Can one stipulate to pay double the loan money in default?

An Expert's View about Law and Compliance in Ethiopia

Posted on: 24 Mar 2012

In a contract of loan the parties can agree to the terms of loan. But can parties stipulate provisions stating if the debtor fails to pay the loan within the time specified that he had to pay double/twice of the original loan money?
The case initiated in the Western Shoa High Court and its basic content was that the plaintiff had loaned 11,750 birr to the defendant on the ground that if he failed to pay in the specified time he had to pay twice the amount he took. The claim of the plaintiff here is since the time stipulated has lapsed he should pay twice the money he originally took.
The defendant, on the other hand argued the money he is obliged to return is only the 11, 750 birr he took from the plaintiff.
The court analyzed both parties arguments and decided that the defendant should pay twice the Money; the extra money as interest. Both the Oromia Supreme Court and Cassation bench cancelled the appeal on the grounds of Art 337 of the civil procedure code.
The Federal Cassation Bench framing the issue, “can parties agree to pay twice the money originally taken (agree on a 100% interest)” and looked at the issue at hand thoroughly.
It is specifically stipulated under Article 2479 of the Civil Code that parties may not stipulate a rate of interest exceeding 12% per annum and if there is any signed agreement stipulating more than 12% per annum interest the borrower shall owe only the interest of 9%.
When we come to the case at hand, in the first place it is not lawful to agree to make the borrower pay 100% interest rate. In addition the lower court’s decision to consider the claim of the applicant for payment of twice the money he has loaned as an interest claim and consider the extra money as interest is not proper. Giving the above elaborations, the bench decided to modify the lower courts judgments and ordered the defendant to pay the loan with 9% interest rate starting from the date the loan was due.
Thus, one can grasp from the decision of the cassation bench that any agreement made between parties to make the borrower pay twice what he had loaned will not be enforced since it’s not in accordance with the law.

Posted: 24 March 2012

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