Relationship Between Interest for Lawful and Unlawful Use of Funds

Link to the article in the “New Ukrainian Law” Journal

Statement of the Problem

The large-scale armed aggression against Ukraine and the introduction of martial law have led to a significant worsening of the non-payment crisis caused by the inability of individuals and legal entities to service their debt obligations for reasons beyond their control (loss of housing and other property, loss of permanent employment and regular income, forced relocation to another region or country, etc.). The additional accrual by creditors of various types of interest on the amount of debt substantially increases the amount of monetary obligations and places debtors in an even more vulnerable position.

Under these circumstances, it appears appropriate to examine the various types of interest for the use of funds under Ukrainian civil law and to analyze the practice of their application depending on whether the use of funds is lawful or unlawful. The current stage of development of Ukrainian civil legislation in the context of its adaptation to European Union law (the EU acquis) requires improvement of the legal regulation governing interest for the use of funds, taking into account European trends and EU guidance documents in the field of private law, which are of high legal quality and represent the development of contemporary global private law thought.

Analysis of Recent Research and Publications

In the national private law doctrine, certain issues concerning interest for the use of funds have been examined in the scholarly works of such legal scholars as N. Yu. Holubieva, I. S. Kanzafarova, N. S. Kuznietsova, S. O. Pohribnyi, O. P. Podtserkovnyi, V. D. Prymak, Ya. M. Romaniuk, V. H. Rotan, M. M. Sibilov, L. V. Tarasenko, O. I. Shapovalova, N. V. Shcherbakova, A. H. Yarema, and others. At the same time, the legal nature of interest for the use of funds, its differentiation depending on whether the use of funds is lawful or unlawful, and the problems arising from creditors’ simultaneous application of different types of interest to the same monetary obligation require renewed consideration and further systematic scholarly analysis.

The purpose of this article is to determine the relationship between interest for the lawful and unlawful use of funds.

Presentation of the Main Research Findings

Under the current civil legislation of Ukraine, provisions governing interest are contained in various chapters and sections of the Civil Code of Ukraine and may be conditionally divided into the following groups:

legal provisions that provide for the accrual of interest as payment for the use of a loan, credit, bank deposit, or funds held in a bank account (Part 1 of Article 1048, Part 1 of Article 1054, Article 1056¹, Part 1 of Article 1058, Article 1061, Part 1 of Article 1070 of Section III “Specific Types of Obligations” of Book Five “Law of Obligations” of the Civil Code of Ukraine) [1];
legal provisions that provide for the payment of interest for delay in the performance of any monetary obligation (Part 2 of Article 625 of Chapter 51 “Legal Consequences of Breach of an Obligation. Liability for Breach of an Obligation” of Section I “General Provisions on Obligations” of Book Five “Law of Obligations” of the Civil Code of Ukraine) [1];
legal provisions that provide for the payment of interest for breach of specific obligations where expressly prescribed by the legislature: interest for the use of another person’s funds in the event of delayed payment for goods; interest on the amount of an advance payment in the event of the seller’s delay in delivering the goods; interest for delayed payment of an annuity; interest for improper performance by a bank of transactions involving a client’s account; interest for refusal to honor a check; interest for the use of funds acquired or retained without sufficient legal grounds (Part 3 of Article 692, Part 5 of Article 694, Part 3 of Article 693, Part 1 of Article 736, Article 1073, Part 1 of Article 1106, Part 2 of Article 1214 of Section III “Specific Types of Obligations” of Book Five “Law of Obligations” of the Civil Code of Ukraine) [1].

At the same time, Section I “General Provisions on Obligations” of Book Five “Law of Obligations” of the Civil Code of Ukraine also contains Article 536, “Interest,” which is regarded as a general provision establishing the rule that the use of another person’s funds must be compensated.

