We’ll break down three financial protection tools and explain how to calculate each one correctly.
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You included a “0.1% daily penalty” in your contract. Do you know how much that is per year and why the court might reduce this amount?
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Do you know the difference between statutory interest, contractual interest, and contractual penalties—and when each tool applies?
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What is more beneficial to include in a contract when working with commercial partners—and why doesn’t one condition replace another?
An entrepreneur entered into a contract and included the clause “late payment will incur a penalty of 0.5% for each day of delay.” The debtor hadn’t paid for four months. When the calculations were made, the principal debt was €10,000, with penalties totaling €6,000.
The debtor appealed to the court to reduce the penalty. The court reduced it to €1,500, finding it disproportionate. The creditor received significantly less than expected.
Choosing the right type of sanction isn’t a matter of detail. It’s the difference between real protection and the illusion of protection.
Tool One: Legal Interest
Article 1765 of the Civil Law of Latvia: If the performance of a monetary obligation is delayed, the debtor shall pay statutory interest for each day of delay. The amount is determined as the ECB refinancing rate plus 8 percentage points for commercial transactions.
As of May 2026: ECB base rate of approximately 2.4% + 8% = approximately 10.4% per annum. This automatically applies to all commercial debt, even if the contract does not stipulate sanctions.
When is this sufficient: for small amounts and short-term overdue payments. It doesn’t require a special clause in the contract—it works by default.
The second tool: contractual interest
The parties have the right to establish a different interest rate for the use of funds in the agreement. This may be a fixed rate (e.g., 12% or 15% per annum) or a floating rate linked to market indicators.
Important: contractual interest rates do not automatically replace statutory interest rates. They either replace them if expressly stated in the contract, or apply in parallel if so provided. Clarify in the contract exactly what applies.
Tool three: contractual penalty
This is the most flexible and, at the same time, the riskiest instrument. A penalty is a pre-agreed amount that the debtor pays for breach of contract. There’s no need to prove the amount of damages—the amount is predetermined.
Types of penalties: a fine is a fixed amount for a specific violation, a late payment penalty is an amount accrued for each day of delay.
An example of typical wording: “For late payment, the Buyer shall pay a penalty in the amount of 0.1% of the debt amount for each day of delay” or “For violation of the confidentiality conditions, the Party shall pay a fine in the amount of 5,000 euros.”
Critical warning: the court reserves the right to reduce the penalty if it is clearly disproportionate to the consequences of the violation. 0.5% per day equals 182.5% per annum. In the case of prolonged delay, the penalty amount may exceed the principal debt several times. Courts regularly reduce such amounts.
Safe range: 0.05%-0.1% per day (18-36% per annum). This is sufficiently stimulating, but not so unreasonable that the court will lower it.
How to properly draft a sanctions clause
The optimal structure of a sanctions clause includes three levels of protection:
Level one – legal interest at least: “For late performance of a monetary obligation, legal interest is charged in accordance with Article 1765 of the Civil Law of Latvia.”
Level two is a contractual penalty: “In addition to the legal interest, a penalty of 0.1% of the debt amount is charged for each day of delay.”
Level three—the right to recover damages: “The creditor has the right to demand compensation for damages in excess of the accrued penalty.” This clause is important if the actual damages significantly exceed the penalty.
Calculation: How to calculate the amount of sanctions
A penalty of 0.1% per day on the amount of 10,000 euros: 10,000 x 0.001 = 10 euros per day. For 90 days = 900 euros. For 180 days = 1,800 euros. Total with principal: 11,800 euros.
The legal interest rate is 10.4% per annum on €10,000: €10,000 x 0.104 / 365 = approximately €2.85 per day. Over 90 days = €256. Significantly less—but the court certainly won’t lower it.
The practical conclusion is that for commercial contracts, a combination of statutory interest plus a moderate penalty plus the right to recover damages is the best protection.
A penalty doesn’t scare a debtor who knows it will be reduced. A properly calculated and justified sanction does.
This article is for informational purposes only and does not constitute legal advice.