Interest on overdue payments: a need for an amendment to the law

by Sigurd Holter Torp



Today's rules in Norway relating to interest on overdue payments (or penalty interest) are, in reality, brutal. The current interest rate of 11.75% p.a. can result in very significant gains for the creditor and a corresponding loss for the debtor. This is especially true for large commercial disputes that can go on for years and where the disputed amounts can be enormous. Often the creditor is not to blame for the fact that payment has not taken place earlier, e.g., because the claim is disputed, and the dispute is pending before the courts. In many instances, the penalty interest on the notified claim can grow so large that an amicable solution may be difficult to reach. As such, there is a need for an amendment to the law. The rules relating to interest on overdue payments should be amended so that the debtor may provide security for the main claim so that a costly penalty interest can be avoided.

The creditor has great sway over interest on overdue payments, since the interest is easily triggered by a written claim for payment (Nw.: påkrav) to the debtor where the due date is not fixed in advance, see the Norwegian Act relating to Interest on Overdue Payments, Section 2 (Nw.: forsinkelsesrenteloven). A non-statutory objective liability applies to monetary obligations, so that a debtor has no excuse for not paying. Therefore, by sending such a claim for payment, the creditor ensures that 30 days later penalty interest on the claim will start to run until payment is made.

The creditor is entitled to penalty interest regardless of whether it has specifically suffered any financial loss, see Rt-1995-498. The creditor is also entitled to penalty interest regardless of whether the claim is undisputed or clarified, as penalty interest will also run on disputed claims, see, e.g., LB-2022-159367. If the creditor demands an amount that is too high, they will be entitled to penalty interest to the extent the claim later succeeds, see NOU 1974:54 page 54.

The rules therefore enable the creditor to immediately send a written claim for payment when they believe they have a potential claim against a debtor. Furthermore, the rules encourage the creditor to exaggerate the amount, since they will receive penalty interest to the extent the claim is subsequently successful. The fact that the claim has been calculated incorrectly does not constitute a delay in accepting performance that will prevent penalty interest under the Act relating to Interest on Overdue Payments, Section 2, second paragraph.

Whoever receives such a claim is placed in a difficult situation. Often, they will think that there is no basis for the claim or that it is significantly too high. However, at present, the debtor only has two choices as to whether penalty interest should run or not: to pay in whole or in part, or to not pay. However, it is not very tempting to pay a claim that you believe is unjustified and where there is a risk that the amount will never be repaid, e.g., due to the creditor's inability or unwillingness to pay. Normally the debtor does not pay, but the cost of not paying is the accrual of penalty interest which runs from 30 days after the claim for payment is made until payment occurs (if the claim in any part succeeds in the courts).

The same not only applies to claims for payment, but also to claims for compensation and legal costs determined by the courts. A party who is ordered by the District Court to pay compensation and legal costs to the opposing party has the same challenge even if the case is appealed. If the compensation and the legal costs are not paid within two weeks of the service of the District Court's judgment, penalty interest starts to run. However, the appeal can take a long time, and the outcome is uncertain. In this situation, it may also not be very tempting to pay as a result of the District Court's judgment, because you dispute that there is basis for a claim and/or because you fear that the amount will not be repaid if the case is won in a higher court. Even if the case is won in the appeals court, the opposing party may refuse to repay, e.g., under the pretext of set-off, so that new and perhaps unnecessary legal proceedings must be initiated. Nevertheless, at present you only have the choice between paying or not paying, with the risk of significant loss whether you choose one or the other.

There has long been a need for an amendment to the law that reduces the risk of penalty interest and which allows a debtor to also avoid the risk of paying the creditor the principal sum just to avoid potential penalty interest. At the same time, consideration for the creditor must also be given. An obvious solution is to refer to Section 3-4 of the Norwegian Enforcement Act on the provision of security, which specifically determines what security the debtor may provide to prevent enforcement, e.g., bank deposits in a closed account.

In the same way, there should be an opportunity for a potential debtor to provide security for all or part of the notified main claim, as stated in the claim or non-final judgment, in order to avoid penalty interest. Adequate consideration should then be given to the creditor by the fact that security has been provided for the principal if the claim is successful, while the creditor can receive ordinary bank interest on the security. By introducing such safety measures, the significant risk and uncertainty created by the current rules is avoided. A debtor who fails to provide security for all or part of the claim takes a conscious risk and must accept penalty interest on the outstanding amount.

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