By their legal nature, all types of interest provided for by the above provisions of the Civil Code of Ukraine may be divided into two categories: interest constituting payment (remuneration) for the lawful use of funds (Part 1 of Article 1048, Part 1 of Article 1054, Article 1056¹, Part 1 of Article 1058, Article 1061, Part 1 of Article 1070 of the Civil Code of Ukraine), and interest constituting a measure of liability for breach of monetary and certain other obligations (Part 2 of Article 625, Part 3 of Article 692, Part 5 of Article 694, Part 3 of Article 693, Part 1 of Article 736, Article 1073, Part 1 of Article 1106, Part 2 of Article 1214 of the Civil Code of Ukraine).

O. I. Shapovalova, in examining the civil-law nature of interest in monetary obligations, proposed the following classification of interest: 1) interest where a loan is lawfully granted, representing an increase in monetary debt (growth interest); 2) interest in the event of a breach of a monetary obligation (usury interest), regarded as an independent measure of liability or, in exceptional cases where provided by law or contract, as compensation for damages or as a penalty [2, p. 7].

An analysis of these provisions on interest demonstrates that the existing legal framework lacks a unified (universal) approach to defining interest as payment for the use of funds. The term “interest” is used for different types of accruals that differ in their legal nature and grounds for arising, which in practice creates difficulties in distinguishing and correlating them and gives rise to the problem of a creditor simultaneously applying different types of interest to the same amount of debt [3, pp. 340–341].

At present, there is also no clear statutory distinction between interest for the lawful and unlawful use of funds, although the need for such a distinction has become apparent from the standpoint of both current judicial practice and civil law doctrine.

The practice of interpreting and applying civil-law provisions governing interest for the use of funds may conditionally be divided into two periods: before 2018 and after 2018.

Before 2018, judicial practice was dominated by an approach that permitted the simultaneous accrual of two types of interest on an overdue monetary obligation – interest as payment for the use of funds and interest as a measure of liability for breach of a monetary obligation.

A generalized statement of this position is contained in the Letter of the Supreme Court of Ukraine “Analysis of the Application of Article 625 of the Civil Code of Ukraine in Civil Proceedings” dated July 1, 2014, which states that “interest provided for by Articles 536, 1048, 1056¹, and 1061 of the Civil Code of Ukraine constitutes payment for the use of another person’s funds and, unless otherwise agreed by the parties, is payable by the debtor for the entire period during which the funds are used, including after the due date for their repayment. At the same time, a debtor who breaches a monetary obligation is subject to liability under Article 625 of the Civil Code of Ukraine, which consists in adding to the unperformed obligation a new additional obligation to compensate the creditor for financial losses resulting from the depreciation of funds due to inflation throughout the entire period of delay, as well as to pay three percent per annum on the overdue amount, unless a different rate of interest is established by contract or law” [4].

Accordingly, given the different legal nature of the interest provided for by Articles 536, 1048, 1056¹, and 1061 of the Civil Code of Ukraine and the interest recoverable under Article 625 of the Civil Code of Ukraine, as well as the absence of restrictions under the legislation then in force, the Supreme Court of Ukraine confirmed the lawfulness of recovering both types of interest simultaneously, provided that the creditor asserted such claims [4].

In other words, the annual interest provided for by Part 2 of Article 625 of the Civil Code of Ukraine was not regarded as interest for the use of another person’s funds within the meaning of Article 536 of the Civil Code of Ukraine, and therefore the simultaneous accrual of such interest on overdue amounts was not excluded.

At the same time, doctrinal views regarding this relationship between the different types of interest cannot be regarded as unanimous.

L. V. Tarasenko’s position is consistent with the understanding of interest outlined above. In determining the relationship between annual interest under Article 625 of the Civil Code of Ukraine and interest for the use of another person’s funds under Article 536 of the Civil Code of Ukraine, she concluded that these types of interest, being entirely different in their legal nature, do not overlap or condition one another and are payable independently: interest for the use of another person’s funds is payable for the entire period during which such funds are used, regardless of whether the debtor is held civilly liable for breach of a monetary obligation; annual interest is recoverable alongside, but independently of, interest for the use of another person’s funds where grounds for civil liability exist [5, p. 17].

