SOUTHWEST CONCRETE PRODUCTS, Plaintiff, Cross-defendant and Appellant, v. GOSH CONSTRUCTION CORPORATION et al., Defendants, Cross-complainants and Appellants; ARMCO, INC., Cross-defendant and Appellant, 51 Cal. 3d 701

Opinion PANELLI, J. We granted review in this matter to resolve a conflict among the Courts of Appeal on the issue of whether a provision in a commercial sales contract which calls for interest of 18 percent per year on late payments violates the usury law. Although the petition for review had raised other issues as well, our order limited review to the usury question. We conclude that interest payments on overdue commercial accounts are not subject to the usury law and disapprove Crestwood Lumber Co. v. Citizens Sav. & Loan Assn. (1978) 83 Cal.App.3d 819 [148 Cal.Rptr. 129] and Mark McDowell Corp. v.

LSM 128 (1989) 214 Cal.App.3d 1427 [263 Cal.Rptr. 310], which held to the contrary. In the present case, Gosh Construction Corporation and Lawrence Gosh (collectively, Gosh) formed a joint venture to install sewer pipe in the City of Palm Springs. Gosh purchased the pipe from Southwest Concrete Products; the pipe was manufactured by Armco, Inc. A dispute arose about the quality of the pipe, and Gosh failed to pay for it. Southwest brought suit to recover the unpaid balance. Gosh cross-complained against Southwest and Armco for breach of contract and negligence, alleging that the pipe was defective.

Armco was granted a nonsuit before the case went to the jury. The jury found in favor of Southwest and against Gosh on the complaint and the cross-complaint. The jury found, on the basis of a special verdict, that the delivery tickets and invoices that accompanied the pipe constituted a contract with Southwest, that Gosh breached the contract, and that the contract contained an attorney fees clause and a provision for interest of 1 Vz percent per month (18 percent per year) on late payments. The trial court awarded Southwest prejudgment interest at the rate of 18 percent per year based on the contract.

It also awarded Southwest attorney fees of $13,077 under Civil Code

section 1717. Armco’s motion for attorney fees was denied on the ground it was not a party to the contract. Gosh moved for a new trial and for judgment notwithstanding the verdict on the ground that the prejudgment interest of 18 percent was usurious. The trial court denied the motion. All parties appealed. The Court of Appeal, in the published portion of its opinion, affirmed the award of prejudgment interest at the rate of 18 percent, holding that the late charge was not subject to the usury law. In the unpublished portion of its opinion, the Court of Appeal reversed and remanded on other issues. The law of usury in California is based upon California Constitution

article XV,

section 1, which limits the interest payable “[f]or any loan or forbearance of any money.” A loan of money is the delivery of a sum of money to another under a contract to return at some future time an equivalent amount. A forbearance of money is the giving of further time for the payment of a debt or an agreement not to enforce a claim at its due date. (Boerner v. Colwell Co. (1978) 21 Cal.3d 37, 44, fn. 7 [145 Cal.Rptr. 380, 577 P.2d 200].) However, “[b]oth a loan of money and a forbearance are to be distinguished from a sale which is the ‘transfer of property in a thing for a price in money.’ ” (O’Connor v.

Televideo System, Inc. (1990) 218 Cal.App.3d 709, 713 [267 Cal.Rptr. 237].) In determining whether a transaction constitutes a loan or forbearance, we look to the substance rather than the form of the transaction. “In all such cases the issue is whether or not the bargain of the parties, assessed in light of all the circumstances and with a view to substance rather than form, has as its true object the hire of money at an excessive rate of interest.” (Boerner v.

Colwell Co., supra, 21 Cal.3d at p. 44.) There are many exceptions to the usury law. (See Rabin & Brownlie, Usury Law in California: A Guide Through the Maze (1987) 20 U.C. Davis L.Rev. 397.) Two of the exceptions are applicable here. One is the “time-price” doctrine. This doctrine applies when property is sold on credit as an advance over the cash price. In these circumstances, the seller finances the purchase of property by extending payments over time and charging a higher price for carrying the financing.

This type of transaction, often called a bona fide credit sale, is not subject to the usury law because it does not involve a loan or forbearance. (Boerner v. Colwell Co., supra, 21 Cal.3d at p. 45; Verbeck v. Clymer (1927) 202 Cal. 557, 563 [261 P. 1017]; O’Connor v. Televideo System, Inc., supra, 218 Cal.App.3d at p. 714.) As explained in Verbeck: “ ‘On principle and authority, the owner of property, whether real or personal, has a perfect right to name the price on which he is willing to sell, and to refuse to accede to any other.

He may offer to sell at a designated price for cash or at a much higher price on credit, and a credit sale will not constitute usury however great the difference between the two prices, unless the buying and selling was a mere pretense. . . .’ ” (Verbeck v.

