May 30, 2008
The Ohio Supreme Court recently addressed a practice that is likely very common to most businesspeople and vendors -- the attempt by a party to unilaterally state an interest rate that will apply to unpaid balances. In short, the Court ruled that such unilateral impositions of interest on open accounts cannot exceed the Ohio statutory rate of interest.

In Minster Farmers Cooperative Exchange Company, Inc. v. Meyer, farmers had opened accounts to purchase feed, fertilizer, and farm supplies from the Minster Farmers Cooperative. After a 10 year relationship, the Coop changed its invoices to state that a 2% finance charge per month would apply after 30 days – the equivalent of 24% annually.

The Court first clarified that “open book accounts” are arrangements where a detailed statement constitutes the principal record of the transactions between the creditor and debtor, and details the debits and credits in connection with that relationship. When that type of account is at issue, only a written contract can establish an interest rate greater than the default rate established by Ohio law (i.e. the federal short-term rate plus three percent). To meet that “written contract” criteria, the seller cannot unilaterally add a higher interest rate to an invoice. Rather, the parties must have a written meeting of the minds specifically addressing the applicable interest rate.

While the facts of this case were limited to an open book account, the Court was interpreting a statute with much broader coverage. Ohio Revised Code 1343.03 states that “when money becomes due and payable upon any bond, bill, note, or other instrument of writing, upon any book account, upon any settlement between parties, upon all verbal contracts entered into, and upon all judgments, decrees, and orders of any judicial tribunal for the payment of money arising out of tortious conduct or a contract or other transaction, the creditor is entitled to interest at the rate per annum determined pursuant to section 5703.47 of the Revised Code, unless a written contract provides a different rate of interest….” Therefore, it seems likely that the Ohio Supreme Court would apply the same standard to these other types of debt as well.

The Ohio Supreme Court also recognized that this ruling could have a significant economic impact and that it could “encourage a propagation of pleadings regarding past practices.” Therefore, to ease that economic impact, the Court specifically stated that this ruling will only apply to the parties in that case and “for transactions occurring after the date of this decision.”