M. M. Sibilov also interprets Article 536 of the Civil Code of Ukraine narrowly, stating that the interest provided for by this provision is, by its legal nature, not a sanction but a debt [6, pp. 393, 401].

N. V. Shcherbakova and A. E. Shyrnina likewise consider interest under Article 536 of the Civil Code of Ukraine to constitute income that the debtor is obligated to return to the creditor and that such interest is payable in all cases, regardless of whether there has been a delay in performing the monetary obligation [7, p. 87].

O. P. Podtserkovnyi expresses a different view of Article 536 of the Civil Code of Ukraine, describing interest for the late repayment of funds under Part 2 of Article 625 of the Civil Code of Ukraine as a special case of the application of Article 536 of the Civil Code of Ukraine that operates in circumstances of delayed payment [8, p. 279].

V. H. Rotan and A. H. Yarema take the same view, noting that Article 625 of the Civil Code of Ukraine, insofar as it provides for the payment of interest, is a special provision in relation to Article 536 of the Civil Code of Ukraine, which establishes interest for the use of another person’s funds. Article 536 applies to all cases involving the use of another person’s funds, whereas Article 625 establishes interest only in the event of delay in the performance of a monetary obligation. Accordingly, the application of interest under Article 536 of the Civil Code of Ukraine excludes the application of interest provided for by Article 625 of the Civil Code of Ukraine [9, pp. 220, 624].

A fundamentally new approach to understanding the provisions governing interest for the use of funds is associated with the adoption by the Grand Chamber of the Supreme Court of resolutions dated March 28, 2018, in Case No. 444/9519/12; April 10, 2018, in Case No. 910/10156/17; May 23, 2018, in Case No. 910/1238/17; October 31, 2018, in Case No. 202/4494/16-c; February 4, 2020, in Case No. 912/1120/16; May 25, 2021, in Case No. 149/1499/18; April 5, 2023, in Case No. 910/4518/16; and others.

As the Constitutional Court of Ukraine stated in its Decision No. 6-r(II)/2022 dated June 22, 2022, “since March 2018, the practice of the court of cassation concerning the possibility of simultaneously applying the provisions of Part 1 of Article 1048 of the Civil Code of Ukraine and the first sentence of Part 1 of Article 1050 of the Civil Code of Ukraine, read in conjunction with Part 2 of Article 625 of the Civil Code of Ukraine, has undergone fundamental changes. These changes were caused, first, by a change in the approach to interpreting Article 1048 of the Code (concerning the debtor’s obligation to pay interest until the date of repayment of the loan) in the context of determining the period for performance of obligations under a credit agreement and, second, by a new approach to determining the legal nature of the interest established by Part 1 of Article 1048 of the Code (payment for funds provided) and Part 2 of Article 625 of the Code (a measure of liability for breach of a monetary obligation), as well as the different legal grounds for their application” [10].

In these resolutions, the Supreme Court reassessed the lawfulness of recovering interest as payment for funds provided beyond the credit term, that is, after the due date for repayment of the funds.

Thus, paragraph 6.28 of the Resolution of the Grand Chamber of the Supreme Court dated February 4, 2020, in Case No. 912/1120/16 states that “since the debtor’s conduct cannot be lawful and unlawful at the same time, the regulatory provision of Part 1 of Article 1048 of the Civil Code of Ukraine and the protective provision of Part 2 of Article 625 of that Code cannot apply simultaneously. Therefore, for the period before the debtor defaults, interest on the amount of the loan (credit) is recoverable in accordance with the terms of the agreement and Part 1 of Article 1048 of the Civil Code of Ukraine as payment for the loan (credit) provided, while for the period after such default, annual interest is recoverable pursuant to Part 2 of Article 625 of the Civil Code of Ukraine as a monetary amount that the debtor must transfer to the creditor in the event of a breach of the debtor’s obligation, that is, as a measure of liability for breach of a monetary obligation” [11].