Clymer, supra, 202 Cal. at p. 563.) Another exception to the usury laws is the rule that a debtor by voluntary act cannot render an otherwise valid transaction usurious. “[A] debtor cannot bring his creditor to the penalties of the Usury Law by his voluntary default in respect to the obligation involved where no violation of law is present at the inception of the contract.” (Sharp v. Mortgage Security Corp. (1932) 215 Cal. 287, 291 [9 P.2d 819].) Where the excessive interest is caused by a contingency under the debtor’s control, the transaction will not be deemed usurious. (Ibid.; Penziner v.

West American Finance Co. (1933) 133 Cal.App. 578, 590 [24 P.2d 501]; Abbott v. Stevens (1955) 133 Cal.App.2d 242, 247 [284 P.2d 159].) Gosh correctly contends that their position—that the late charge is usurious—is supported by Crestwood Lumber Co. v. Citizens Sav. & Loan Assn., supra, 83 Cal.App.3d 819. In Crestwood, a lumber company sold lumber for real property improvements. The sales orders and invoices stated that payment was due within 10 days from date of invoice and that a finance charge of lVz percent per month (18 percent per year) would be charged on all overdue accounts.

The buyer failed to pay, and the lumber company brought suit. The trial court found the interest rate usurious and void. The Court of Appeal affirmed, holding that the finance charge was interest upon a forbearance of money and was therefore subject to the usury laws. Crestwood, supra, 83 Cal.App.3d 819, was followed recently in Mark McDowell Corp. v. LSM 128, supra, 214 Cal.App.3d 1427. In Mark McDowell, the plaintiff, a subcontractor, contracted with the defendant to do rough grading work on a construction project.

Under the terms of the agreement, the plaintiff was to bill the defendant for work performed, and the defendant was to pay each bill within a specified number of days. The contract provided that sums not paid when due would thereafter bear interest at the rate of 1 Vz percent per month. The defendant failed to pay, and the plaintiff sued for the unpaid balance and interest. The trial court found the interest rate usurious and awarded only 10 percent interest. The Court of Appeal affirmed, relying on Crestwood. The Court of Appeal in the present case refused to follow Crestwood, supra, 83 Cal.App.3d 819.

It noted that Crestwood had been criticized by legal commentators (Hogan, Is There a Cap on Service Charges? (1987) 7 Cal.Law. No. 1, p. 30; Loomis, Crestwood Lumber Company v. Citizens Savings & Loan Association: The Usury Law and Liquidated Damages in Sale of Goods Transactions (1980) 10 Golden Gate L.Rev. 553) and that its reasoning had been undercut by Fox v. Federated Department Stores, Inc. (1979) 94 Cal.App.3d 867 [156 Cal.Rptr. 893].

The court found no valid distinction between the present transaction and the service charges on retail department store and oil company charge accounts which were held in Fox not to violate the usury laws. In Fox, retail department stores and oil companies imposed monthly charges of 1 to 1 Vz percent on unpaid account balances. The plaintiffs, who were purchasers of goods and services, argued that such charges constituted usury and that the Unruh Act, which allowed finance charges in excess of the limit imposed by California Constitution

article XV, was unconstitutional. The court in Fox held that a “time-price” or a “finance charge” in a bona fide sale of goods or services is not a form of interest within the meaning of

article XV of the California Constitution’s proscription against usury. It further held that the sales by the defendants of their goods and services are bona fide sales to which the time-price doctrine applies. (Fox v.

Federated Department Stores, Inc., supra, 94 Cal.App.3d at p. 872.) It also upheld the constitutionality of the Unruh Act, which allows finance charges in excess of usury limits, on the ground that the transactions it regulates are within the time-price doctrine and thus not subject to the usury laws. (Id. at p. 880.) In the present case, the Court of Appeal found the reasoning of Fox directly applicable to the transaction at issue here. It is exempt from the usury laws because it was a bona fide credit sale. This is true regardless of whether the Unruh Act applies to the transaction.

The court in Fox recognized this when it responded to the argument that the Unruh Act did not apply to the oil company defendants because they sold through independent dealers and thus were not retailers: “The sales through their independent dealers are not exempt because the Unruh Act exempts them, but because the transactions are good faith credit sales of their products. This good faith sale of products was recognized as not subject to the usury limitation before the enactment of the Unruh Act.” (Fox v.

Federated Department Stores, Inc., supra, 94 Cal.App.3d at p. 873.) Another reason given by the Court of Appeal for not following Crestwood (supra, 83 Cal.App.3d 819) was that Crestwood failed to consider the California Uniform Commercial Code when it concluded that the late charge did not qualify as a liquidated damage provision because the parties had not agreed to it. The court here noted that under

section 2207 of the California Uniform Commercial Code, the clause providing for late charges on overdue invoices became part of the contract.

