Answered by Shaykh Abdurrahman al-Kharsa
Is it permissible to impose late fees on customers for delayed payments?
All praise is due to Allah.
Imposing late fees on customers is what is referred to today as a “penalty clause.” It comes in various forms, some of which are permissible, and others are not. The Islamic Fiqh Council has clarified these forms as follows:
1. A penalty clause in the law is an agreement between the parties to determine the compensation due from the one who has committed a breach for the harm caused to the other party due to the non-performance of what the other party has undertaken or for the delay in its performance.
2. The Council reaffirms its previous resolutions regarding the penalty clause in its resolution in al-Salam (no. 85) (2/9), which states, “The penalty clause for delay in the delivery of a purchased item is not permissible because it constitutes a debt, and it is not permissible to impose an increase in debt for delay.” The Council also refers to its resolution in al-Istisnaʿ (no. 65) (3/7), which states, “A penalty clause may be included in an Istisnaʿ contract according to what is agreed upon by the contracting parties unless there are compelling circumstances.” The Council further points to its resolution in the sale with deferred payment (no. 51) (2/6), which states, “If the buyer (the debtor) delays payment of the instalments after the specified due date, it is not permissible to obligate them to any increase in the debt, whether it is due to a prior condition or without a condition, as it is considered impermissible usury.”
3. The penalty clause may be stipulated in the original contract or in a subsequent agreement before the occurrence of the harm.
4. The penalty clause may be stipulated in all financial contracts, except for contracts in which the original obligation is a debt. Including such a clause in such contracts is considered explicit usury.
Based on this, a penalty clause may be permitted in contracts such as construction contracts for the contractor, supply contracts for the supplier, and manufacturing contracts for the manufacturer (seller) if the other party does not fulfil their obligations or delays their execution. However, it is not permissible, for example, in instalment sales due to the debtor’s delay in paying the remaining instalments, whether due to insolvency or procrastination. Also, it is not permissible in an Istisnaʿ contract if the client (buyer) delays in fulfilling what is upon them.
5. The harm for which compensation is permissible includes actual financial harm, the loss suffered by the one wronged, and the guaranteed income that has been missed. It does not include moral or emotional harm.
6. The penalty clause does not apply if the one upon whom it is stipulated proves that his breach of contract was due to reasons beyond his control, or that the breach did not cause any harm to the one who stipulated it.
7. The court may adjust the amount of compensation upon the request of either party if there is a justification for it or if it is excessive.
May Allah grant us all lawful, wholesome, and blessed sustenance and keep us far from the prohibited, no matter what it may be, as He is the Answerer of prayers and the One to whom we all turn in repentance.
[Reference: Islamic Fiqh Council’s Resolutions (371)]