Annual interest: a path of trial and error

This article examines three types of interest — interest on the use of funds, penalty interest and annual interest — and clarifies contentious issues regarding their legal nature, the possibility of their simultaneous recovery, and the court’s power to reduce their amount. It is argued that, under current Ukrainian legislation, interest for the use of funds must be charged for the entire period until the contract is duly performed. Upon expiry of the contract term, annual interest also begins to accrue at the rate specified in the contract, or at 3 per cent if the contract does not specify an annual interest rate. The debtor’s default also gives rise to the recovery of a penalty in the amount stipulated in the contract, but not exceeding twice the discount rate of the National Bank of Ukraine in force during the period for which the penalty is payable. It is argued that, in the event of the debtor’s failure to fulfil a monetary obligation, the court may only reduce the amount of the penalty. The law does not provide for a reduction in annual interest or in interest charged as a fee for the use of funds. The conflict of legal principles created by judicial practice cannot be justified, and the principle of fairness cannot diminish the significance of the principle of freedom of contract. It is proposed that, in order to reduce the scope of the debtor’s liability, the law should stipulate that liability for late performance of a monetary obligation must take the form of a penalty. Annual interest rates should be set by law and charged where the contract does not provide for a penalty.