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French Reform of the Legal Interest Rate

The legal interest rate is the reference rate used to calculate penalties for an obligation’s late performance.

Calculated on the basis of the level of state financing on 13 weeks, the legal interest rate has decreased drastically over the last years, falling from 0.71% in 2012 to a historical level of 0.04% in 2013 and 2014. Accordingly, it no longer fulfilled its role of inducing the debtor to pay in a timely manner.

The formula for calculating the legal interest rate was therefore modified to be more representative of a creditor’s refinancing cost and based on the economic activity’s evolution.

This reform of the legal interest rate, which entered into force on 1 January 2015, led to two main innovations:

  • The creation of two different rates—a higher one, directed primarily to protect individuals, and a second one intended for professionals.

Note that an “individual” is considered to be any natural person who does not act for professional purposes. In other cases, this will be a “professional”.

  • A half-yearly (no longer yearly) update to best reflect the fluctuations in economic activity.

For the first half of 2015, the decree of 23 December 2014 sets the legal interest rate intended to protect individuals at 4.06%, and at 0.93% for the other case.

Debtor

Creditor

Rate (first half of 2015)

Individual

Individual

4.06%

Professional

Individual

4.06%

Professional

Professional

0.93%

Individual

Professional

0.93%

 

Note that the legal interest rate should not be confused with other related concepts, in particular, the increased legal interest rate and the late payment interests:

  • The increased legal interest rate is applied when an amount due in respect of a court conviction is not paid within two months following the day on which the decision has become enforceable. The legal interest rate is in such case increased by five points (Article L.313-3 of the French Monetary and Financial Code).

  • The late payment interests under ordinary law compensate for an amount’s late payment. Late payment interests are payable from the date of the summons and are served, for instance, through a formal notice (Article 1153 of the French Civil Code).

Between professionals in the sales and services sectors, in particular, these late payment interests are governed by a specific regime provided for in Article L.441-6 of the French Commercial Code. According to this article, the terms and conditions of sale, which must be exchanged between the parties, define the rate of the late payment interests attached to the failure to pay an invoice. Unless stipulated to the contrary, provided that the rate cannot be set at less than three times the legal interest rate, the rate applied corresponds to the European Central Bank refinancing rate, increased by 10 points (10.05% today). These late payment interests are automatically payable from day one after the payment date indicated on the invoice, without the need for a formal notice.

Copyright © 2017 by Morgan, Lewis & Bockius LLP. All Rights Reserved.

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About this Author

Partner

Alexandre Bailly is a partner in Morgan Lewis's Litigation Practice. Mr. Bailly concentrates his practice on international litigation, arbitration, and transactional matters. His litigation and arbitration experience includes matters involving the industrial risks sector, commercial contracts, banking, bankruptcy, construction, and portfolio management. Mr. Bailly's clients include multinational corporations in the automotive, construction, and consumer products industries, as well as banks, asset managers, and brokers.

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