Nouraei & M. Mostafavi Law Offices – September 3, 2024-Tehran- One of the critical issues in transactions between individuals and Iran’s financial and commercial market is the demand for late payment damages by the creditor and the manner and amount of the claim. In most contracts, damages for late payment are foreseen, and if the subject of the obligation is to pay cash, the court can, in honoring Article 221 of the Civil Code, condemn the debtor to compensate the damages resulting from the delay in payment, which in light of Article 522 of the Law of Procedure of General and Revolutionary Courts in Civil Affairs are calculated and judged.
According to Article 522’’ in lawsuits whose subject is debt in the form of official currency (Rial), and the debtor refuses to pay due to the creditor’s demand and the debtor’s solvency, in the event of a drastic change in the annual price index from the time of maturity to the time of payment and after the creditor’s demand, the court will calculate and judge in proportion to the annual index change determined by the Central Bank of the Islamic Republic of Iran, unless the parties compromise in another way’’.
Compound interest is the interest that accrues on the principal of the investment /loan and the previous interests added to them. However, in simple interest, interest belonging to the principal amount is not added to the principal amount in subsequent periods. The compound interest method has been common in connection with the loans that Iranian banks and credit institutions give to individuals, as well as to merchants and industrialists, which has caused many problems for the borrowers and their inability to repay the received loans. Consequently, such a practice was prohibited according to the order of the 7th Progress (Development) Plan Law, which became effective on 3 Mordad 1403 (July 24, 2024). In this connection, the additional paragraph 4 of Article 10 of the 7th Progress Plan of the Islamic Republic of Iran has stipulated that:
4- In all banking operations, including facilities, receiving and paying any compound interest and interest from interest, interest & penalty for delay about payment of the commitment sum and damage and penalty for delay in payment are prohibited and void. Legal punishments will also be applied, if the mentioned cases are considered criminal, in addition to refunding the sums and compensating the damages. The Central Bank is obliged to send this section’s performance report to the parliament’s economic committee annually”.
In the meantime, the Supreme Court of the Country has raised some points regarding the manner of calculation of late payment damages and the illegitimacy/illegality of the claim for late payment damages on compound interest in its decision No. 850 dated 16 Mordad 1403 (August 6, 2024), published in the Official Gazette No. 23132 dated 5 Shahrivar403 (August 26, 2024).
In accordance with Article 161 of the Constitution of Iran, the Supreme Court was formed for the purpose of supervising the correct implementation of the laws by the courts, ensuring uniformity of judicial procedure, and fulfilling any other responsibilities assigned to it by law, on the basis of regulations to be established by the Head of the Judiciary, and its rulings shall be binding on all the courts. The decision of the Supreme Court on delayed payment and compound interest is as follows:
“Deduced from Article 522 of the Law of Procedure of General and Revolutionary Courts in Civil Affairs, approved on 21/1/1379 (April 9, 2000), in financial lawsuits where the subject is debt and of the type of official money, to compensate the damages caused to the creditor, by meeting the conditions stated in this article of such as the financial solvency of the debtor and his refusal to pay the debt, the damage of late payment by the proportionality of the annual index change which is published by the Central Bank of the Islamic Republic of Iran in the form of a monthly table, it has been determined that the method of calculation is: the result of dividing the index number at the time of payment by the index number at the time of maturity, multiply the principal amount of the loan and the obtained number will be the amount of the debt including the late payment damage. Therefore, owing to the clarity of the article and its expressions, the calculation of late payment damages is based on the “annual index.”. In addition, the compensation for delay in payment will not include the compound interest that has no legitimate basis….”
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