With the emergence of this judicial practice, the term “use of another person’s funds” came to be interpreted by the Supreme Court in two senses. The first is the debtor’s obtaining, generally for consideration, the opportunity lawfully not to repay the debt to the creditor for a certain period. The second is delay in the performance of a monetary obligation, where the debtor is required to pay the money but unlawfully fails to do so [12].

It should be noted that this understanding of the concept of the “use of another person’s funds” is also shared by the academic community.

Thus, I. S. Kanzafarova notes that, for the purposes of Article 536 of the Civil Code of Ukraine, the “use of another person’s funds” should be understood broadly, meaning not only obligations whose principal subject matter is the provision of funds for temporary use (loan, credit, bank deposit, etc.), but also cases involving delayed payment under any obligations requiring payment [13, p. 28].

V. Prymak expresses a similar position, emphasizing that any interest accrued on the amount of a monetary obligation should be considered in the context of two legal phenomena: it will constitute either payment for the lawful use of money, embodying the reciprocal (onerous) nature of this type of obligation, or the debtor’s property liability, where interest takes on the characteristics of a financial sanction for an offense committed, including delay in the payment of a debt [14, p. 9].

H. Yu. Shemshuchenko also considers that the use of another person’s funds may be either lawful (borrowed funds) or unlawful (as a consequence of an offense) [15, p. 317].

As Ya. M. Romaniuk observes, there is a longstanding doctrinal debate regarding the legal nature of the interest provided for by Part 2 of Article 625 of the Civil Code of Ukraine: some scholars consider such interest to be a sanction for breach of a monetary obligation, while others regard it as payment for the unlawful use of another person’s funds [16, p. 37].

Accordingly, under the position of the Supreme Court described above, only the interest provided for by Part 2 of Article 625 of the Civil Code of Ukraine – interest for the unlawful use of funds – may be recovered on overdue payments, while the accrual and recovery of interest as payment for funds provided – lawful use of funds – is excluded.

Analyzing these judicial decisions in terms of the application of the provisions of the Civil Code of Ukraine governing interest, S. O. Pohribnyi noted that “…by setting forth the legal conclusions in the aforementioned resolutions of the Supreme Court, the rule of law was effectively supplemented as a result of judicial lawmaking…” [17, p. 371].

One critic of this new position of the Supreme Court was Ya. M. Romaniuk, who, on the one hand, supported the Grand Chamber’s attempt to protect individuals in legal relationships with banks, in which individuals are inherently the weaker party, but, on the other hand, pointed out that its conclusion is effective only for a certain category of cases and, more generally, created a clear imbalance between the interests of borrowers and lenders [16, pp. 37–38].

Referring to the experience of European Union Member States, Ya. M. Romaniuk noted that, unlike in those countries, where banks are prohibited from setting default interest rates, the conclusion of the Grand Chamber of the Supreme Court encourages banks to stipulate in credit agreements interest under Part 2 of Article 625 of the Civil Code of Ukraine at rates that far exceed the contractual interest rate, thereby substantially worsening the legal position of consumers of banking services and bank clients [16, pp. 37, 39].

While fully supporting the author’s reference to the experience of other countries in combating usury and attempts by banks to impose excessive interest rates on credit, I would disagree only with the assertion that the aforementioned conclusion of the Grand Chamber of the Supreme Court was itself the reason for the spread of the opposite practice in Ukraine. The ability of creditors to impose high annual interest rates on overdue payments results primarily not from the new judicial practice but from the deficiencies of Part 2 of Article 625 of the Civil Code of Ukraine, whose excessive dispositive nature permits agreements to establish any other annual interest rate without any prescribed limit.

