What is wrong with charging the interest
IN MARCH ISSUE OF «THE CORPORATE LAWYER» MAGAZINE
Let’s understand what is wrong with new rules of calculation of interest together with default interest. And clear up how the courts measure the losses if the creditor cannot prove their certain total amount.
Kliment Rusakomskiy, managing partner of Law Group "Paradigma"
This interesting interest
A big excitement was made by a novel in the general part of the law of obligation of the Civil Code of Russian Federation concerning the possibility to determine the interest rates at one's own and sole discretion. According to this, the creditor has the right to charge interest both for using money (interest, as a payment by installments) and for default in payment.
The main problem now lies in the possibility to charge together the interest according to the para. 1 of Art. 317.1 and default interest according the Art. 395 of the Civil Code. There are a lot of decisions satisfying both of the claims (decision of Arbitrazh Court of the Nizhniy Novgorod Region dated 20.01.2016 on case № A43-28826/2015, decision of Arbitrazh Court of the Sverdlovsk Region dated 20.01.2016 on case № А60-48519/2015). Although the opposite legal practice exists, too. For example, courts can refuse to charge the interest calculated in accordance with the Art. 317.1 on the ground of the general principles of civil law that don’t provide a dual liability for same breach of obligation (decision of Ninth Arbitrazh Court of appeal dated 08.12.2015 on case № А40-125230/2015, decision of Arbitrazh Court of the Tatarstan Republic dated 18.01.2016 on case № А65-27063/2015). Refusing in satisfying these claims on other grounds, courts emphasized the nature of legal interest, that is a lawful and agreed by the parties payment for borrowing a sum of money, but not a penalty for default (decision of Arbitrazh Court of the Arkhangelsk Region dated 20.01.2016 on case № А05-14232/2015, decision of Arbitrazh Court of the Chuvash Republic dated 19.01.2016 on case № А79-8320/2015).
You will get over all of these difficulties if you would pay a lot of attention to a method for determining the interest and default interest when you conclude a contract. Luckily, there is such opportunity.
As it follows from the literal interpretation of para. 1 of Art. 317.1 of the Civil Code and legal precedents, it is possible to charge together both the interest and default interest in case of default. But you should remember the difference in their legal nature. If case of debtor’s delay in execution creditor still should have the right to receive the interest that is a return or compensation for the use of a sum of money belonging to the borrower. That's exactly the legislative will as we can see from the place of the Art. 317.1 in the structure of the Civil Code. At this time there is no official judicial interpretation concerning this, so we recommend yuo to calculate both kind of interest in your lawsuit.
Many lawyers have difficulty in understanding the interest under the Art. 317.1 of the Civil Code. Therefore there is a tendency of excluding such interest from a contract.
There are many speculations that interest under the Art. 317.1 of the Civil Code should be calculated from the moment of creation of obligation, not from the moment of a default.
However, if we refer to the text of the article, it will become apparent that the legislator doesn’t give us clear answers to the question on the sphere of its application and the moment of calculation. Disputes on the application of Art. 317.1 are quite common, and every court interprets this provision in its own way.
The end of this dispute is forthcoming. The work on the project of the Resolution of Plenum of Supreme Court of the Russian Federation is nearing completion. We hope that it should answer to the questions of liability set out at the general provisions of the Civil Code and resolve the legal uncertainty.
Inaccurate size is not a sentence
The ability to claim damages in behalf of the creditor when their accurate amount is not proved is another novel in the general part of the law of obligation of the Civil Code of Russian Federation (para. 5 of Art. 393 of the Civil Code). From now on, the courts cannot refuse to satisfy the creditor's claims for damages if their size cannot be determined with a reasonable degree of certainty. In such cases, there is a suggestion for courts to be guided by circumstances of the case and the very vague categories of fairness and proportionality of responsibility.
