Can delay in debt collection affect the amount of default interest?

According to Section 1805(2) of the Civil Code, “a creditor who, without a reasonable cause, delays asserting the right to payment of the debt to the extent that the interest equals the principal, loses the right to claim further interest.” The Supreme Court of the Czech Republic, in its decision dated 5 August 2024, case no. 26 Cdo 2716/2023, for the first time addressed the application of Section 1805(2) of the Civil Code to default interest primarily governed by Section 1970 of the Civil Code.

Factual circumstances of the case

The plaintiff entered into a sublease agreement with the defendant, a subtenant, on 1 May 2018 for the lease of an apartment used for business purposes. The defendant failed to pay rent for the months of May to September 2018.

Therefore, the plaintiff filed a lawsuit (only) on 1 May 2021 for payment of the amount of CZK 262,559.60, including contractual default interest at a rate of 0.25% per day from 2 May 2018 until payment. The lawsuit was filed just before the statute of limitations expired. It should also be noted that the plaintiff did not request payment from the defendant before filing the lawsuit.

Legal assessment by the first-instance and appellate courts

The first-instance court awarded the plaintiff the claimed amount, including default interest in full, meaning default interest totaling more than CZK 700,000. The court reasoned that Section 1805(2) of the Civil Code does not apply to default interest, as it is not explicitly mentioned in the law. According to the first-instance court, the plaintiff is thus entitled to default interest even exceeding the principal of the claim.

The appellate court partially reversed the first-instance judgment, dismissing the claim for default interest exceeding the principal of the claim. The court disagreed with the first-instance court’s conclusion and referred to Section 1805(2) of the Civil Code, under which a creditor who, without a reasonable cause, delays asserting their right, loses the right to claim further interest exceeding the principal, including default interest. The appellate court found that the plaintiff filed the lawsuit three years after the default occurred without a sufficiently reasonable cause.

Supreme Court ruling

The plaintiff appealed the appellate court’s decision.

The Supreme Court first recalled that “Section 1805(2) of the Civil Code had no equivalent under the legal regulations in force until 31 December 2013 (i.e., in Act No. 40/1964 Coll., the Civil Code, and Act No. 513/1991 Coll., the Commercial Code). Previous case law inferred that the unreasonableness of interest could not be determined by its total amount if it was the result of long-term default. A contracting party could not avoid the obligation to pay capitalized default interest by invoking good morals if they could have prevented the total amount from increasing by fulfilling their obligation properly and in a timely manner.”

However, the new legal framework is based on the legal principle of "ultra duplum" (or ne ultra alterum tantum), which has its origins in Roman law. Its purpose is to protect the debtor and motivate the creditor to assert their claim promptly, thereby preventing interest from ultimately burdening the debtor more than the principal.

The Supreme Court based its decision, among other things, on this legal principle of "ultra duplum." Furthermore, it stated that the wording of the law, specifically Section 1805(2) of the Civil Code, is very general. According to the Supreme Court, this provision cannot be limited solely to ordinary loan or credit interest. The Court also noted that Section 1970 of the Civil Code, which governs default interest, does not explicitly exclude or limit Section 1805(2). If the legislature had intended to explicitly establish this limitation, it would have done so in a clearer and more specific manner.

The Supreme Court therefore ruled that Section 1805(2) of the Civil Code also applies to default interest and dismissed the plaintiff's appeal. This provision protects the debtor from unreasonable and excessive increases in, among other things, default interest due to the creditor's inaction in asserting the claim without reasonable cause.

Reasonable cause and delay in asserting the claim

In its decision, the Supreme Court also described examples where a reasonable cause for not asserting the claim might generally be found, as well as situations where there would likely be delay: “Delay will generally occur when the creditor does not seek to enforce their claim despite having the legal opportunity to do so; particularly in situations where they do not assert an already due claim, or do not accelerate a claim that is not yet due (especially due to the debtor's failure to fulfill their obligations), although they are already entitled to do so. A reasonable cause may be, for example, the debtor's assurances of prompt fulfillment of the obligation or situations where the creditor reasonably and justifiably expects that the debtor will be able to fulfill the debt at a later time.”

In conclusion, it should be noted that the Supreme Court fully agreed with the appellate court’s finding that the plaintiff's financial reasons are not a reasonable cause for delaying the enforcement of the claim. On the contrary, the plaintiff's unfavorable financial situation should have led them to expedite the claim enforcement, especially since the situation had not changed even by the time of filing the lawsuit, as the plaintiff requested exemption from court fees.

Impact of the decision on practice

The Supreme Court’s decision sets an important precedent for future disputes concerning default interest. For creditors, it is crucial to assert their claims in a timely manner, as they risk being denied the right to claim default interest exceeding the principal.

This decision opens the door to a broader application of the "ultra duplum" rule in Czech legal practice, thereby increasing pressure on creditors to pursue debt collection efficiently and promptly.