Interest Rates Set in Invoices No Longer Enforceable in Ohio Unless Expressly Agreed to by Both Parties
Kegler Brown Construction Alert June 11, 2008
The Ohio Supreme Court has ruled in a 7-0 decision dated March 26, 2008, that entries on invoices and account statements that set forth an interest rate do not constitute a “written contract” for purposes of an Ohio law that sets a statutory interest rate applicable to past due amounts on a "book account" in the absence of a written contract. Minster Farmers Coop. Exchange Co., Inc. v. Meyer, 117 Ohio St.3d 459, 2008-Ohio-1259.
Under Ohio law, book accounts are "a detailed statement that constitutes the principal record of the transactions between the creditor and debtor" arising out of a contract relationship. The statement details the debits and credits in connection with that business relationship. Many Ohio businesses —particularly construction suppliers— rely on what the Supreme Court here described as a book account to do business.
Because the Credit Applications or other documents that are used to open the account may not include an interest rate or expressly incorporate or attach the terms and conditions on invoices, this will result in much smaller interest recoveries on certain claims and accounts receivable. This is because it is common for businesses using book accounts to use an interest rate of 1½% to 2% per month (equaling 18% and 24% per year). In contrast, the Ohio statutory rate is currently 8%. The Court noted that, in order for a written contract to exist under Ohio law, "there must be a writing to which both parties have assented. An invoice or monthly statement does not constitute such a writing.”
In its decision, the Supreme Court resolved what had been a split between Ohio Appellate Courts on the issue, and resolved it in favor of what the "clear majority" had been holding. The question arises as to what happens to existing claims in the minority of Ohio Districts with respect to this decision. The Court noted that it did not intend to "create shock waves" throughout the Ohio economy and limited the effect of its decision to the cases before it and "to transactions arising in the future." This means that any accounts impacted by the decision will likely have the higher interest rate applied to the account balance. Deliveries and other transactions that occur after March 26, 2008, however, will be subject to the decision.
The potential for a much lower interest rate emphasizes the need for businesses that rely on book accounts to obtain the express agreement of their customers to an appropriate interest rate. The best way to do this is to state the interest rate in the document signed by the customer that establishes the "agreement," such as the credit application or supply agreement. Another, less attractive, but possibly viable option under the Court's Decision is to expressly condition the acceptance of orders on the customer's agreement to the interest rate (or terms and conditions containing an interest rate).
In this way, those businesses can better preserve their ability to recover a competitive rate of interest that encourages prompt payment rather than default to the state's statutory rate, currently a much lower figure. In contrast, in those parts of the state that followed the minority rule, contractors and subcontractors who are debtors on a book account and have not expressly agreed to the interest rate being charged can argue that no interest rate higher than the statutory rate applies to amounts due for transactions after March 28, 2008.