Compound interest on a loan
A creditor charging contractual interest on interest that has already fallen due must be able to point to a stipulation for it. Without one, interest is calculated on a simple basis, unless the claim arises from a commercial agreement. What that default rests on, what the 2009 Supreme Court judgment does and does not settle, and how the line between business and private matters.
Creditor charges compound interest without a stipulation
On 27 January 2010 the District Court of Rotterdam rejected the compound calculation. Hofman & Hofman B.V. claimed repayment of a long-term loan. It calculated the contractual interest not only on the principal but also on interest that had already fallen due. The defendant disputed that there was any basis for this and was upheld: interest on interest, where the interest is set by contract, is payable only if that has been agreed (ECLI:NL:RBROT:2010:BL1723, para. 4.13a).
The creditor had argued that the method of Section 6:119 of the Dutch Civil Code, which lets statutory interest compound automatically, may be applied by analogy to contractual interest. The District Court rejected that route. For contractual interest there is no comparable statutory provision, and the court saw insufficient ground for an analogy.
The statute provides for compounding only for statutory interest
The distinction lies in the structure of Section 6:119 DCC. Subsection 2 provides that the amount on which statutory interest is calculated is increased, at the end of each year, by the interest due for that year. On its wording that compounding rule covers statutory interest alone. Contractual interest is dealt with in subsection 3. That subsection does no more than provide that an agreed rate higher than the statutory rate keeps running once the debtor is in default. On the method of calculation it is silent.
Advocate General Timmerman inferred from this that the legislature proceeded on the basis that contractual interest is calculated on a simple basis unless agreed otherwise. His argument is structural: had the legislature taken compounding as the starting point, subsection 2 would have been unnecessary. He supported this with the parliamentary history of subsection 3 and with the standard works of Asser-Hartkamp-Sieburgh and Rank (ECLI:NL:PHR:2009:BJ2678, para. 3.4).
A serious argument was advanced against that outcome. In cassation it was contended that damage from delay over more than a year is fully compensated only if the interest compounds. Section 6:119(2) DCC ought therefore to apply by analogy. The Advocate General held to the text and the structure: subsection 2 covers statutory interest alone, and subsection 3 together with its parliamentary history shows that the legislature conceived of agreed interest as simple.
What the 2009 judgment does and does not settle
Supreme Court 9 October 2009 is often cited on this point, and caution is called for. That case was a dispute over deliveries of plant material, with an agreed rate of 2 per cent a month. The Court of Appeal in Amsterdam had held that compound interest was not payable absent a stipulation. The Supreme Court dismissed the complaints against it under Section 81 of the Judiciary (Organisation) Act. It therefore gave no substantive reasons (ECLI:NL:HR:2009:BJ2678). What the judgment yields is that the Court of Appeal's holding survived review in cassation, rather than a rule formulated by the Supreme Court itself.
There is a further reason to cite the judgment with care. In the cross-appeal the Supreme Court set aside that same Amsterdam judgment of 12 April 2007 and referred the case to the Court of Appeal in The Hague. That setting aside rested on a different element, the fee under the Seeds and Planting Materials Act, but the operative part does not confine it to that element.
In 2020 the Court of Appeal in Arnhem-Leeuwarden expressly limited what follows from the judgment. A party argued there that it establishes that interest is calculated on a simple basis unless the parties have agreed otherwise. That argument overlooks the fact that the judgment concerns the situation in which there is no commercial agreement, the Court held (ECLI:NL:GHARL:2020:8090, para. 6.14).
For a commercial agreement the default is reversed
For a commercial agreement the calculation works the other way round, and that follows from two subsections together. Section 6:119a(9) DCC equates any other agreed rate with the statutory rate for the purposes of that section. Subsection 3 then lets the amount on which that interest runs increase each year by the interest due for that year. Contractual interest on a commercial claim therefore compounds, even without a stipulation. In the 2020 case that was not in dispute between the parties (para. 6.3).
What is then decisive is whether the claim falls under a commercial agreement. That means an agreement for consideration between persons acting in the course of a profession or business, or between legal entities. The Court of Appeal in Arnhem-Leeuwarden accordingly split the invoiced work in two. The part relating to winding up the client's businesses fell under a commercial agreement; the part concerning the division of the matrimonial estate did not. On the first part the interest compounded, on the second it did not. For that division the Court took as its starting point an expert report from earlier proceedings between the same parties, even though it had been drawn up for a different purpose (para. 6.13).
What does this mean in a dispute about interest?
Start with the wording of the deed. Where the lender claims interest that is also calculated on interest left unpaid earlier, the first question is whether a stipulation permits this. A standard sentence about interest of a percentage a month on the outstanding amount does not govern the method of calculation, and in the Rotterdam case that was precisely the gap.
Then establish whether the claim arises from a commercial agreement, because that tips the default. In a loan between family members or friends neither party acts in the course of a profession or business, so the simple default continues to apply. Where the relationship runs partly business and partly private, a single claim may fall into two parts, each with its own method of calculation.
Be restrained about the authority attributed to the case law. The line rests on the structure of the statute and on an Opinion of the Advocate General's office. A District Court judgment and a Court of Appeal judgment point the same way. A reasoned Supreme Court judgment on the method of calculating agreed interest does not exist. Anyone advancing one as authority invites the objection the Court of Appeal in Arnhem-Leeuwarden upheld in 2020.
Frequently asked questions
Does the simple default also apply where statutory interest is claimed?
No. For statutory interest the statute prescribes compounding itself, and that is an exception covering only that interest. Where a contractual rate is tied to the statutory rate, for instance as the statutory rate plus a margin, the compounding does not travel with it. A stipulation of its own remains necessary, because the link concerns the level and not the method.
When is a stipulation for interest on interest sufficiently clear?
The stipulation must govern the method of calculation and not merely the rate. What is needed is that interest previously due is added to the principal, and that interest then runs afresh on that total. A clause naming only a monthly percentage on the outstanding principal leaves the method open and therefore does not produce compound interest.
Can a creditor base compounding on full compensation of its loss?
That was attempted and rejected. The thought was that a party kept waiting for more than a year is made whole only through compounding. Advocate General Timmerman preferred the statutory text to that reasoning. A creditor who wants compounding stipulates for it. It cannot be built on the law of damages after the event. Agreeing a higher simple rate is the alternative that stays within the default.
Cited case law
Supreme Court
- ECLI:NL:HR:2009:BJ2678 (9 October 2009) — the complaints against the holding that compound interest is not payable without a stipulation were dismissed under Section 81 of the Judiciary (Organisation) Act; in the cross-appeal the Amsterdam judgment was set aside and the case referred to the Court of Appeal in The Hague.
Advocate General
- ECLI:NL:PHR:2009:BJ2678 (9 October 2009) — Opinion of Advocate General Timmerman: Section 6:119(2) DCC covers statutory interest alone, and subsection 3 with its parliamentary history shows that agreed interest is in principle calculated on a simple basis.
Courts of Appeal
- ECLI:NL:GHARL:2020:8090 (6 October 2020) — under a commercial agreement contractual interest compounds by virtue of Section 6:119a DCC; no general rule follows from the 2009 judgment, because that concerns the situation without a commercial agreement.
District Courts
- ECLI:NL:RBROT:2010:BL1723 (27 January 2010) — interest on interest, where the interest is set by contract, is payable only if agreed; Section 6:119 DCC does not lend itself to application by analogy to contractual interest.