Default Interest Rates in International Transaction: Analyses of Private Law Application

Abstract

Abstract: A legal problem that regularly arises in the event of default of monetary obligations in international contracts, or contracts which contain a foreign element, is which law to apply to default interest rates. This is of significant importance as default interest rates can vary to a great extent between countries. Iceland was hit hard by the 2008 financial crisis, especially by the spill-over effects of its banking failure which, inter alia, lead to the collapse of the currency (ISK). As a result, both the failed banks as well as many debtors defaulted on their obligations. This has provided for interesting case law in Iceland. The article explores Icelandic rules on default interest on monetary claims in foreign currency. The main issue at hand whether Icelandic or foreign law is applicable. The 2001 Interest Act applies to default interest on monetary claims. The rate of the official default interest is based on the strength of the relevant currency. In states where the currency is strong the default interest is usually lower than in states that have a weaker currency. Accordingly, if a foreign currency monetary claim accrues default interest under Icelandic law, the creditors’ return can be much higher or lower than under the law of the state of the currency of payment, depending on the strength of that currency. It is, therefore, pivotal to determine which law is applicable to the contract. In the absence of express choice of law, the rules of Icelandic private international law decide what is the prevailing law of the contract. The relevant law is the 2000 Act on the Choice of Law in Contracts which materially corresponds to the 1980 Rome Convention on the law applicable to contractual obligations. The Supreme Court of Iceland has held that the prevailing law of the contract is also the applicable law of the default interest on a foreign currency monetary claim. This is also the prevailing view of courts in most of foreign jurisdictions. Article 78 of the United Nations Convention on Contracts for the International Sale of Goods (CISG) only states that if a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it. However, it is silent on the interest rate. On the other hand, the UNIDROIT Principles of International Commercial Contracts, 7.4.9(2), the Principles of European Contract Law, PECL 9:508(1), the Draft Common Frame of Reference, DCFR III. – 3:708, as well as the Common European Sales Law (CESL) address the problem with an explicit rule that states that the interest shall be the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place for payment. Résumé: Un problème juridique qui se pose régulièrement dans le cas de manquement aux obligations monétaires dans les contrats internationaux, ou dans les contrats contenant un élément étranger, est de savoir quelle loi appliquer aux taux d’intérêts de retard. Ceci est d’une importance majeure dans la mesure où les taux d’intérêts de retard peuvent varier énormément selon les pays. L’Islande a été durement touchée par la crise financière de 2008, spécialement par les répercussions des faillites de ses banques qui ont notamment conduit à l’effondrement de la devise (ISK). Par voie de conséquence, les banques en faillite, ainsi que de nombreux débiteurs, n’ont pas respecté leurs obligations. Cette situation a fourni une intéressante jurisprudence en Islande. Le présent article étudie les réglementations islandaises concernant les interest de retard sur des créances pécuniaires en monnaie étrangère. La question essentielle est de savoir si c’est la loi islandaise ou la loi étrangère qui s’applique. La ‘Loi sur