Default Interest (Late Payment) Clauses In New Zealand: Rates & Use In Contracts

Late payments can quietly cause big problems for a small business. You’ve delivered the work, paid your team, covered supplier invoices, and then you’re left waiting (and chasing) for your customer to pay you.

That’s where a default interest (late payment) clause can help. When it’s drafted properly, it sets clear expectations about what happens if an invoice isn’t paid on time, and it can give you more leverage when you need to follow up.

In this guide, we’ll walk you through what a default interest clause is, how it works in New Zealand, what “typical” rates often look like in commercial agreements, and the practical steps you can take to include it in your contracts without creating unnecessary disputes.

What Is A Default Interest Clause (And Why Do Small Businesses Use One)?

A default interest clause (sometimes called a “late payment interest clause”) is a contract term that says if your customer doesn’t pay an amount by the due date, they must pay interest on the overdue amount.

In plain terms: it’s the “cost of being late”.

What A Default Interest Clause Is Designed To Do

For most small businesses, the goal isn’t to “make money” from interest. It’s to:

• Encourage on-time payment by making the consequences of late payment clear.
• Compensate you for cashflow impact (for example, needing to use an overdraft, or being unable to pay suppliers on time).
• Reduce arguments by setting a clear rule up front, rather than negotiating later when things are tense.
• Support debt recovery if you need to escalate a dispute, send a formal demand, or take legal action.

Where You’ll Usually See It

You’ll often include a default interest clause in:

• your Terms of Trade (common for product-based businesses and wholesale suppliers);
• a customer Service Agreement (common for consultants, agencies, trades, and B2B service providers);
• ongoing supply agreements or master services arrangements;
• credit arrangements where the customer is approved for 7/14/30-day terms (often documented using Credit application terms).

If you regularly invoice customers (especially other businesses), having a well-structured default interest clause is one of those “legal foundations” that can protect you from day one.

Are Default Interest Clauses Enforceable In New Zealand?

Generally, yes - default interest clauses can be enforceable in New Zealand, provided they’re drafted and used properly.

That said, enforceability depends on the surrounding facts. A clause that looks reasonable and reflects a genuine commercial approach is far more likely to be enforced than one that looks punitive or “out of the blue”.

Penalty Risk: The Clause Can’t Be Punishment Disguised As Interest

A key concept in contract law is that a contract term shouldn’t operate as an unlawful penalty.

In a business context, that means if your default interest rate is so high that it looks designed to punish the customer (rather than compensate you for late payment risk/cost), there’s a real risk it could be challenged.

While New Zealand’s contract framework includes key legislation like the Contract and Commercial Law Act 2017, whether a term is an unenforceable penalty is generally assessed under broader contract law principles and how the clause operates in practice. The practical takeaway is simple: keep your default interest clause commercially justifiable.

Clear Agreement Matters (Especially In B2B Relationships)

Even a “reasonable” default interest clause may be hard to enforce if the customer never clearly agreed to it.

For example, problems can arise when:

• you only put the clause on the back of an invoice after the work is done;
• your quote and your terms contradict each other;
• you bury the clause in long terms that were never actually provided to the customer.

The safest approach is to ensure your customer agrees to your terms before you supply goods or start services - usually at quote acceptance, onboarding, or account set-up.

Consumer Vs Business Customers

This article is written for small businesses dealing mainly with other businesses, but it’s worth noting: if you sell to consumers, different rules and expectations can apply, and the wording needs extra care to avoid unfairness and ensure transparency.

Depending on how you structure payment terms and credit, you may also need to consider other legal regimes (for example, the Fair Trading Act 1986 around misleading conduct). If you’re not sure where your customers sit, it’s smart to get advice specific to your business model.

What Are Typical Default Interest Rates In New Zealand (And What’s “Reasonable”)?

There isn’t one fixed “legal rate” that applies to every business invoice in New Zealand. The “right” default interest rate depends on your industry, your bargaining power, your risk, and what you can justify as commercially reasonable.

With that said, there are some common patterns we see in small business contracts.

Common Commercial Approaches

In practice, default interest clauses in New Zealand business-to-business contracts often use one of these approaches:

• A per annum percentage (e.g. “X% per annum”), calculated daily on overdue amounts.
• A monthly percentage (e.g. “Y% per month”), sometimes compounding monthly.
• A “margin over a base rate” approach (e.g. “the lender’s base rate plus Z%”).

A Practical “Typical Range” (With A Strong Caveat)

Many SMEs choose default interest rates that (depending on the industry and the deal) land somewhere in the broad ballpark of:

• around 10%–18% per annum, or
• around 1%–2% per month.

These aren’t official rates, and they’re not a “safe harbour”. A rate that’s enforceable in one contract might be challenged in another depending on factors like the parties’ bargaining power, whether the customer is a consumer, the overall fee structure, and whether the clause looks proportionate to the legitimate costs/risks of late payment.

Compounding Vs Non-Compounding Interest

Another “quiet” issue is whether interest compounds (i.e. interest is charged on top of interest). Compounding can increase the amount quickly, which can become contentious.

Many small businesses choose:

• simple interest calculated daily (often easier to justify and explain), or
• monthly compounding if the industry norm supports it and the customer is sophisticated.

If you want to compound, make sure the clause explicitly says so. If it’s not clear, you can end up in an argument about what was agreed.

Be Careful With “Daily” Rates That Sound Small But Aren’t

A “daily rate” can be deceptive. For example, 1% per day is enormous when annualised and is very likely to be challenged as punitive.

If you want daily calculation, it’s usually better to express the rate per annum and then state it is calculated daily on overdue amounts.

How Do You Draft And Use A Default Interest Clause The Right Way?