Section 2207 provides that additional terms become part of a contract between merchants unless the person receiving them objects to them. The official code comment to this

section lists as an example of such additional terms “a clause providing for interest on overdue invoices. . . .” (23A West’s Ann. Cal. U. Com. Code (1964 ed.) § 2207, com. 5, p. 175 [Deering’s Ann. Cal. U. Com. Code (1986 ed.) § 2207, p. 75].) We agree with the Court of Appeal that Crestwood, supra, 83 Cal.App.3d 819, should not be followed. This was not a cash sale, as the Crestwood court believed. A cash sale is one where the buyer and seller exchange the goods and payment at the same time; any other method of payment is “on credit.” The transaction in this case was a credit sale.

Payment was to be made within a certain number of days after delivery of the pipe; if payment was not made by that date, then finance charges would accrue. There was no forbearance here. As previously noted, a forbearance is the giving of further time for payment of a debt or an agreement not to insist upon payment at the due date. (Boerner v.

Colwell Co., supra, 21 Cal.3d at p. 44, fn. 7.) “If the invoice[s] truly constituted an agreement to give further time for payment in exchange for an 18 percent surcharge on the principal, then the buyer could conceivably forbear ad infinitum, so long as the finance charge was paid, and the creditor could never recover the principal. The creditor would never be able to sue to collect the money past due because it was receiving consideration for its agreement to forbear on the account.” (O’Connor v.

Televideo System, Inc., supra, 218 Cal.App.3d at p. 717.) Both Crestwood (supra, 83 Cal.App.3d 819) and Mark McDowell (supra, 214 Cal.App.3d 1427) also failed to apply, or even discuss, the rule that a transaction that was not usurious at its inception cannot become usurious by virtue of the debtor’s voluntary default. As the court in O’Connor v. Televideo System, Inc., supra, 218 Cal.App.3d at pages 716-717, stated: “This precept has been expressed in a number of California cases. (Sharp v. Mortgage Security Corp., supra, 215 Cal. at p. 291; Penziner v.

West American Finance Co., supra, 133 Cal.App. at p. 590; see also French v. Mortgage Guarantee Co. [(1940)] 16 Cal.2d [26,] 33 [104 P.2d 655, 130 A.L.R. 67]; Abbot v. Stevens, supra, 133 Cal.App.2d at p. 247; First American Title Ins. & Trust Co. v. Cook [(1970)] 12 Cal.App.3d [592,] 596 [90 Cal.Rptr. 645]; Fox v. Federated Department Stores, supra, 94 Cal.App.3d at p. 884.) It has also been recognized by numerous other authorities. (See, e.g., 1 Witkin,

Summary of Cal. Law (9th ed. 1987) Contracts, § 487, p. 434; 47 C.J.S., Interest & Usury § 140, p. 257; Scientific Products v. Cyto Medical Laboratory, Inc. (D.Conn. 1978) 457 F.Supp. 1373, 1379; Rangen, Inc. v. Valley Trout Farms, Inc. (1983) 104 Idaho 284 [658 P.2d 955, 960]; Union Bank v. Kruger (1969) 1 Wn.App. 622 [463 P.2d 955, 960].)” That principle applies here as well. We further agree with the Court of Appeal’s analysis of the California Uniform Commercial Code. The late charges became part of the contract under

section 2207 of the California Uniform Commercial Code. Indeed, the jury expressly found that the delivery tickets and invoices that accompanied the pipe constituted a contract which included the provision for 1 Vi percent interest per month on late payments. To summarize, we conclude that the late charge provided in the contract is not subject to the usury law because it does not constitute payment for the “loan or forbearance of any money.” (Cal. Const., art.

XV, § 1.) It is exempt from the usury law under the time-price doctrine and the principle that a debtor by voluntary act cannot render an otherwise valid contract usurious. In light of our limitation of review to the issue of usury, we do not reach the question urged by amicus curiae regarding the validity of the late charge as a liquidated damage provision. The judgment of the Court of Appeal is affirmed. Lucas, C. J., Eagleson, J., Kennard, J., and Arabian, J., concurred.

Subdivision (2) of that provision sets the maximum rate at the higher of 10 percent or 5 percent per year plus the Federal Reserve Bank of San Francisco rate in effect on specified dates. (Cal. Const., art. XV, § 1, subd. (2).) It is undisputed that the maximum permissible rate is less than 18 percent per year. Even more recently, however, the Sixth Appellate District Court of Appeal criticized and refused to follow Crestwood and Mark McDowell in O’Connor v. Televideo System, Inc., supra, 218 Cal.App.3d 709. The Court of Appeal did not discuss Mark McDowell Corp. v.

LSM 128, supra, 214 Cal.App.3d 1427, because that case was filed a few weeks after the opinion in this case. The Unruh Act (Civ. Code, §§ 1801-1812.20) was adopted in 1959 to regulate retail installment sales. It regulates, among other things, the finance charges that may be collected for bona fide credit sales of consumer goods or services. It applies, however, only to retail transactions.