Interest on Late Payment and the Principle of Good Faith - International Law Office

International Law Office

Company & Commercial - Estonia

Interest on Late Payment and the Principle of Good Faith

February 04 2008


According to Estonian law, a party is entitled to claim prearranged interest on payments that have been delayed (interest on late payment). In cases where the interest rate has not been agreed upon, the rate applicable by law may be claimed. However, certain activity can affect a claim of interest on late payment and may lead to the claim being abolished. Primarily, this happens when the principle of good faith is violated.

Pursuant to Section 6(1) of the Law of Obligations Act, obligees and obligors must act in good faith in their contractual relations. Section 6(2) provides that nothing arising from law, a usage or a transaction may be applied to an obligation if it is contrary to the principle of good faith. In a recent decision the Supreme Court considered what constitutes an action that is contrary to the principle of good faith and can result in the loss of the right to claim interest on a late payment.(1)

The Supreme Court upheld an earlier statement which asserted that although a claim cannot be stated to have been lost before the expiry of the limitation period, failure to exert the right to claim for a prolonged period may result in the right being revoked. Nevertheless, the loss of a claim occurs only in exceptional circumstances.

The Supreme Court suggested that such extraordinary circumstances may include, among other things, a case where the obligee forwards balance notices to the obligor for a prolonged period without making any claim of interest. The court established that such an action would give grounds to apply the principle of good faith because the obligee had given the impression that it was waiving the claim of interest and then later insisted that the obligor pay the interest owed. The Supreme Court regarded this behaviour as controversial and contrary to the principle of good faith. Thus, the obligee was no longer considered to be entitled to claim the interest for the period during which the balance notices were forwarded and no interest on late payment was claimed.

Accordingly, if an obligee wants to file a claim against an obligor arising from accessory obligations (eg, a claim for interest on late payment), the claim must be filed in due time. The obligor should also constantly remind the obligee that it has the right to file accessory claims against the obligor. The obligee should not give the obligor the impression that it has waived the accessory claims (eg, rendering bills or balance notices without inserting the claim for interest on late payment). In doing so, it may lose the right to file the accessory claims.

The Supreme Court analyzed this contradiction between claiming interest on late payments and the principle of good faith in two further decisions.

In the first such decision(2) the Supreme Court noted that one of the functions of the principle of good faith is to prevent the obligee from abusing its rights. The court held that, in principle, the claim for interest on late payment and the claim for interest as allowed by law may be contrary to the principle of good faith. Pursuant to the generally recognized position under Estonian civil law, an obligee will lose its right to claim if, due to the circumstances, the exercise of its rights would not correspond with the essence of the contractual relationship, the object of the contract or social moral standards. Consequently, this may preclude the assertion of a claim for interest on late payment.

In another decision(3) the Supreme Court emphasized that if the purpose of exercising the right to claim is to the detriment of the other party to the contract, the opportunity to exercise that right will be lost due to the application of the principle of good faith. At the same time, the obligee will lose the right to demand the payment of interest from the obligor.

Accordingly, a party wishing to file a claim for interest on late payment should keep in mind that if it acts contrary to the principle of good faith, it may lose the right to execute its claim. In order to retain its claim, the obligee must continuously notify the obligor of its wish to file indirect claims (among them, the claim for interest on late payment) against it. Hence, the obligee should insert the sum of interest in all invoices, balance notices and other similar documents that are sent to the obligor. The claim for interest on late payment may also be presented as a separate invoice or proof of claim.

In addition, the obligee should comprehend that in certain cases a claim for interest on late payment may be prevented due to the nature of the contractual relationship. In cases where the court deems the claim to be based on a wish to disadvantage the obligor, the court has the right to abstain from ordering payment of the interest on late payment based on the principle of good faith.

For further information on this topic please contact Merit Sergejev at Advokaadibüroo Aivar Pilv by telephone (+372 6 404 650) or by fax (+372 6 404 653) or by email (merit@apilv.ee).

Endnotes

(1) Supreme Court judgment dated December 6 2007, Civil Case 3-2-1-100-07.

(2) Supreme Court judgment dated October 10 2007, Civil Case 3-2-1-41-07.

(3) Supreme Court judgment dated October 23 2007, Civil Case 3-2-1-93-07.


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