Default interest is no longer 7.5 per cent
The seven and a half per cent still printed in a great many contracts and pleadings does not match the words of section 224 as it now stands, and the fix is not simply to swap in another number.
A floating rate, not a fixed figure
Section 224 of the Civil and Commercial Code provides that interest on a money debt during default runs at the rate fixed under section 7 plus an additional two per cent a year, and that where the creditor may claim a higher rate on other lawful grounds, that rate continues to apply. What matters is that section 224 does not state a figure of its own. It points to section 7, and that rate is capable of changing.
Section 7, and the three-yearly review
Section 7 provides that where interest is payable and no rate has been fixed by juristic act or by an express provision of law, the rate is three per cent a year. Its second paragraph adds that this rate may be lowered or raised to suit the economic conditions of the country by royal decree, and that the Ministry of Finance is normally to review it every three years so that it stays close to the average of commercial banks' deposit and lending rates.
What that comes to today, and why the wording matters
With the section 7 rate at three per cent a year, default interest under section 224 comes to five per cent a year. But writing a bare five per cent into a contract or a pleading has the same weakness as writing seven and a half: the moment a royal decree adjusts the section 7 rate, a hard-coded figure is wrong. The safe reference is to section 224 itself, which follows section 7 wherever it goes.
No interest upon interest
The second paragraph of section 224 forbids charging interest upon interest during the default, and the third states that other damages beyond it may still be proved. Read together, they mean that default interest is a floor that needs no proof, while loss beyond that floor remains recoverable but has to be established by evidence.
A penalty that is disproportionate
Section 379 forfeits the penalty on the debtor's default, and where the obligation is to abstain from something, forfeits it when that thing is done in breach. Section 383 then provides that if the forfeited penalty is disproportionately high, the court may reduce it to a reasonable amount, and that in deciding what is reasonable regard is to be had to every lawful interest of the creditor, not merely to proprietary interests.
Once it is paid, it cannot be reduced
The closing sentence of the first paragraph of section 383 has the most practical bite: once the penalty has been paid, the right to seek a reduction is extinguished. A debtor who pays a penalty to make the matter go away, intending to ask the court to cut it afterwards, never reaches that point. The decision whether to pay or to contest has to be made before payment, not after.
PREPARE
What to bring
- The signed contract with its penalty and interest clauses
- The demand letter and proof it was sent
- The date default actually began, and what caused it
- The loss actually suffered, with supporting documents
- A full record of payments already made
QUESTIONS
Questions this raises
My contract says default interest of seven and a half per cent.
The first paragraph of section 224 says that where the creditor may claim a higher rate on other lawful grounds, that rate continues to apply. A rate agreed in the contract is therefore a different question from the rate the law supplies where nothing was agreed. What has to be examined is how far that clause is enforceable under the law governing the transaction, not whether the figure matches section 224.
How does a penalty differ from damages?
A penalty under section 379 is a sum agreed in advance and forfeited on default without proving loss item by item. Damages are the loss actually suffered and must be established by evidence. The distinction matters because a penalty is subject to the court's power under section 383 to reduce it where it is disproportionate, while the third paragraph of section 224 still allows other damages beyond interest to be proved.
LAW
The legislation
- Civil and Commercial Code, section 7
- Civil and Commercial Code, section 224
- Civil and Commercial Code, section 379
- Civil and Commercial Code, section 383
ENQUIRIES
