Dealing with Late Payments and Ribbit

Question: I, a lawyer, often need to write a contract with a clause for extra payment if the buyer pays late. How can I do this without making the client violate ribbit (usury)?



Answer: In some ways, such late payments are classic ribbit in that a person who needs to pay must pay extra because of the time that passed (what the gemara calls, agar natar ­– the reward for waiting). But it is/can be different from classical ribbit in two main ways: 1. The payment is not the return of a loan but payment for a sale, which makes it, at worst, a Rabbinic prohibition (Shach, Yoreh Deah 173:4); 2. The increase in payment is not desired by the lender to make money, but is created to pressure the buyer to pay on time (Shut Harashba I:651).

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Rabbi Daniel Mann

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Neither of these grounds for leniency create a permitted situation alone. It is forbidden to sell something and say that there is a lower price if the buyer pays on time and a higher one if he pays late (mishna, Bava Metzia 65a; Shulchan Aruch, YD 173:1). The Shulchan Aruch (YD 177:14) rules that it is forbidden Rabbinically to make a penalty for one who returns a loan after the due date. (The Rama ad loc. does provide a way to do so.) But when the two lenient factors combine, it is permitted, i.e., one may make a legally binding condition that if a buyer pays later than he is supposed to, he will pay even a significant penalty (Shulchan Aruch ibid. 18).

While this system seems to be the solution to your problem, not all sellers would agree to it because of the following limitation: One may use only a one-time penalty. Multiple penalties over time make it considered like one who is charging for the time, as opposed to for lack of adherence (Shulchan Aruch ibid. 16 and Shach ad loc. 33).

There are possible ideas to make such an approach work. On a practical level, it can be quite effective to make one penalty late enough that it will not be activated by accident and large enough to strongly discourage delaying payment indefinitely. (If there is basic trust between the parties and they understand what and why they are doing it, the seller can relinquish his right to some of the penalty for an honest delay, if it is not built into the binding agreement). I have another idea, based on the idea that it is permitted for a borrower to pay certain loan-generated expenses, including legal ones, which is not considered a penalty (see The Laws of Ribbis (Reisman), p. 78). I would thus propose a system like this. After the one penalty, the buyer obligates himself by contract to pay a high but realistic fee for a lawyer to work on the case if another X weeks go by without full payment; this can be followed by paying for further actions, and eventually for the expenses of adjudication.

Realistically, only clients who are bnei Torah are likely to agree to such convoluted arrangements. Therefore, the best straightforward approach is to write a standard late payment schedule and include a clause that any payment that can be construed as an interest payment is to be governed by the provisions of a standard heter iska. We, at Eretz Hemdah, include such a clause in the relevant documents available for the public.

It is best to rely on such a standard clause only when a more specific ribbit remedy is unavailable. A heter iska is susceptible to the claim of ha’arama (lack of serious intent), especially if the sides lack even general understanding of its mechanism (see opinions in Brit Yehuda 35:4 and Torat Ribbit 16:1). The mechanism (sharing assumed profits and dangers) can justify only moderate price increases. However, despite reservations, heter iska is a legitimate halachic tool when not abused, and it is a necessity as a halachic alternative within Jewish financial institutions and interactions.

If you made your client aware of your recommendation for a heter iska (you can mention that all the major Israeli banks have one) and he or the other side refuse to include it, you can still work on the case (development of that topic is beyond our scope – see The Laws of Ribbis, p. 58).