For example, Case No. 902/417/18 concerned a supply agreement dated June 1, 2017, in which the parties agreed to modify the interest rate provided for by Part 2 of Article 625 of the Civil Code of Ukraine and set it at 40% per annum on the unpaid value of the goods for 90 calendar days from the date on which payment for the goods became due, and at 96% per annum on the unpaid price of the goods from the expiration of the ninety-calendar-day period until the date of full payment [18]. Case No. 640/925/20 concerned loan agreements entered into in 2016, which provided that, in the event of non-performance or improper performance by the borrower of its obligations under the agreement, interest of 3.8% of the amount of the loan not repaid on time would accrue for each day of use of the loan, equivalent to 1,387% per annum [19].

Accordingly, the problem of imposing unconscionably high interest rates in agreements existed even before the Grand Chamber of the Supreme Court formulated its conclusion regarding the application of legal provisions governing the payment of interest.

In analyzing the reasons underlying the Supreme Court’s conclusion, it should be noted that they primarily concern the need to ensure a balance between the interests of the parties to a credit agreement, establish uniform consequences for breach of a monetary obligation regardless of the type of agreement from which the obligation arose, and reduce artificial conditions contributing to the bankruptcy of businesses and individuals [20].

While fully supporting this reasoning, it should also be added that a situation in which a creditor is able, through interest accrued as payment for funds provided beyond the credit term, to continuously and indefinitely increase the principal amount of the debt without any temporal, contractual, or statutory limitations is inconsistent with the principle of legal certainty. In such a case, the consequences of the debtor’s breach of the obligation become more advantageous to the creditor, which is contrary to fair business practices and the general principles of civil law – fairness, good faith, and reasonableness.

At the same time, the accrual of interest under Part 2 of Article 625 of the Civil Code of Ukraine does not result in the continuous growth of the principal debt because such interest has a different legal nature – it constitutes a measure of liability for breach of a monetary obligation – and, under certain circumstances, may even be reduced by a court by analogy with a contractual penalty.

Despite the repeated application of this conclusion in various resolutions of the Supreme Court, the position of the Grand Chamber of the Supreme Court on the issue under consideration has now come to be perceived as not entirely consistent.

In particular, in its Resolution dated January 18, 2022, in Case No. 910/17048/17, the Grand Chamber of the Supreme Court, without formally departing from its previous conclusions set forth in the resolutions mentioned above, held that the accrual of interest for the use of credit until the date of actual repayment was lawful regardless of the expiration of the credit agreements [21].

In the Separate Opinion of Judges of the Grand Chamber of the Supreme Court L. Y. Katerynchuk, H. R. Kret, and L. I. Rohach dated January 18, 2022, in Case No. 910/17048/17, the judges expressed disagreement with this conclusion, which, in their view, was entirely inconsistent with the Supreme Court’s previous settled practice [22].

Having analyzed the provisions of Ukrainian civil legislation governing interest and the relevant law enforcement practice, the position that developed after 2018 and excludes the possibility of accruing interest applicable to the lawful use of funds on an overdue monetary obligation appears more acceptable and well-founded.

It is evident that the legal relationships concerning the accrual of contractually determined payment for the use of funds during the agreed period for which they were provided and the legal relationships concerning the accrual of interest for failure to fulfill the obligation to return funds by the specified deadline differ in substance. The former arise upon the commencement of permitted (lawful) use of another person’s funds under the terms established by the agreement and are therefore regulatory in nature, whereas the latter result from the commission of a legal violation – late performance of a monetary obligation – and are therefore protective in nature.

Accordingly, one should agree with the Grand Chamber of the Supreme Court that, because the debtor’s conduct cannot be lawful and unlawful at the same time, the regulatory provisions governing interest (Part 1 of Article 1048, Part 1 of Article 1054, Article 1056¹, Part 1 of Article 1058, Article 1061, Part 1 of Article 1070 of the Civil Code of Ukraine) and the protective provision of Part 2 of Article 625 of the Civil Code of Ukraine cannot apply simultaneously.

