The Provision of the First Sentence of Article 1050.1 of the Civil Code of Ukraine Does Not Restrict the Bank’s Right to Interest as Payment for the Credit Usage – the Constitutional Court Decision

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23.06.2022

On June 22, the Second Senate of the Constitutional Court of Ukraine adopted Decision № 6-r(II)/2022 in the case upon the constitutional complaint of Joint Stock Company “The State Savings Bank of Ukraine” regarding the constitutionality of the provision of the first sentence of Article 1050.1 of the Civil Code of Ukraine (hereinafter referred to as the Code). The Judge-Rapporteur in this case is Serhiy Holovaty.

The formula of the impugned provision of the Code is as follows: “in case the borrower fails to repay the credit amount in a timely manner, he/she is obliged to pay the amount of money in accordance with Article 625 of this Code”.

Joint Stock Company “The State Savings Bank of Ukraine” (hereinafter referred to as the Bank) noted that both at the time of conclusion of the credit agreement and during its execution, it had legitimate expectations to receive interest for the use of funds until the day a credit was repaid, and such legitimate expectations did not depend on conscientious behaviour of the borrower (timely or untimely repayment of the credit).

According to the Bank’s opinion, the provision of the first sentence of Article 1050.1 of the Code limits the receipt by the Bank of the accrued interest for using the credit by the moment of its repayment, rather than crediting the borrowed amount to the creditor’s bank account. The Bank argues that as a consequence of this, it had been unlawfully deprived of the the right of ownership acquired in accordance with the law (Article 41 of the Constitution of Ukraine), and its right to entrepreneurial activity, which is not prohibited by law, was limited (Article 42 of the Constitution of Ukraine).

The Constitutional Court of Ukraine noted that the prescribed provision of Article 41 of the Constitution of Ukraine defines the triad of the owner’s powers: possession, use, disposal, which he/she exercises in relation to certain property belonging to him/her on one or another legal basis, therefore, in the understanding of this provision, the property, which everyone has the right to own, use and dispose, relates to property. Accordingly, the constitutional imperative on the inviolability of the right of private property is primarily aimed at protecting the owner from an unlawful interference in the exercise of his/her rights to own, use and dispose the property belonging to him/her freely and at his/her own discretion.

Having examined the European Court of Human Rights case-law on the interpretation of the term “property” within the meaning of Article 1 of Protocol No. 1 to the Convention for the Protection of Human Rights and Fundamental Freedoms of 1950, guided by the principle of pacta sunt servanda (agreements must be kept), taking into account the provisions of Article 190.1, Article 1048.1.2 of the Code, the established case-law of national courts on the legality of collecting interest for the credit usage, accrued for an overdue period (which has remained stable during 2011-2017), the Constitutional Court of Ukraine concluded that both at the time of the credit agreement, and during certain credit period, the Bank had legitimate expectations to receive interest for the use of funds before the date of credit repayment, and therefore the right of the Bank to pay such interest is deemed to be a property and, accordingly, is the item subject to ownership, protection of which is guaranteed by Article 41 of the Constitution.

Having analysed the scope of application of the provisions of Articles 625 and 1050 of the Code and Article 1048 of the Code, the Constitutional Court of Ukraine noted that the provisions of Articles 625 and 1050 of the Code regulate the issues of liability for violation of a monetary obligation by the borrower, while the provisions of Article 1048 of the Code determine the general conditions for accrual, payment interest for the use of funds as essential terms of the loan agreement, credit agreement.

The Constitutional Court of Ukraine noted that the provisions of Article 625.5, the first sentence of Article 1050.1 of the Code and Article 1048.1 of the Code regulate legal relations that are different in their content and are not mutually exclusive, because, as a general rule (Article 622.1 of the Code), unless otherwise provided by the agreement or the law, the application of civil liability measures does not relieve the debtor from the performance of obligations under the agreement in kind.

The Constitutional Court of Ukraine came to the conclusion that the application of the provision of the first sentence of Article 1050.1 of the Code, as such, aimed at granting a creditor the right to receive three percent per annum of the overdue amount and inflationary losses as measures of civil liability for improper performance of monetary obligations by the borrower, and, thus, cannot affect the right of the creditor to receive interest as payment for the use of the credit, that is, the right to demand from the debtor the fulfillment of obligations under the credit agreement in kind.

As a result, the Decision established that in the aspect of the issues raised in the constitutional complaint, the provision of the first sentence of Article 1050.1 of the Code does not restrict the Bank’s right to receive interest as payment for the credit usage, as it does not entail negative consequences for the Bank’s right to conduct entrepreneurial activities, and therefore is consistent with the Constitution Ukraine (is constitutional).

 

 

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