Payment in Euro? – Remember to include penalty provisions in the contract!

Belarus: This article examines the widespread situation where a debt is owed by a Belarusian party under a contract but it is not possible to recover more than the contract price, and includes recommendations for foreign parties on how to prevent this situation.

A typical scenario: a foreign company concludes an agreement with a Belarusian party, according to which the Belarusian party undertakes an obligation to pay, where:
– the currency of the agreement is any currency but Belarusian roubles (e.g. Euro, US dollars, Polish zloty);
– the section of the agreement on “Liability of the Parties” includes a provision similar to the following: “The Parties bear liability for non-performance (improper performance) of their obligations under the agreement in accordance with the provisions of this agreement” or “in accordance with current legislation”;
– the applicable law is Belarusian law or, where the applicable law is not set in the agreement, Belarusian law applies under conflict of law rules.

At first glance, this seems in order. However, if the Belarusian party delays payment (or fails to pay), no monetary sanctions will apply. For your company as creditor this means putting considerable effort plus time and money into debt collection (finding a lawyer, making a claim, applying to the court and initiating enforcement procedures), which is inconvenient in itself (it often takes years until the money is collected), and ending up with being reimbursed, at most, for your debt collection costs.

Why is this so? Belarusian legislation, like the legislation of other countries, allows for recovery of interest on the amount due. Under Art. 366 of the Belarusian Civil Code, the applicable interest rate is the same as the refinancing rate of the National Bank of the Republic of Belarus (as of the date on which an obligation is fulfilled or the date on which a court judgement is entered). However, this interest rate applies only to obligations nominated in Belarusian roubles. There is no official interest rate for obligations nominated in foreign currency. Therefore, courts do not apply the above cited article of the Civil Code when another currency (i.e., not Belarusian roubles) is set as the payment currency in the agreement.

On the other hand, losses suffered by a creditor in connection with payments overdue from a debtor are generally hard to prove in court.

However, the agreement between the parties may include provisions on liability for failure to pay on time. Moreover, it is even possible to agree that the applicable interest rate will be the same as the refinancing rate of the Belarus National Bank (that is, the interest rate applicable to payments in Euro will be the interest rate applied to Belarusian roubles). It is only necessary for the agreement to specify the method of calculation and the interest rate if a foreign currency is set as the currency of payment.

However, it is more conventional to agree on a penalty (for a certain period as an agreed percentage of the amount due) in the contract rather than to agree on an interest rate. Both penalty and interest can be provided for in the agreement: Belarusian law treats them as two separate types of liability.

In the case of an international sale of goods agreement and where the Vienna Convention on Contracts for the International Sale of Goods applies (and in case of a Belarusian party it applies unless the parties exclude it in the contract) interest can be recovered under Art. 78. However, this article only entitles the creditor to claim interest but does not provide a mechanism for calculating interest. The Belarusian courts are of the opinion that the UNIDROIT Principles of International Commercial Contracts (the UNIDROIT Principles), which allow a lacuna as to setting the applicable interest rate (Article 7.4.9) to be filled, apply only if the parties have so agreed. Therefore, if the parties do not refer to the UNIDROIT Principles in the contract and the respondent in a dispute objects to applying those principles, then recovery of interest on the basis of Art. 78 of the Vienna Convention is not possible.

The simplest way to avoid the situation described above is to agree on a penalty or interest paid in case of failure of or delay in payment, for example to include the following provisions in the contract:
In the case of delay in payment as required by the Contract, the party that delays payment shall pay to the other party a penalty in the amount of […] per cent of the value of the delayed payment for each day of delay in payment
or (and)
In the case of delay in payment as required by the Contract, the party that delays payment shall pay to the other party interest for the amount of delayed payment calculated at the annual rate of […] per cent for the whole period of delay until the payment obligation is fulfilled”.

The aim of this article is to draw the attention of foreign contract parties to the situation described above. The suggested recommendations are the easiest way to ensure that not only the contract price but also money sanctions for late payment are recoverable. The particular situation may require more complex and tailored solutions. Our lawyers will be glad to assist you in finding solutions which will respect the interests of your company and meet the requirements of the particular situation.

bnt legal&tax has long-standing professional experience in debt collection from foreign and Belarusian companies, both in Belarus and Germany as well as in other countries.Our quality management system certified in accordance with ISO standard presumes a high level of consultations taking into account the personal needs of the client. Our specialists will be happy to answer your questions by telephone +375 17 203 94 55 or e-mail .

 

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