RELATIONSHIP BETWEEN INTEREST AND PENALTIES FOR LATE PAYMENT IN CONTRACT

Late payment interest and penalty are common remedies applied in commercial contracts and civil contracts alike when there is late payment as breach of contractual obligations.

For delays in fulfilling payment obligations under a contract, late payment interest is often the primary remedy, which may be applied alongside penalties for breach if agreed upon by the parties. Unlike penalties for breach, late payment interest is fundamentally a statutory remedy, not contingent upon the parties’ agreement. This means that even if not stipulated in the contract, the aggrieved party is always entitled to claim late payment interest as provided by law. However, in essence, late payment interest shares similarities with penalties for breach as both remedies can impose significant financial burdens on the breaching party.

Neither the 2015 Civil Code nor the 2005 Commercial Law explicitly addresses the relationship between late payment interest and penalties for breach. According to Precedent No. 09/2016/AL, if a court or arbitration tribunal upholds a claim for penalties for breach made by the aggrieved party, late payment interest cannot be applied to the delay in paying the penalty for breach. Although late payment interest is excluded in such cases, interest on judgment debts will still be applicable. Beyond this limitation, the Civil Code 2015 and the Commercial Law 2005 appear to recognize the parties’ agreement to concurrently apply both remedies, provided such agreement exists. In other words, after imposing late payment interest for a breach of payment obligations, the aggrieved party may still request penalties for breach in theory, if such penalties have been agreed upon.

There is an opinion suggesting that only one remedy—either late payment interest or penalty for breach—should be applied in cases of delayed payment obligations. This view may be appropriate when considering the inherent similarity between these two remedies and the principle that a single breach should not be penalized twice.

When examining the provisions related to loan agreements, Article 12 of Resolution No. 01/2019/NQ-HDTP states:

“1. For a loan agreement that includes provisions addressing the borrower’s failure to repay on time, the court shall review and decide based on the principle of addressing each act of delayed repayment only once.”

In cases where a loan agreement includes provisions for both a penalty for breach and interest on overdue principal or other measures applicable to delayed repayment, the court shall base its review and decision on the corresponding provisions of the Civil Code, the Law on Credit Institutions, and relevant legal documents providing detailed guidance on the application of the Civil Code and the Law on Credit Institutions. The court shall take into account the applicable regulations at the time the contract was formed and the applicable interest rate at the time of calculation, following the principle outlined in Clause 1 of this Article.

Article 12 of Resolution No. 01/2019/NQ-HDTP does not explicitly clarify whether both late payment interest and penalty for breach can be applied concurrently to the same act of delayed payment under a loan agreement. However, Draft No. 3 of the Supreme People’s Court’s Resolution on guidelines for the application of laws regarding interest rates and penalties for breach appears to provide a clearer stance on this issue:

“Clause 3. When resolving disputes involving credit agreements with provisions on penalties for delayed repayment of principal or interest where the borrower fails to repay or fully repay on time, the lender has the right to request payment of the penalty. If the agreement includes provisions for both penalties and overdue interest rates, penalty interest rates, late payment interest, or other measures applicable to the borrower’s delayed repayment obligations, the Court shall consider and accept either the penalty payment request or the overdue interest request, depending on the lender’s choice.”

This approach is clear: for a single act of delayed payment, only one remedy may be applied—either late payment interest (or similar forms of interest) or penalty for breach. The rationale for this principle likely stems from the concern that applying multiple financial remedies to the same breach could impose an excessive financial burden on the breaching party.

Currently, the principle of addressing a single act of delayed repayment only once is explicitly applied to loan agreements, as outlined in Resolution No. 01/2019/NQ-HDTP. This leaves room for the possibility of applying multiple remedies in other contractual contexts, such as sales contracts. Additionally, if the legislative intent is to prohibit the simultaneous application of penalties and late payment interest for the same contractual breach, this restriction should be expressly codified in relevant legal documents.

In the author’s opinion, when parties have explicitly agreed to the concurrent application of late payment interest and penalty for breach, such an agreement should be respected, provided it does not violate the law or public morals. This aligns with the principle of freedom of contract, especially in cases where the actual damages suffered by the non-breaching party cannot be fully compensated by either remedy separately.