation of the balance claimed to be due.’”
Based on the language of Section 1343.03(A), the Supreme Court held that the business could not collect from its customers “the interest rate it claims is due unless that rate had been set forth in a “written contract.”
The Supreme Court also rejected the notion that an invoice alone can constitute a written contract: “We agree that an invoice or account statement unilaterally stating interest terms does not meet R.C. 1343.03's requirement of a written contract. An invoice, as such, is no contract. An invoice is a mere detailed statement of the nature, quantity and the cost or price of the things invoiced.”
On a happier note, the Supreme Court specifically limited the legal effect of this new decision to “transactions arising in the future,” meaning that this decision will not affect accounts or invoices that existed prior to March 26, 2008, apparently in an attempt to avoid an onslaught of litigation challenging outstanding invoices.
From a practical standpoint, the effect of this decision means that absent a written agreement between both parties to a transaction, the maximum interest rate allowable will be that specified by Section 1343.03(A), which in turn relies on the rate calculated by Section 5703.47. This second statute establishes a new “statutory interest rate” on an annual basis, which goes into effect the first day of January of each year. In 2008, for example, the rate is 8% per annum, which is obviously far lower than the 24% per annum imposed when the rate is 2% per month.
Given this important change in the law, our business clients are well advised to reexamine their invoicing and interest rate policies to comply with the change, and to consider requiring their customers to sign a written agreement specifying payment terms and interest rates before providing any goods and services. Also, businesses would be well served to consult with their legal advisors concerning this change in order to develop future contact and invoicing policies that will continue to provide them the interest rates they require.
If you have any questions, please contact Attorney Matthew P. Mullen (email@example.com) or Attorney John P. Maxwell (firstname.lastname@example.org) at Krugliak, Wilkins, Griffiths & Dougherty Co., L.P.A. at 330-497-0700.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.