DEFAULT INTEREST LIMITATIONS DURING COVID-19
On 5 April 2020 a new legal provision has entered into force providing that during the period from 1 April 2020 till 1 September 2020, the default interest for the delay in the performance of civil legal obligations shall not exceed the statutory interest. As is apparent from the annotation of said legal provision, its purpose is to reduce the workload of the courts with those litigation matters that are related to the application of force majeure circumstances caused by Covid-19 when the claimant is requesting to release it from negative consequences (such as default interest or contractual penalty).
After analyzing said legal provision in more detail, as well as discussing the application of limitations with customers, we have concluded that there are a couple of ambiguous issues regarding the application of said legal provision. Below you will find brief answers to questions that we hope will help you better understand said limitation. If you need more detailed information within a specific transaction, we will be happy to answer your questions.
Which transactions are affected?
The limitation of the default interest rate applies to all civil law obligations, which is a very wide range of legal relationships (it would be easier to answer which obligations are not affected). The limitation covers all types of transactions, including loan agreements with banks and other creditors (including agreements with consumers and legal entities). Said limitation also applies to various transactions related to the provision of services, including lease agreement and utility service agreement.
What is the amount of the statutory interest rate?
The amount of statutory interest rate depends on the type of transaction. In general, the statutory interest rate is 6% per annum. However, in some cases, the statutory interest rate is 8% + the refinancing rate set by the European Central Bank (ECB), which can be found on the ECB’s website [here: https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index. en.html]. As of 16 March 2016, this ECB rate is 0%. It should be noted that the ECB rate applicable on the day before the half-year in question must be used to determine the statutory interest rate, which is applicable for the following 6 months. The case where the refinancing rate set by the ECB + 8% is applicable is the late payment of a monetary debt agreed as consideration in a contract for the supply of goods, a purchase or the provision of a service, with the exception of transactions with consumers. In the case of consumers, the standard 6% per annum applies.
Does the default interest limitation also apply if the contractual party delays the performance of its obligations maliciously (e.g. if the person’s financial situation has not been affected by governmental restrictions and a fall in economic activity)?
The limitation of default interest applies to everyone, including those who do not have any difficulties and who unfairly delay the fulfillment of their obligations. As indicated in the annotation of the legal provision, the application of the restriction to all civil law relations will prevent disputes as to whether the particular legal entity is within the scope of application of the norm, as well as individual assessment of each case.
It should be noted that in such case, other negative consequences that may occur due to delay in the fulfillment of obligations, including the obligation to compensate losses, are not excluded. If a party unjustifiably delays the performance of obligations and as a result of such delay the other party has incurred losses, there is a possibility to bring a claim against such party acting in bad faith for the compensation of losses.
Does the limitation apply to contractual penalties for non-performance at the right time (term)?
The limitation only applies to default interest. If the agreement provides for a contractual penalty for late performance of the obligation, then said limitation is not applicable despite the fact that in terms of legal consequences, the contractual penalty has the same economic effect on the contractual party as the default interest. In this case, the contractual penalty can be calculated in full in compliance with the restrictions provided in the Civil Law and other laws, as well as the guidelines of the supervisory authorities (for example, the Consumer Rights Protection Center guidelines on default interest and penalties in consumer contracts [here: http://ptac.gov. en / sites / default / files / docs / ligumsodu_nokavejuma_procentu_vadlinijas_24042018._nr._3.pdf]). We would like to remind that the contractual penalty for delay in the performance of obligations in total may not exceed 10% of the principal debt amount or the principal obligation.
Does the limitation apply to the regular interest?
No, the limitation does not affect interest for the use of capital, which is payable in the amount specified in the agreement. As indicated in the annotation, the basis for payment of interest for the use of capital is not a consequence of delay, as well as, in the event of a delay, interest for the use of capital is not considered to be default interest.
Can other negative consequences be applied during the period of limitation, such as unilateral termination of the agreement?
The limitation of default interest does not change other obligations, including the creditor’s right to unilaterally withdraw from the agreement or to initiate recovery actions against the debtor. Therefore, when assessing the negative consequences of a delay, a careful analysis of the debt recovery instruments available to the creditor must be carried out.
What should be done by creditors who calculate default interest automatically in their IT systems?
In this case, creditors must perform a manual recalculation and ensure that incorrect debt calculations and warning letters are not sent to the debtors until the relevant IT systems have been adapted. At the same time, we would like to praise the legislator for the reservation in the annotation, according to which it is expected that incorrect automated calculations of default interest will not be considered an aggressive commercial practice that may lead to administrative proceedings initiated by the Consumer Rights Protection Center and a fine of up to EUR 100,000.