As correctly noted in paragraphs 82 and 84 of the Resolution of the Grand Chamber of the Supreme Court dated April 5, 2023, in Case No. 910/4518/16, “the granting of credit provides the borrower with a benefit consisting in the fact that, having received funds from the creditor, the borrower is not required to return them immediately but instead obtains the opportunity lawfully not to repay the debt to the creditor for a certain period (the credit term, within which the parties may establish periods for repayment of portions of the credit amount), while the creditor, as a general rule, is correspondingly not entitled to demand repayment of the debt during the relevant period (the creditor’s right to demand early repayment of the entire credit amount is provided for by Part 2 of Article 1050 of the Civil Code of Ukraine). It is precisely for this benefit – the opportunity lawfully not to repay the debt to the creditor for a certain period – that the borrower pays the creditor consideration in the form of interest under the credit agreement pursuant to Article 1048 of the Civil Code of Ukraine. At the same time, upon expiration of the credit term or upon the creditor’s demand for early repayment of the credit, no further credit is extended to the borrower, the borrower may no longer lawfully refrain from returning the funds, and the creditor is therefore entitled to demand repayment of the credit together with interest accrued in accordance with the periodic payment deadlines established in the agreement as of the expiration of the credit term or the presentation of a demand for early repayment within that term. In other words, in such a case the borrower does not receive the corresponding benefit from the creditor for the period following the expiration of the credit term or the presentation of a demand for early repayment and therefore should not pay new interest for that period pursuant to Article 1048 of the Civil Code of Ukraine” [20].

This approach also appears correct from the standpoint of ensuring a fair balance between the rights and obligations of the creditor and the debtor, as it prevents a creditor from abusing its rights by accruing different types of interest, differing in their legal nature, on the same debt and thereby imposing an excessive burden on the debtor that is disproportionate to the consequences of the breach committed.

A literal interpretation of Part 1 of Article 1050 of the Civil Code of Ukraine also supports this conclusion. The first sentence of that provision requires only the payment of interest under Article 625 of the Civil Code of Ukraine on a loan amount not repaid on time and does not permit the lender to receive interest as payment for the use of the loan under Part 1 of Article 1048 of the Civil Code of Ukraine accrued for the overdue period – the period from the due date for repayment until actual repayment – because, in that provision, the phrase “regardless of the payment of interest due to the lender pursuant to Article 1048 of this Code” is applied by the legislature only to agreements whose subject matter consists of fungible goods rather than funds.

Accordingly, given the inconsistencies in the practice of applying and interpreting the current provisions of the Civil Code of Ukraine governing interest and the establishment of an approach recognizing the dual meaning of the term “use of another person’s funds,” it appears appropriate to incorporate into Article 536 of the Civil Code of Ukraine, which is the general provision governing the payment of interest, a twofold regime for interest for the use of another person’s funds by clearly dividing it into two types: interest for the lawful use of another person’s funds (Part 1 of Article 1048, Part 1 of Article 1054, Article 1056¹, Part 1 of Article 1058, Article 1061, Part 1 of Article 1070 of the Civil Code of Ukraine) and interest for the unlawful use of another person’s funds (Part 2 of Article 625, Part 3 of Article 692, Part 5 of Article 694, Part 3 of Article 693, Part 1 of Article 736, Article 1073, Part 1 of Article 1106, Part 2 of Article 1214 of the Civil Code of Ukraine).

Under this approach, in connection with introducing the new terms “lawful use of another person’s funds” and “unlawful use of another person’s funds” into Ukrainian civil legislation, it would also be appropriate to define their meaning by emphasizing that lawful use of funds is limited to a specified term and by providing a non-exhaustive list of instances of unlawful use of funds: delay in the performance of a monetary obligation, acquisition or retention of funds without sufficient legal grounds, and other cases of unlawful retention, failure to return, or delayed payment of funds.

