The rule whereby interest must never accrue beyond the debt principal also applies to default interest.Read on to find out what this means for your debts (or your receivables).
Our law firm carefully follows the latest developments in the law in order to always provide you with the best legal assistance. A recent, extremely important decision of the Supreme Court of the Czech Republic (namely the judgment issued under case no. 26 Cdo 2716/2023) fundamentally clarifies the issue of default interest, with significant consequences for anyone who ever has to deal with debts – whether as a debtor or a creditor.
What exactly is interest, and default interest?
Interest is generally the consideration to be given for the provision of money, for example in the form of a loan or credit.If monetary debts are repaid only belatedly (i.e., after they have fallen due), so-called default interest applies, which serves as a penalty for late payment and, to some degree, as compensation for the damage incurred by the creditor as a result of not being able to dispose of their money on time.
A rule which suspends the accrual of interest when the principal amount is reached
The Civil Code has introduced an important protection for debtors in the provision of Section 1805 (2) – the rule known as “ultra duplum” (according to which interest is capped at the nominal amount of the debt).In other words, if the creditor waits so long to collect his claim without good reason that the interest due but outstanding amounts to the same amount as the original capital (i.e. the principal debt), they forfeit the right to claim further interest.This restriction should apply until the time when the creditor asserts their claim in court.Interest may then continue to accrue from the time the claim is filed, without any restriction as to the amount.
The purpose of this rule, which goes all the way back to Roman law, is twofold: to protect the debtor from the undue burden of uncontrollably growing interest, and to motivate the creditor to collect their claims promptly and without undue dallying.Before its incorporation in the Civil Code, Czech law did not provide this kind of protection to debtors.
An important point of clarification from the Supreme Court
This is where the key decision 26 Cdo 2716/2023 comes into play: the Supreme Court has confirmed that the ultra duplum rule (in Section 1805 (2) of the Civil Code) extends not only to standard contractual interest, but also to default interest.The Supreme Court has thus clarified the issue, which was previously the subject matter of discussions, and confirmed that this protection clause should be interpreted broadly.The judgment emphasizes that the general term “interest” in Section 1805 (2) of the Civil Code includes both contractual interest and interest on arrears.
The court also dealt with the question of what can be considered a “reasonable cause” for a delay in debt collection.In the case in question, the creditor had claimed that she did not have sufficient funds to pay the court fee and therefore only filed the action later.However, the Supreme Court has now clearly ruled that a lack of funds to pay the court fee cannot be considered a valid reason.On the contrary, a creditor in such a situation should be motivated to collect the debt more quickly instead of letting the reins slip.
The consequences for everyday life and business operations
What does this decision mean for you?If you are a creditor, it is important that you actively collect your debts and do not allow interest to grow uncontrollably beyond the principal without having legitimate reasons for doing so.Otherwise, you may be deprived of that part of the interest which exceeds the nominal amount of the debt.If you are a debtor, you should know that even in the event of default there is a statutory protection clause that prevents interest from growing to infinity.This rule is particularly important in commercial relationships, where a certain degree of prudence and concern for one’s own affairs and active claims management are expected as a matter of course.
Our law firm will be happy to help you assess your situation, whether you are working on the repayment of your debts or collecting a claim.We will advise you on how to proceed effectively and in accordance with the law in order to protect your rights and minimize any risks.
Source:
Supreme Court judgment 26 Cdo 2716/2023
Civil Code (Act No. 89/2012 Coll.)