Statutory penalty interest at 8%: the latest relevant jurisprudential trends in Italy

Allen & Overy LLP
Contact

Allen & Overy LLP

Through four recent judgments, most recently judgment No. 561 dated 24 February 2020, the Court of Florence has established that if a party submits a claim aimed at obtaining payment of "legal interest" (i.e. the statutory penalty interest whose rate is set out by the law) without specifying anything else, the Court is entitled to calculate the interest at the rate set forth by Article 1284, fourth paragraph, of the Civil Code (the so-called Increased Rate), instead of the so-called standard rate set forth in Article 1284, first paragraph, of the Civil Code (the so-called Standard Rate).

The ruling of the Court of Florence is quite important, given the huge difference between the two rates: the Increased Rate is 8% per year, whereas the Standard Rate is now only 0.05% per year.

As a result, where the Plaintiff has asked, as in most cases, the Court to order the Defendant to pay the principal "in addition to the legal interest", the Court, if the claim is upheld, is entitled to order the Defendant to pay the annual rate of 8%. This circumstance may have a serious impact on companies' balance sheets with regard to the possible underestimation of the item "provisions for risks and charges".

Facts

A company brought a lawsuit to request the confirmation of the termination of certain derivative contracts signed with the bank in 2009 and 2010, as well as the return of all amounts paid for any reason to the bank – worth EUR 1,639,226 – in addition to the "legal interest".

The Judge upheld the claim and ordered the bank to refund all sums paid in execution of the above contracts, in addition to the payment of the legal interest, calculating the latter by applying not the Standard Rate, but the Increased Rate, and this notwithstanding the fact that the Plaintiff had not specifically requested the application of the Increased Rate.

Innovative principles and some considerations

In the specific case submitted for its consideration, the Court of Florence established the following question of law: "whether a judge, who is asked generically to order the defendant to pay interest, without any other specification or reference to art. 1284 fourth paragraph, of the Civil Code, is allowed to calculate the interest according to the said provision, or if the decision is, in hypothesis, vitiated for extra/ultra petita under art. 112 of the Italian code of Civil Procedure".

This question has been raised because in 2014 (by Legislative Decree No. 132/2014, converted into Law No. 162/2014) a fourth paragraph was introduced to Article 1284 of the Civil Code, effective from 11 December 2014. As of 2014, Article 1284 of the Civil Code, headed "Rate of interest", reads as follows:

  1. the first paragraph provides, as it has always done in the past, the measure of the so-called standard or ordinary rate: today this provision provides expressly that "the legal interest rate is determined at 0.05% per cent on an annual basis" (the above-mentioned Standard Rate);
  2. the fourth paragraph provides, for proceedings brought on or after 11 December 2014 only, that "if the parties have not specified the size, from the moment that legal action is brought, the legal interest rate is the same as provided by the special legislation related to the delays of payment in commercial transactions", i.e. the rate set forth by Legislative Decree No. 231/2002, consisting of the ECB rate increased by 8 percentage points (the above-mentioned Increased Rate).

It is therefore clear that, where a generic request for payment of the legal interest is submitted, the question arises as to which rate is actually applicable to the calculation, in the judgment, of the legal interest requested by the party. According to the Court of Florence, the calculation of the legal interest with the application of the Increased Rate is not subject to the specific request of the creditor-Plaintiff, since "a mere request for payment of legal interest" is sufficient.

As a basis of this ruling, the Court of Florence stated that:

  • even the Court of Cassation in its jurisprudence on Article 1284 of the Civil Code, in its formulation prior to the new law being enacted in 2014, has already recognised as absolutely legitimate the calculation of legal interest made not by using the "legal rate ordinarily provided for [i.e. the Standard Rate ex Article 1284, first paragraph, Civil Code], but that set forth by the special legislation applicable to the specific case under its cognizance, in the face of a generic application of 'legal interest', without further specification" (see Court of Cassation 14 February 2002 No. 2149 and Court of Cassation 4 July 2012 No. 11187);
  • the Increased Rate, set forth by Article 1284, fourth paragraph, of the Civil Code, is a special provision in law, which was introduced by the Italian legislator in 2014 with the purpose of "discouraging the delaying tactics of the debtors of sums of money in the proceedings";
  • where a generic request for the payment of legal interest is submitted, the Court is required to legally qualify such request and this qualification is "to be oriented according to the principle lex specialis derogat lex generali".

On the basis of these arguments, the Court of Florence has established the following principle of law: "Where the proceeding has as its object a pecuniary obligation, against an additional request for payment of the legal interest, without further specification, the applicable interest will be therefore the 'increased rate' referred to in the combined provisions of Article 1284, fourth paragraph, of the Civil Code, and Legislative Decree No. 231/2002".

For the sake of completeness, it should be noted that through two recent rulings (see Court of Cassation 7 November 2018 No. 28409 and 25 March 2019 No. 8289) the Court of Cassation clarified that the Increased Rate is applicable only to contractual disputes and to the ensuing restitutions, but not to extra-contractual disputes.

The implications for companies

The application-related consequences of this interpretation given by the Court of Florence are significant. Let us assume, by way of example, a case started on 1 January 2016 in which the plaintiff asked for the payment of EUR 1 million, with a first instance judgment issued after four years. If the Standard Rate were applied, the interest would be equal to EUR 14,000; following the interpretation of the Court of Florence it would instead be equal to EUR 320,247.

This interpretation may also have two practical consequences of great importance. Those who, in drafting the financial statements for the year, have made or are making "provisions for risks and charges", must verify that these are not underestimated, considering the Increase Rate; the ones who should plan the legal or settlement strategy in a dispute must also be aware, in their assessments, of this higher rate and the consequent higher risk of losing the case.

Final remarks

At the moment, it is unknown whether or not the ruling of the Court of Florence, which complies with three other rulings issued by the same Judge Mr Ghelardini (Court of Florence dated 24 January 2017, dated 8 May 2018 and 14 June 2018) has been appealed.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Allen & Overy LLP | Attorney Advertising

Written by:

Allen & Overy LLP
Contact
more
less

Allen & Overy LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.