Late Fees, Penalties, or Interest: Which is the Right Choice for Overdue Payment Obligations?

In this briefing, we take a brief look at which regulatory mechanism—late fees, penalties, or interest—is most appropriate for overdue payment obligations.

Although the concepts of late fees, penalties, and interest are commonly used interchangeably in connection with overdue payments, they serve distinct legal rules and calculation methods under Mongolian Civil Code.

Late Fees refer to a recurring payment agreed upon by contract or prescribed by law, where the defaulting party pays an amount not exceeding 0.5% of the unperformed obligation value for each day of delay.[1]

Penalties refer to a predetermined lump-sum amount, or a specific percentage of the unperformed obligation value, which a non-performing or improperly performing party is required to pay as specified by law or contract.[2]

Both late fees and penalties are classified as types of liquidated damages, and the total accumulated amount of liquidated damages cannot exceed 50% of the total value of the unperformed obligation.[3] To enforce either late fees or penalties, the underlying agreement must be executed in writing.[4]

Conversely, if a monetary payment is not settled on time, the debtor is legally obligated to pay Interest for the period of delay.[5] In this scenario, the parties must explicitly agree upon the interest rate within a written contract.

Therefore, when drafting agreements involving payment schedules, parties should carefully consider the specific legal implications of late fees, penalties, and interest to select the mechanism that best aligns with their transaction.

If you require specific legal advice regarding any of the topics covered above, please contact the experienced team at our firm for tailored guidance.

Sources:

[1] Civil Code of Mongolia (2002), Article 232, Paragraph 232.6

[2] Civil Code of Mongolia (2002), Article 232, Paragraph 232.5

[3] Civil Code of Mongolia (2002), Article 232, Paragraph 232.4

[4] Civil Code of Mongolia (2002), Article 232, Paragraph 232.3

[5] Civil Code of Mongolia (2002), Article 222, Paragraph 222.5

Disclaimer: This article is intended for general informational purposes only and have been prepared in accordance with the laws in effect at the time of writing. For legal advice, please consult a professional attorney.