With its decision of September 18, 2020, No. 19597, the Joint Sections of the Supreme Court of Cassation provided an interesting answer and ended the case-law conflict among its different sections.
The facts concern a loan agreement between a bank and a consumer. The agreement provided compensatory interest and default interest. The consumer stopped paying the loan, the bank terminated the agreement and started a proceeding to collect the entire amount due, adding 18%, the default rate. The consumer’s defense pointed out, among other things, (i) that the default interest was above the legal threshold and, therefore, was a usury interest rate — hence, it should be declared null and void — and (ii) that the relevant clause in the loan agreement was unfair in light of the applicable law — and as such should be declared ineffective.
In 1996, law No. 108 amended the Italian Code of Criminal Law (article 644) as well as the Civil Code (article 1815) to provide an adequate set of rules to address the problem of usurious interest rates. The ratio behind this law was to protect the financed party, to repress economic criminality, to control financial activities, and to secure the stability of the credit market. In light of this ratio, the appropriate ministry (now the Ministry of Economy and Finance) issues a quarterly order that identifies the global average effective rate, as well as the legal interest rate, for various categories of financial transactions that involve loans.
The internal case law conflict
For many years, courts have held opposing views as to whether default interest should be subject to the abovementioned law concerning usurious interest rates. The theories do overlap in places, however, i.e., in the belief that the financed party should be protected adequately.
On one hand, the more restrictive theory purports that the abovementioned law concerns only compensatory interest, leaving the parties free to agree upon different (even potentially higher) rates when default in repayment occurs; indeed, this theory emphasizes the different ratio for compensatory interest (which is intended to make a loan profitable, as long as the financed party pays its installments in a timely manner) and default interest (which is designed to compensate for damages caused by missed payment, with all the attendant costs and uncertainties); in light of that difference, says the theory, default interest should be subject to different legal limitations, such as reducing an excessive rate to an equitable amount pursuant to article 1384 of the Italian Civil Code.
On the other hand, the less restrictive theory emphasizes the fact that both kinds of interest are meant to make the deal profitable for the lending party; the key point, in this perspective, is the twofold ratio of the abovementioned law of 1996, which is both intended to protect victims against usury and, in the grander scheme of things, to defend the public interest in orderly and correct financial activities. These objectives cannot be reached if default interest is not subject to the anti-usury legislation. This higher degree of protection means that an excessive default interest rate will make that clause null and void pursuant to article 1815 of the Civil Code, while providing further liability to the lending party pursuant to article 644 of the Criminal Code.
In order to clarify the conflict between these opposing solutions, the case was assigned to the Joint Sections of the Supreme Court.
The Joint Sections’ decision
In reaching its decision, the court clearly states that notwithstanding the different ratio for compensatory interest and for default interest, as briefly described above, the anti-usury legislation must limit both.
In light of article 1815, para. 2, of the Civil Code, that limit is required due to the fact that a usury rate is null and void and, therefore, no interest is owed; moreover, since nullity operates ex tunc, if any amount has been paid to the lender in force of the interest rate that is found to be null and void, said amount shall have to be returned. However, the Supreme Court states that in spite of the default interest’s nullity, if the compensatory interest is valid, it will apply (per article 1224 para 1 of the Civil Code) to the portion of the loan that the financed party still owes to the lender. This, in fact, is considered a necessary balance to the nullity, as without it the party in default would be rewarded with a free loan.
The second part of this decision concerns the fact that the loan agreement was signed by a consumer. This means that the agreement is subject to the Consumer Code (D. Lgs. No. 206 of 2005), according to which a clause is deemed unfair (article 33, para 2, letter F) if it imposes payment of an excessive amount on the consumer in case of default; in that case, the unfair clause (pursuant to article 36 para 1) is considered null and void.
Hence, also in force of the Consumer Code, the Supreme Court reaches the same conclusion in order to protect the consumer from a usury interest rate.
Finally, the above conclusions are in line with the applicable European legislation, in particular Council Directive 93/13 EEC, under article 6 para 1 (stating that unfair terms in a contract with a consumer shall not be applicable to the latter) as recently applied in the Judgment of the ECJ on August 7, 2018, in particular in para 72–78.