Interest as the Principal Claim

In accordance with the Law on Contracts and Torts (“LCT“), a debtor who is late with the execution of a financial obligation is obliged to pay the statutory default interest in addition to the principal debt.

Therefore, the creditor’s right to default interest comes directly from the law, and as in this particular case it is an imperative norm, this creditor’s right cannot be separately contracted. Since it is an imperative norm, not even failing to claim the statutory default interest in addition to the principal debt means that the creditor waives that right.

Default interest is owed when the debtor is in arrears or is late with the fulfilment of a monetary obligation, therefore, the legal default interest in a way represents a sanction for a delay in the fulfilment of a monetary obligation, and essentially represents the obligation of the debtor to pay compensation to the creditor for using the creditor’s money after the debt is due. The foregoing means that the creditor is entitled to default interest even when he does not suffer any damage, but often the effect of default interest is still such that it covers the losses incurred by the creditor due to inflationary damage.

Default interest runs as long as there is a main obligation, but even though it is an accessory right that accompanies the main claim, it is not extinguished by the payment of the principal debt, i.e. it cannot disappear, but becomes an independent claim and may be the subject of a separate lawsuit as the so-called “principal interest” (except in the case of highlighting the statute of limitations of the main obligation, when it becomes a natural obligation that cannot be the subject of forced collection).

Principal and procedural interest

Under which conditions can default interest have the status of the principal claim, and whether a new default interest can be calculated on the amount of unpaid interest? From which moment is it possible to claim such interest?

In order for default interest to be the subject of an independent lawsuit, it is necessary for the principal debt to which the interest is attached to have been fully paid before that. Therefore, if the principal amount of the debt is not settled in full, and the creditor files a lawsuit to collect only the default interest and not the principal amount of the debt, such a lawsuit will be rejected as impermissible. The reason for this is the accessory nature of default interest, which procedurally follows the fate of the main claim, so if the main claim is not the subject of a lawsuit, our legislator does not allow default interest as an accessory right to be claimed independently.

However, in a situation where the debtor settles the principal amount of the debt but does not settle the default interest calculated on the principal amount of the debt, in that case the default interest passes from the accessory right now to the principal claim (because the beginning and end of its calculation is precisely known), is capitalized and can be claimed independently.

Article 279, paragraph 1 of the LCT stipulates that no interest shall be accrued on due but unpaid contractual or default interest, as well as on other due periodic payments, except when this is prescribed by law.

Therefore, in our legal system, the legislator prohibits the collection of interest on due and unpaid interest, i.e. “interest-on-interest” or anatocism. Anatocism has been prohibited since ancient times for the reason that it represents a suitable ground for concluding usury contracts, which are void contracts under our law. Any provision in the contract which stipulates that the interest, when due for payment, will start to accrue new interest, if not paid, would be void. An exception to the rule is the contractual interest, and only in relation to the lending operations of banks and other banking organizations, in which case it is allowed that the contractual interest, when due for payment, will begin to accrue default interest, if the contractual interest is not paid.

On the other hand, the legislator prescribed in Article 279, Paragraph 2 of the LCT that default interest can be demanded on the amount of unpaid interest, from the day when the request for its payment was submitted to the court, that is, from the day the lawsuit was filed until the final payment.

Therefore, in accordance with the mentioned provisions of the LCT, procedural default interest on the amount of unpaid due default interest can be requested only when the main monetary claim from which this interest arises ceases, i.e. when the default interest calculated on the principal debt is capitalized. In other words, only after the payment of the principal debt, the conditions are met to perform the calculation of default interest and its capitalization and payment as a principal debt, on which default interest could be claimed from the day of payment until the final payment, and such default interest is called “procedural interest”.

There are numerous decisions of our courts that support the above mentioned, including the judgment of the Court of Appeal in Novi Sad No. Gž 3974/2016 dated 17 November 2016, where the court took the position that:

Procedural interest on the amount of unpaid default interest can only be claimed after the termination of the main monetary claim from which it arises.

Therefore, principal interest is the interest that is attributed to the principal of the debt and which has the characteristics of a principal debt, and therefore can be the subject of a separate lawsuit, and procedural interest can be calculated on it starting from the moment of filing the lawsuit until the final payment.

Likewise, the Supreme Court of Cassation is of the opinion that a lawsuit claiming interest as the principal claim, in a situation where the debtor has previously paid the principal, is not disorderly if the creditor (plaintiff) claims interest in the lawsuit, indicating the principal amount and the period from which he considers the debtor to be in arrears (judgment of the Supreme Court of Cassation, Rev2. 330/2011 dated 18 January 2012).

