May one charge a fee for a delayed payment?

May one charge a fee for a delayed payment?[1]

Business transaction: It is permitted for one to legally obligate [see next] a buyer/seller, [employer or renter[2]] at the time of agreement on the transaction, that if payment, or the arrival of the purchased product, is not made on time then a set fee will need to be paid in addition to the money’s/items owed.[3] However, this is only permitted if the total sum of the fee takes effect in one moment, immediately upon the passing of the due date for the payment of the owed money’s/item, and the fee hence does not grow together with the amount of time that the payment/item is delayed. However, to make the fine grow together with the passing of time of delay of payment is Biblically forbidden due to Ribis.[4] [For example, if Reuvein rented an apartment from Shimon and agreed to pay $1000 monthly rent, it is permitted for Shimon to arrange a legal obligation on Reuvein to pay an extra $200 if payments are not made by the 10^th of each month. It is however forbidden for Shimon to make this fine grow with the passage of time if the payment is still delayed, and hence the landowner cannot say, “For every week or month of delayed payment, you will have a $100 fine”.] Likewise, every G-d fearing Jew is not to arrange with the debtor that so long as he pays the fine then the original payment may be delayed, and rather the original payment is to be paid by the due date irrelevant of whether he becomes liable to pay the fine or not.[5]

Loan: It is Rabbinically forbidden for one to stipulate with a borrower that if payments are not made on time then a set fee will need to be paid in addition to the money owed.[6] This applies even if the fine will not grow together with the time of delay of payment. If however the fine will grow together with the delay of payment, then it is Biblically forbidden due to Ribis to do so, as stated above.[7]

How to legally validate a fine within a business transaction:[8]

In order for a fine to be legally valid in the parameters of Halacha, the person being fined must make a Kinyan Sudar at the time of the transaction that if he delays payment then he agrees that retroactively from now[9] he is liable to pay the agreed price plus the fine, for the product or service he received. It does not suffice to make a mere documented agreement, and rather a Kinyan Sudar must be performed, as will be explained.[10] (However, some Poskim[11] rule that a fine does not hold legal weight even if it was solidified with a Kinyan Sudar, unless it was performed in the presence of a prestigious Beis Din.[12] Alternatively, he is to sign a contract which states that the fine was acquired through a prestigious Beis Din, in which case it suffices even if in truth there was no prestigious Beis Din present at all, so long as a Kinyan Sudar was performed by him in actuality. Practically, the main opinion follows this ruling.[13] One must warn the public that make a mistake in this matter and do not make a Kinyan Sudar at all and illegally collect a fine based on a mere contract.)

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[1] Admur Ribis 46-48

[2] Bris Pinchas 9-10

[3] Admur 46 regarding buying/selling merchandise; Michaber 177/18; Rivash 335

The reason: Doing so does not transgress the prohibition against interest being that interest involves charging a sum of money that inflates according to the level of delay. However, a set fee for a delay of payment which was agreed upon at the onset of the transaction is permitted, and is as if the parties agreed on that price to begin with. The fine is hence not a profit made in exchange for the delay of payment but rather a fine that the person agreed to fine himself as soon as the due date passes without him having paid the debt. It is thus not similar at all to Ribis which is an inflating amount of money in accordance to the amount of time that the debtor delays the payment. [Admur 46]

[4] Admur Ribis 48; Michaber and Rama 177/16; Rashba 2/2

The reason: Although this payment is officially a fine and not interest, nevertheless, since it grows with the passing of time that he delays the payment, it is therefore complete Ribis. The reason for this is because as soon as the payment date passes, the payment becomes a debt onto the person who needs to make the payment, and it is completely Biblically forbidden to charge interest on any debt, just as it is forbidden by a debt that came as result of a loan. [Admur ibid]

Other opinions: Some Poskim rule that a fine that grows with delay is only Rabbinically forbidden due to Ribis. [Mabit 2/51, brought in Shach ibid; Rav Avraham Mizrachi 23, brought in Pischeiy Teshuvah 177/4]

[5] Admur 46 in suspicion of ruling of Shach 177/36 and Bach

Other opinions: Some Poskim are lenient and rule it is permitted to condition that the payment may be delayed if the fine is paid. [Taz 177/23; First opinion in Admur ibid]

[6] Admur Ribis 47 and 48; Michaber 177/14; Rashba 1/651; Rivash

The reason: Doing so does not transgress the Biblical prohibition against interest being that interest involves charging a sum of money that inflates according to the level of delay, such as every week or every month of delay he is charged more money. However, a set fee for a delay of payment which was agreed upon at the onset of the transaction is Biblically permitted, and is as if the parties agreed on that price to begin with. [Admur 48] However, Rabbinically, it is forbidden due to Haramas Ribis, looking like Ribis, as since the borrower is paying him more money than he borrowed it appears that he borrowed with interest. [Admur 47 and 48; Shach 177/33]

[7] Admur Ribis 48; Michaber and Rama 177/16;  Shach 177/33; Maharal Chaviv; Rav Avraham Sasson 62, brought in Shach ibid

Other opinions: Some Poskim rule it is only Rabbinically forbidden due to Ribis. [Mabit 2/51, brought in Shach ibid; Rav Avraham Mizrachi 23, brought in Pischeiy Teshuvah 177/4]

[8] Admur Ribis 46; Michaber C.M. 207; Tosafus Baba Metzia 66a

[9] Meaning that he obligates himself to already be liable to pay from now the money of the fine. However, to agree that the fine will only take effect later on is invalid, as a) It is considered a mere Asmachta [Michaber ibid] and because a Kinyan Sudar cannot take effect later on being the Sudar was already returned to the owner. [Smeh ibid; Tosafus ibid]

[10] Admur ibid; Michaber C.M. 207 that by an Asmachta a Kinyan must be made and “from now” must be said; Smeh 207/39 that a Stam Kinyan is Kinyan Sudar; Tosafus Baba Metzia 66a

[11] Tosafos Baba Metzia 66a; Rosh 29

[12] The reason: As any fine is considered an Asmachta, even if acquired with a Kinyan Sudar. [ibid]

[13] Rama Choshen Mishpat 207/14