A default interest clause works best when it’s part of a broader payment framework that’s consistent across your quote, your contract, your invoice, and your collection process.

Below are the key building blocks we typically look for when helping small businesses set these clauses up.

1) Define When Payment Is Due (And When Interest Starts)

This sounds obvious, but a lot of late payment disputes start here.

Your contract should clearly state:

• when invoices will be issued (e.g. upfront, on milestones, weekly, monthly);
• the payment due date (e.g. “7 days from invoice date”, “20th of the month”, or “immediately”); and
• when default interest starts accruing (e.g. “from the day after the due date until paid”).

If your due date is vague (“as soon as possible”), your default interest clause won’t have a stable anchor.

2) State The Interest Rate And How It’s Calculated

A good clause usually spells out:

• the rate (per annum is common);
• whether interest is simple or compounding;
• how it’s calculated (daily/monthly); and
• whether, and to what extent, interest continues after court proceedings (noting that post-judgment interest can be affected by statute and the court’s orders).

Clarity here reduces friction when you need to enforce it.

3) Include Recovery Costs (But Don’t Overreach)

Many small businesses want to recover the costs of chasing payment - and that’s fair.

Alongside (or separate from) your default interest clause, your payment terms might include that the customer must reimburse reasonable costs of collection, such as:

• legal fees on a solicitor-client basis (or similar drafting);
• debt collection fees;
• court filing fees and enforcement costs.

These terms should be drafted carefully so they’re reasonable and consistent with how you actually enforce debts. If you regularly outsource collections, a Debt collection agreement can also help ensure your process is structured and compliant.

4) Make Sure The Clause Is Actually Part Of The Deal

This is where businesses often fall down: the clause exists, but it wasn’t properly incorporated into the contract.

To strengthen enforceability, you want a clean paper trail showing the customer agreed to your terms. Practical options include:

• your quote says “This quote is subject to our Terms of Trade” and links to them, and acceptance confirms agreement;
• a signed customer agreement that attaches or links to the relevant terms;
• account set-up where the customer signs or ticks to accept terms (common for trade accounts).

If you’re not sure whether your current process stacks up, it’s often worth getting a Contract review before you rely on the clause in a real dispute.

5) Think About Security And Leverage For Higher-Risk Customers

Default interest is helpful, but it doesn’t guarantee you’ll get paid. If you supply goods on credit, or you’re exposed to larger invoices, you might also consider whether you need stronger protections (depending on the relationship and bargaining position), such as:

• personal guarantees from directors (common where the customer is a company);
• retention of title terms (if you supply goods);
• security documentation like a General security agreement for certain credit arrangements.

These tools can be powerful, but they need to be set up carefully and consistently with your overall contracting process.

Example: A Simple Default Interest Clause Structure (For Illustration Only)

Every business is different, but a default interest clause often follows a structure like:

• Trigger: “If any amount is not paid by the due date…”
• Interest rate: “…interest will accrue at X% per annum…”
• Calculation method: “…calculated daily from the due date until payment is received…”
• Compounding (optional): “…compounding monthly…”
• Recovery costs (optional): “…and the customer must pay our reasonable costs of recovery…”

It’s a great starting point - but the enforceability often comes down to the detail and how the clause fits with the rest of your contract.

Common Mistakes With Default Interest Clauses (And How To Avoid Them)

Default interest clauses are simple in concept, but the real-world disputes usually come from avoidable drafting or process issues.

Putting The Clause Only On The Invoice

If the first time a customer sees your default interest clause is after you’ve already supplied the goods/services, you may struggle to argue it formed part of the contract.

A better approach is to include the clause in your signed agreement, accepted quote terms, or Terms of Trade that the customer agrees to up front.

Using An Aggressive Rate That Looks Like A Penalty

If you set an extreme rate, you risk:

• the clause being challenged as an unenforceable penalty;
• commercial backlash (customers refusing to sign);
• relationship damage that costs more than the interest is worth.

As a rule of thumb, choose a rate you can explain with a straight face: “This reflects our financing costs and the disruption of late payment.”

Failing To Align Your Terms With Your Credit Process

If you offer trade accounts, make sure your onboarding matches your documents. For example, if you approve customers for 30-day terms, your Credit application terms and your invoices should be consistent about due dates, interest, and what happens on default.

Not Thinking Through Disputes About The Underlying Invoice

Sometimes a customer doesn’t pay because they claim:

• the work wasn’t completed;
• the goods were defective;
• the invoice doesn’t match the quote.

In these cases, default interest can become a “flashpoint” rather than a solution. Your underlying contract needs to clearly define deliverables, acceptance, and when you’re entitled to invoice. This is one reason a properly drafted Service Agreement (or supply agreement) matters just as much as the interest clause itself.

Key Takeaways

• A default interest clause is a contract term that lets you charge interest on overdue amounts, helping protect your cashflow and encouraging timely payment.
• Default interest clauses are generally enforceable in New Zealand, but the clause needs to be reasonable, clearly agreed, and not operate as a penalty.
• There’s no universal “legal rate” for late payment interest; many commercial agreements use a rate in the broad range of 10%–18% per annum (or 1%–2% per month), but what’s appropriate depends on your business, your customer, and the deal.
• The best clauses clearly define the payment due date, when interest starts, how interest is calculated, and whether it compounds.
• Interest clauses work best when combined with strong payment terms, clear invoicing rules, and a consistent contracting process that shows the customer agreed up front.
• Common mistakes include relying on invoice-only terms, choosing an aggressive rate that looks punitive, and having inconsistent documents across quotes, contracts, and credit onboarding.

If you’d like help drafting or updating a default interest clause (or tightening up your payment terms more broadly), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.