On the issue of limiting fines during an emergency situation

08.05.2020 Andrejs Sviksh, lawyer

In connection with an emergency situation and under the Section 30 of the law “On Measures for the Prevention and Suppression of Threat to the State and Its Consequences Due to the Spread of Covid-19”, during the time period from1 April 2020 to 1 September 2020, the late payment interest on default of the performance of civil obligations may not exceed the lawful interest. This section of the law may lead to major discussions in practice, given the different interpretations of the term “late payment interest”.

In Section 1759 of the Civil Law, under the term “late payment interest” is meant interest payable without any agreement on the basis of the law for each late payment of a debt, even though the debt itself may be interest-free.

However, there is a concept in the Civil Law such as “contractual penalty” indicating a penalty which a person undertakes to bear regarding his or her obligation in such case as he or she does not perform the obligation, does not perform it satisfactorily or does not perform it within due time (time period). Contractual penalty for non-performance of the obligation at all shall be a sum of money or other financial benefit which may not be laid down in the form of several (repeated) or ascending payments or supplies.

Terms such as “monetary fine”, “penalty fine”, “penalty interest” are often used in contracts.

It can be concluded from the above that in practice there are a sufficient number of similar concepts, which means that in the future disputes between the creditor and the debtor may arise as to whether a section of the law applies to their situation. For example, a creditor may consider that interest set by law limit does not apply to late payment interest or penalty interest set out in a contract between the parties. However, the debtor is interested in a broader interpretation of the concept of “late payment interest” and will insist that all sanctions are subject to the statutory limitation of interest set by law. These inconsistencies can lead to lengthy lawsuits.

It is worth paying attention to the fact that the law sets a limit on interest set by law. The mass media often mentions a limit of 6% per year, identifying the concept with interest set by law. That is not quite the case. In accordance with Section 1765 of the Civil Law, the lawful interest amount for the late payment of such a money debt, which is contracted for as compensation in the contract for the supply of goods, for purchase or provision of services shall be eight percentage points above the basic interest rate (Section 1765, Paragraph three) per year, but in contractual relations in which a consumer participates – six per cent per year. That is, not all cases are taken into account at 6% per year; this limit applies only to contracts with consumers.

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