default interest provision
A provision in a contract which:
• Provides a contractual sanction against non-payment of a sum of money; and
• Is a form of liquidated damages for that non-payment.
A default interest provision is nearly always included in an agreement where interest would be payable in the ordinary course of dealings as a part of the transaction, most obviously in a loan agreement. The rate of default interest payable in such a case is usually 1% or 2% above the rate payable in the ordinary course of the agreement where all the sums are paid on time. In other types of transactions, a default interest clause may be included to support an obligation to pay a sum of money by a particular date. Care needs to be taken in the choice of default rate and the manner in which it becomes payable to guard against it being invalid as a penalty. The rate should reflect the estimated loss to the supplier of being deprived of the use of the funds.
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Practical Law Dictionary. Glossary of UK, US and international legal terms. . 2010.

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