The statute of limitations for default interest, i.e. principal interest

Article 372, paragraph 1, stipulates that the periodic givings that are due annually or at shorter specified intervals (periodic claims), regardless of whether these are secondary occasional claims such as interest claims, expire within 3 years from the maturity of each individual claim. Therefore, if the debtor falls into arrears with the payment of the principal debt, default interest as an accessory right can be claimed within 3 years from the due date of each individual payment.

Naturally, if the main debt expires, secondary claims are also subject to statute of limitations, such as for example the claim of yield, contractual penalties, and interest. Therefore, due to the statute of limitations of the principal debt, the interest as an accessory claim also becomes statute-barred, so it can no longer be claimed through the courts.

However, the question arises concerning the statute of limitations on principal interest claims if the principal debt did not end by statute of limitations, but for example by the principal debt getting fulfilled or in some other way. Thus, within which period can the “principal interest” be claimed?

Upon the termination of the main claim in any manner prescribed by law (except by statute of limitations) and regardless of the limitation period that applies to the main claim, the claim for principal interest, which still has the character of a periodical claim, expires within 3 years, counting the period from the moment of termination of the main claim, that is, most often from the moment of repayment of the main debt, as the moment of extinguishing the main obligation.

On the other hand, there is a question of limitation regarding the period for which the “principal interest” is calculated.

Namely, it is necessary to distinguish between the statute of limitations of the calculation period of the “principal interest”, and the statute of limitations of the “principal interest” claim itself.

To make the matter clearer, we will give an example from our judicial practice.

One of our clients concluded a surety contract in 2011, and in the period between 2013 and 2016 paid the amount of about EUR 4 million instead of the main debtor.

In 2017, we filed a lawsuit to establish the nullity of the contract from the main business and the surety contract, and we requested the return of the principal debt given under the surety agreement, without requesting the payment of statutory default interest on the amount of the principal debt.

The dispute was resolved in favor of our client, the debtor paid the principal of the debt in accordance with the judgment, and this year we filed a lawsuit for the payment of “principal interest”, i.e. interest calculated on the principal of the debt. The period of calculation of default interest was from 2013 to 2021, when everything that was acquired on the basis of a void contract was returned.

In this second litigation, the question of the statute of limitations of the claim for “principal interest” was raised, where the defendant claims that the claim is statute-barred.

As the LCT’s provisions on acquisition without grounds apply on the nullity of the contract regarding the consequences of nullity on the return of interests, yields, etc. (it is a legal gap because Article 104 of the LCT does not say anything about the return of interest and yields,), and as no special statute of limitations is provided for the return of what was acquired without grounds, in that case the general limitation period of 10 years applies.

Furthermore, given that Article 214 of the LCT stipulates that when what was acquired without foundation is returned, default interest must be paid, if the acquirer is negligent, from the date of acquisition, and otherwise from the date of submission of the request, then the question of the statute of limitations of the claim with regard to the “principal interest” depends on the negligence of the debtor when concluding the legal transaction as well as on the period for which the interest is capitalized.

The question is for which period can the interest be compounded? Since it is a claim that is analogously equated with one acquired without grounds, the period for which interest can be accrued is a period of 10 years from the date of payment of the principal of the debt, and in accordance with the provisions of the LCT regarding the general limitation period. Therefore, if the main debt according to the judgment would be paid on 11 July 2022, and the defendant was negligent party and the plaintiff started the givings in relation to the void legal work in 2009, this means that the amounts in the name of “principal interest” before 11 July 2012 would be considered a statute-barred claim, and the court would reject the claim in that part.

To conclude, when it comes to “principal interest”, it is necessary to take care of the following issues:

  1. For which period can interest be compounded?
  • If the defendant was a negligent contracting party, the interest accrual period is 10 years back from the date of payment of the principal of the debt.
  • If the defendant was a conscientious contracting party, the interest accrual period is the period starting from the day of filing the lawsuit for the purpose of returning the principal until the payment of the principal of the debt.
  1. In what period can such capitalized interest be claimed in order to avoid the statute of limitations?
  • Three years from the day of payment of the principal of the debt.

Therefore, if the debtor pays the principal debt, the creditor will have to claim the amount of interest (“principal interest”) through the courts within three years from the date of termination of the principal obligation, i.e. repayment of the principal debt, otherwise this right will expire. In addition, the creditor will have the right to claim the procedural interest on the amount of the “principal interest”, starting from the day the claim is filed until the final payment.

FOR MORE INFO CONTACT:

Milinko Mijatovic

Milinko Mijatović

Attorney-at-law | Senior Counsel

Maja Grbić

Associate
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