Monetary adjustment and interest standardization: law amends civil code

The topics of default interest, monetary adjustment, and applicability of the Usury Law (“Lei da Usura”) can be considered one of the most debated and controversial in the doctrine and jurisprudence of Brazilian Financial and Banking Law.

Finally, on June 28, Law No. 10.406/2024 (“Law”) was sanctioned, which seems to end the controversy on such topics and provides for monetary adjustment and interest, amending the Brazilian Civil Code as of September 1, 2024.

Regarding the obligation’s default, a sole paragraph was inserted into article 389, establishing that, if the financial obligation is not fulfilled, the debtor must pay, in addition to losses and damages, interest and attorney’s fees (the attorney’s fees was not previously provided) and monetary adjustment, applied to the Brazilian Extended National Consumer Price Index (IPCA)’s variation (or the index that replaces it), whenever the monetary adjustment index is not agreed upon or is already provided for in specific law.

Regarding interest on arrears or legal interest, the new Law establishes that when these are not agreed upon, or when they are agreed upon without a stipulated rate, or when they arise from a legal determination, they will be set per the legal rate. In this sense, the text establishes that the legal rate is the Selic rate, minus the IPCA.

Furthermore, the calculation methodology and form of application of the Selic rate are yet to be defined by the National Monetary Council (“Conselho Monetário Nacional” or “CMN”) and disclosed by the Central Bank of Brazil (“Banco Central do Brasil” or “BCB”). If the Selic result is negative, it will be considered zero to calculate interest on arrears in the reference period.

Selic rate will also apply to interest (when the rate is not agreed upon) in the following cases: a) in loans for economic purposes; and b) to the unit owner who do not pay their monthly contributions.

Finally, the Law provides for the non-application of Decree No. 22.626/1933, known as the “Usury Law” (“Lei da Usura”), to certain obligations, such as those (i) entered into between legal entities; (ii) represented by negotiable instruments or securities; (iii) entered into with financial institutions or others authorized to operate by the BCB, investment funds or clubs, leasing companies, simple credit companies and civil society organizations of public interest that are dedicated to granting credit; or (iv) carried out in the financial, capital or securities markets.

Thus, the standardization of the rates used for monetary adjustment and legal interest, and the end of any doubts about the inapplicability of the Usury Law in the cases above.

The new Law brings new developments to a long-standing discussion that dates to the entry into force of the new Brazilian Civil Code in 2002 on the interest on arrears applicable to obligation’s default. In this sense, it is necessary to make a distinction between compensatory interest, which remunerates the creditor for the principal, and interest on arrears, which aims to compensate the creditor in the event of default.

Before the Law, the Brazilian Civil Code (2002) provided that “when interest on arrears is not agreed upon or is agreed upon without a stipulated rate, or when it is determined by law, it shall be set according to the rate in force for late payment of taxes due to the National Treasury”, revoking the then current Brazilian Civil Code of 1916, which set the interest rate at 6% per year [1].

With the advent of the Brazilian Civil Code of 2002, heated discussions arose about the applicable interest rate. Initially, the Selic rate was considered, but for various reasons, doctrinal discussions rejected this understanding, and it was agreed that the applicable legal interest rate would be the one of Article 161, paragraph 1, of the Brazilian Nacional Tax Code (“Código Tributário Nacional” or “CTN”), that is, 1% per month.

Thus, the Superior Court of Justice, at the I Civil Law Conference in 2002, issued the following statement: “Statement No. 20 [2]: The default interest rate referred to in article 406 is that one of article 161, paragraph 1, of the National Tax Code, that is, 1% (one percent) per month”, under the argument that “the use of the SELIC rate as an index for calculating legal interest is not legally secure, because it prevents prior knowledge of the interest; it is not operational, because its use will be unfeasible whenever only interest or only monetary correction is calculated; it is incompatible with the rule of Article 591 of the new Brazilian Civil Code [3], which only allows the annual capitalization of interest, and may be incompatible Article 192, paragraph 3, of the Brazilian Federal Constitution if the result is real interest exceeding twelve percent per year. (I Civil Law Conference).”

Subsequently, article 192, paragraph 3 of the Federal Constitution was revoked by Constitutional Amendment No. 40/03 [4], persisting, however, the other reasons for non-application of the Selic.

Therefore, it remains to be seen what the calculation methodology and application of the Selic will be, which are yet to be defined by the CMN, to ensure the legal security of the relationships.