New rules for determining maximum interest rates and statutory interest rates for both interest on capital and interest on delay entered into force on 1 January 2016.
Interest plays a key role in commerce, representing payment for use of capital (interest on capital) or damages for late performance (interest on delay). This character is reflected in Poland’s recently amended regulations specifying the permissible rates of interest.
The changes do not affect the basic provisions on interest, which serve among other things to protect debtors. To prevent creditors from abusing their right to demand interest, which could distort the purpose of this legal institution, the Civil Code prohibits usury by setting maximum interest rates.
Before now, under the Civil Code the maximum annual rate of interest arising out of a legal transaction could not exceed four times the Lombard rate of the National Bank of Poland. If the parties agreed to interest higher than that, interest would only be due at the maximum rate. However, if the parties provide for the payment of interest without indicating the rate, then statutory interest is due. Previously, this was set by a regulation of the Council of Ministers. But these regulations raised doubts whether the maximum rate of interest also applies to interest on delay. Interest on delay is provided for by statute, but the parties may specify the rate in their contract.
Partly to eliminate these doubts in interpretation, the Parliament adopted the Act of 5 August 2015 Amending the Financial Market Supervision Act and Certain Other Acts. The rules for functioning of interest regulations, e.g. the ban on usury, would not change. However, one of the provisions of the amending act attempted to modify the notion of interest on delay under Civil Code Art. 481 by introducing an express limitation on the maximum level of interest on delay, which could not be higher per annum than six times the NBP Lombard rate. However, this amendment never entered into force because it was repealed first by another act.
This was the Act of 9 October 2015 Amending the Act on Payment Terms in Commercial Transactions, the Civil Code and Certain Other Acts, which introduced much more complicated changes and entered into force on 1 January 2016. This amendment changed the rules for calculating both maximum interest and statutory interest. Moreover, the changes affect not only interest on delay, but also the general provisions on interest (Civil Code Art. 359). When that amendment entered into force, two pairs of rules began to function in this area, both constructed around the same principle.
Calculation of interest rates on capital
The first pair of rules are general in nature and concern interest on capital arising under Civil Code Art. 359. According to the first rule, statutory interest is no longer set by a regulation of the Council of Ministers, but on the basis of a mathematical formula stated in the statute. This avoids situations where the Council of Ministers does not manage to amend its regulation as base rates change. (This happened for example in late 2014, when for several months statutory interest exceeded maximum interest.) Under the second rule, the level of maximum interest is equal to twice the rate of statutory interest:
statutory interest = NBP reference rate + 3.5 pp
maximum interest = 2 x (NBP reference rate + 3.5 pp)
Calculation of interest rates on delay
The second pair of rules are specific and apply only to interest on delay, based on Civil Code Art. 481. The first of the pair is tied to introduction of a new institution: statutory interest on delay, calculated according to the formula below. The previous regulations provided for interest on delay to be charged at a rate equal to statutory interest (on capital) if the parties did not specify the rate. Under the second rule, by analogy to the rule for interest on capital, the maximum interest on delay must not exceed twice the rate of statutory interest on delay:
statutory interest on delay = NBP reference rate + 5.5 pp
maximum interest on delay = 2 x (NBP reference rate + 5.5 pp)
It should be pointed out that as a result of applying these formulas, the rate of interest on delay will always be somewhat higher than the rate of interest on capital. As indicated in the justification for the amending act, this follows from the sanctioning function of interest on delay, because it is charged when there is a breach of an obligation.
Exception—interest on delay in commercial transactions
It must additionally be pointed out that the amending act also introduced many changes in the Act on Payment Terms in Commercial Transactions of 8 March 2013. One of these changes affects interest rates and provides for a certain departure from the set of rules discussed above. Under the new Art. 4a of the Act on Payment Terms in Commercial Transactions, Civil Code Art. 481 §2, which specifies the rate of statutory interest on delay, does not apply to commercial transactions. In dealings between businesses (and between parties to the commercial transactions listed in the act), statutory interest on delay is calculated according to a different formula, defined by the new Art. 4(3) of the act as “statutory interest on delay in commercial transactions”:
statutory interest on delay in commercial transactions = NBP reference rate + 8 pp
Moreover, the rate of this interest—unlike the rate of interest arising under the Civil Code—does not change automatically together with a change in the base rate. Under the new Art. 11b of the Act on Payment Terms in Commercial Transactions, interest on delay for the first half of the calendar year (1 January – 30 June) will be based on the reference rate from 1 January, and for the second half (1 July – 31 December) on the reference rate from 1 July.
The other rules for calculating the level of interest rates remain in force also with respect to commercial transactions.
Effects of changes
The practical consequences of the changes for calculation of interest rates is illustrated by the graph below, presenting the levels of interest on capital calculated on the basis of Civil Code Art. 359. It should be borne in mind that the NBP reference rate is always lower than the NBP Lombard rate (the previous basis for calculating maximum interest), so the interest rates should not be compared assuming the same base rate. (For the purpose of the graph below, it was assumed that the Lombard rate is always 1 pp higher than the reference rate.)
On this assumption, it is clear that the prior rules entailed a steep decline in the maximum interest rate when the base rates fell. The new method mitigates this effect, ensuring that they are maintained at a minimum level even if the base rate is zero, which is more advantageous for creditors. On the other hand, this method also slows the growth of the interest rate when there is a rapid rise in base rates. The levels of maximum interest rates equalise at 10% on respective base rates of 1.5% (reference rate) and 2.5% (Lombard rate), i.e. the level of those rates at the time this article was written. But on further growth in the base rates, the level of the maximum interest calculated under the new rules will rise more gently. A similar mechanism operates in the case of interest on delay, but it will be higher than interest on capital.
Contracts from before the amendment
Finally it should be explained what happens with interest on monetary obligations under contracts concluded before entry into force of these changes. The answer to this question will have a great impact on commercial practice. This is addressed by the interim provision of the amending act (Art. 56), under which the prior regulations apply to interest payable for the period ending the day before the effective date of the amending act.
This seems to mean that when calculating statutory interest, the old rules should apply to interest through 31 December 2015, and interest for any day from 1 January 2016 forward should be calculated under the new rules. But the rules for calculating interest in the case of commercial transactions raise some doubts, because Art. 55(1) of the amending act provides that the existing provisions of the Act on Payment Terms in Commercial Transactions applies to commercial transactions entered into before the entry into force of the amending act. The amending act does not expressly determine which of these provisions should control as a specific regulation.
Apart from these doubts, it should be pointed out that in the case of determination of interest rates by the parties in a contract, regardless of the method adopted for setting the rate, these interim regulations may prove inadequate for unequivocal determination of the interest rate, in the case of both commercial transactions and other transactions.
Rafał Kuchta, New Technologies Practice, Wardyński & Partners