Concerns regarding creditors’ ability under Part 2 of Article 625 of the Civil Code of Ukraine to establish excessive interest rates on overdue amounts are indeed valid and have existed at least since the Civil Code of Ukraine entered into force. Therefore, in order to maintain a balance between the interests of debtors and creditors, protect borrowers as weaker parties in legal relationships with credit institutions from excessive interest rates, and bring interest rates to a reasonable and economically justified level, statutory limits should be established on annual interest rates that creditors would not be permitted to exceed.

In introducing such restrictions, the position of Ya. M. Romaniuk appears relevant. Taking into account the instability of Ukraine’s financial market, he proposed linking the statutory interest rate not to a fixed amount – three percent per annum – but to the discount rate of the National Bank of Ukraine, as provided for in Part 1 of Article 1048 and Part 1 of Article 1061 of the Civil Code of Ukraine, increased by several percentage points, so that the default interest rate would exceed the interest rate established in the agreement for the agreed period of use of another person’s funds and thereby provide the debtor with an incentive to perform the monetary obligation on time [16, p. 38].

N. Yu. Holubieva, referring to international legal instruments – the UNIDROIT Principles and the United Nations Convention on Contracts for the International Sale of Goods – likewise proposes that the annual interest rate under Article 625 of the Civil Code of Ukraine be set at the discount rate of the National Bank of Ukraine [23, p. 38].

It should be noted that a similar approach to determining statutory interest is also applied in the Principles, Definitions and Model Rules of European Private Law (Draft Common Frame of Reference), Article III.-3:708 of which provides that, where payment of a sum of money is delayed, irrespective of the circumstances of the non-payment, the creditor is entitled to interest on that sum from the time payment is due until the time of payment at the average commercial bank short-term lending rate applicable at the place where payment is due [24].

It appears that the proposed legislative amendments would contribute to ensuring consistency and predictability in the application of civil legislation governing interest and prevent further divergent interpretations, deprive creditors of the ability to recover excessive monetary amounts from debtors in the form of different types of interest while distorting their true legal purpose, and prevent interest from being transformed from a means of reasonably encouraging the debtor to perform a monetary obligation into an unfairly excessive burden on the debtor and a source of unjustified additional profit for the creditor.

Conclusions

The lack of up-to-date civil-law research in the field of legal regulation of relationships involving the application of interest for the use of funds adversely affects legislative and law enforcement activities, thereby reducing the effectiveness of safeguarding and protecting the rights of participants in civil-law relationships. A poorly drafted provision of the Civil Code of Ukraine or another act of civil legislation undoubtedly requires amendment where there are grounds for its inconsistent application, that is, where courts “fundamentally change” their law enforcement practice without any change to the legal provision being applied. In order to improve the provisions of the current civil legislation of Ukraine governing the application of interest, we consider it appropriate to amend Article 536 of the Civil Code of Ukraine by restating Part 2 thereof as follows:

“2. Interest for the lawful use of another person’s funds shall be established by contract, law, or another act of civil legislation for the agreed period of use of the funds.

Interest for the unlawful use of another person’s funds (delay in the performance of a monetary obligation, acquisition or retention of funds without sufficient legal grounds, other unlawful retention, failure to return, or delayed payment of funds) shall be established by Article 625 of this Code.”

In addition, in order to prevent creditors from abusing the right to establish disproportionately high interest rates in contracts of adhesion that impose an excessive burden on the debtor, we consider it appropriate to amend Article 625 of the Civil Code of Ukraine by restating Part 2 thereof as follows:

“2. A debtor who has delayed performance of a monetary obligation shall, at the creditor’s request, be required to pay the amount of the debt adjusted by the established inflation index for the entire period of delay, as well as annual interest on the overdue amount at a rate equal to the discount rate of the National Bank of Ukraine plus five percentage points, unless a different interest rate is established by contract and does not exceed twice the discount rate of the National Bank of Ukraine.”

Yevhen Ottsevych
Partner at BRASLAVSKYI & PARTNERS Law Firm

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