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Liquidated Damages Clause and Default Interest: Differences and Remedies

Liquidated Damages Clause and Default Interest: Differences and Remedies

Marco Leonardi, Daniela Runggaldier

By Judgment No. 5379 of 21 February 2023, the Supreme Court ruled on the differences between two contractual clauses that are only apparently similar but, in reality, completely different, both in their purposes and protected interests. Indeed, the liquidated-damages clause is used with the aim of conventionally predetermining the damage resulting from a non-performance or delays in the performance (i.e. as a penalty). Default interests, on the other hand, are provided as a consideration, in favour of the creditor, for making available an amount of money. In addition, the liquidated-damages clause is only limited by the so-called manifest excessiveness, thus the sole remedy available to the contracting party who considers the liquidated-damages clause as a penalty clause since  manifestly excessive is the reduction to equity under Article 1384 of the Civil Code. By contrast, default interests meet only the limitation of the cap rate (i.e., the maximum interest rate at which the consideration for lent money can be considered lawful), with consequent application of the anti-usury rules. Such distinction is particularly relevant when entering into loan agreements in Italy: while, on the one hand, the limit to default interests is predetermined by law, on the other hand, in the case of the penalty it will be the judge who will appreciate whether it is manifestly excessive, if contested by the debtor.