This rule has legitimated the actual practice based on the Resolution of Presidium of Supreme Arbitrazh Court of the Russian Federation dated 06.12.2011 № 2929/11 on case № А56-44387/2011. It states, that “a complete dismissal of claim violates the constitutional principle of justice and deprive the applicant of the possibility to restore his violated rights. The objective difficulty of proving damages and their size, as well as the cause-effect relation between the losses and interim measures, on cases involving losing or restriction of corporate control, should not reduce the level of legal protection of participants of corporate relations at an unjustified infringement on their rights. The extremely high risks of losing or restriction of corporate control can lead to negative consequences for macroeconomic and investment processes, which are largely developed through partnership in companies. The court cannot completely reject the claim of company’s member for damages caused by unjustified claim and interim measures (Art. 98 of the Arbitration Procedure Code) only on the ground that the amount of damages cannot be established with a reasonable degree of certainty. In this case, the size of the damages has to be determined by the court with taking into account all the circumstances of the case and with the principle of fairness and proportionality of liability”.
As we can see, the text of para. 5 of Art. 393 of the Civil Code copies the main conclusions from the Resolution.
So, how do courts apply this norm of law? There is no valuable practice at this moment, only a few decisions. Some courts do not apply new provisions and dismiss the claims if the exact size of the damage is not proved (the decision of 13 Arbitrazh Court of Appeal dated 22.01.2016 on case № А56-8013/2015).
Another reason of non-use the para 5 of Art. 393 of the Civil Code is that this provision can be used only when the damage cannot be ascertained. For example, plaintiff provided the court some documents to prove the size of damages (inspection report, expenditure invoices, performance characteristics, chemical expert testimony and other reports). The appellation court agreed with the lower court’s decision to satisfy the claim in part, referring to the above argument and to the fact that the court has determined the amount of damage, though it is less than the plaintiff has asked (Decision of Arbitrazh Court of East-Siberian Disnrict dated 30.12.2015 on the case № А19-4399/2014).
One of the forms of realization of the principle of equity while referring to para. 5 of Art. 393 of the Civil Code is the compensation of the damages determined not from a cost of new car engine (as requested by the plaintiff), but from the cost of repair (Decision of 8 Arbitrazh Court of Appeal dated 28.12.2015 on the case № A75-7870/2015). Taking into account price offer from the service center that was available in case papers, the Court, relying on para. 5 of Art. 393 of the Civil Code, has decided to partially satisfy the plaintiff’s claim.
There are also some single cases when courts of appeal re-evaluate the findings of lower courts that the size of the damage is not proved. For example, the Court of Appeal referring to para. 5 of Art. 393 of the Civil Code considered that there were enough evidences to prove the loss of profit resulted from inaction of authorities and late removal the plaintiff from the register of unfair suppliers (Decision of the 9 Arbitrazh Court of Appeal dated 23.12.2015 on case № А40-215861/2014).
In general, para. 5 of Art. 393 of the Civil Code does not exempt the claimant from the obligation to prove the size of damage caused to him. In our opinion, the rule shall apply in those cases when the plaintiff has taken all possible measures to prove the amount of damage, but could not prove it with a reasonable degree of reliability due to objective reasons. Only in this case there is a possibility that the court will take a decision in favor of the plaintiff.
Let’s see into the rates
The old version of para. 1 of Art.395 of the Civil Code determined the interest rate according to the standard bank interest rate (the refinancing rate). The new version of this article provides the calculation of interest based on the average deposit rate of individuals in the respective periods. Now this indicator is not very different from the size of the refinancing rate, which is equated to a key rate at 11 % since January 1, 2016. At the beginning of 2016 average bank interest rates were at a level of 7-8%. The information about the average bank interest rate is regularly published by the Bank of Russia with differentiation by federal districts. However, this innovation creates some questions.
The legislator spread out the average deposit rate of individuals to the relationships between the legal entities. There seems to be no clear grounds for taking such decision. The imperfection of legal technology can be the reason of such transfer of the rates for private individuals to legal entities.
Now creditors have different degree of protection depending on the obligation currency: deposit rate in foreign currency are significantly lower than the rate in rubles.
The creditor will be less protected in case of default of liabilities in foreign currency.
The difference in exchange rates does not justify this inequality, because the choice of transactions currency may be determined by creditor’s commercial considerations and the usual comfort. Therefore, if your transactions are in foreign currency, we recommend you to fix the interest rate in the agreement.
The new version of para. 1 of Art.395 of the Civil Code made it more difficult to calculate the accurate amount of interest to be charged from the debtor. Now they should be calculated separately for every period of delay in payment due to the average interest deposit rates for this period. The Bank of Russia almost every month publishes the official information about the average rates. Therefore, the interest rate will vary from one month to month. So the rule that the interest rate to be applied in the case may be determined by the date of filing the claim is irrelevant. This is also indicated by the text of para. 1 of Art. 395 of the Civil Code, which refers to "the relevant periods" for determining the average rates.
Most likely these publications will be slightly delayed. So, there could be a situation when it is impossible to determine the accurate rate of interest. This problem is aggravated immediately after the entry into force of the Federal Law dated 03.08.2015 № 42-FZ "On Amendments to Part One of the Civil Code of the Russian Federation". Starting from the date of the beginning of the law until June 10, 2015 the Bank of Russia did not publish any information about the average bank interest rates. As a result, courts have refused to satisfy the claims to charge the interest (Decision of Arbitrazh Court of Republic of Buryatia dated 08.07.2015 on case № А10-1093/2015). Later, there was an explanation of the Supreme Court of Russian Federation: the calculation for each period of delay should be based on the average bank interest rates in this period, and if there is no official information – on the basis of the latest one (Judicial Review of the Supreme Court for 2015 № 3).
There is also no unique approach among the courts in the question of charging the interest in cases when one part of the period falls at the time of duration of the old version of Art. 395 of the Civil Code, and the rest of the period – at the time of duration of the new one.
Courts may satisfy claims for charging the interest that is calculated on base of refinancing rate and applied to the whole period (Decisions of Arbitrazh Court of the Udmurt Republic dated 11.06.2015 on case № А71-2374/2015, Arbitrazh Court of the Pskov Region dated 20.01.2016 on case № А52-3326/2015). But they also can refuse to apply the new rule of calculating the interest for the periods after the June 1, 2015. As the court states in reasons, new average rates were higher than the applied refinancing rate, so the defendant’s rights were not violated. These precedents contravene the law, therefore it is likely that after the passing the case to the Court of Appeal, such decision will be reconsidered.
At the same time there are cases with true interpretation. Thus, the court dismissed the claim to charge the interest calculated from June, 1 of 2015 on the reason of using the refinancing rate to the whole period of default (Decision of Arbitrazh Court of Orlov Region dated 20.01.2016 on case № А48-4014/2015).
Of course, the previous version of Art. 395 of the Civil Code shall apply when it comes to the calculation of interest for the periods of time before the June 1, 2015 regardless of the date of filing a suit and a trial.
It's another matter when the creditor is a foreign company. A literal interpretation of para. 1 of Art. 395 of the Civil Code does not allow him to exercise the right to charge the interest. This article stipulates the calculation based on the average rates of bank interest at the place of location of the legal entity, which in is absurd because the creditor is a foreign legal entity. To overcome this gap the Supreme Court was forced to take the role of legislator and interpret this rule of para. 1 of Art. 395 of the Civil Code. At the Judicial Review of the Supreme Court № 3 is stated that if the creditor is a person with a place of residence (location) outside of Russia, the calculation should be made at the rate existing in the place of location of the court of trial. This clarification is also can be useful for the situations when the debtor is a foreign company, but both of the parties agreed due to the arbitration clause to settle the disputes in Russian court.
Therefore, in order to avoid these difficulties with the contracts of foreign companies should precisely and unambiguously set out the interest rates in the contract.
CATCHED IN THE NET
The court has published the decision on the sensational case of Vympelcom’s action of rescission the lease agreement with currency clause on the ground of sudden devaluation of ruble. As we know, the court has changed the lease agreement and inserted a currency rate limits. But we have been waiting for the full text of decision. And here it is.
In essence, the decision is absolutely wrong. It is funny that the court was frightened of applying the Art. 451 and directly stated that the high devaluation is not an unforeseen material change in circumstances which could give the right to claim under the article 451 of the Civil Code; however the decision to change the agreement was made with reference to the art. 10 of the Civil Code. Anyway, it is a civil, political and legal absurdity, paternalism that is not appropriate in commercial relations and just covered with beautiful words of good faith.
We can only hope that this decision will be reversed for the avoidance of further precedents, opening a Pandora's box and disruption of contract relations.