Interest on late payments in commercial transactions: Economic and legal implications

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Abstract

This study explores the legal and economic implications of interest on late payments in commercial transactions in Kosovo. It addresses the unclear nature of such interest, whether it serves as compensation, a penalty, or both, and highlights inconsistencies in its calculation across shifting legal frameworks. The research aims to clarify its legal classification, assess its economic impact, and evaluate its consistency with fairness and financial stability. Using a qualitative legal approach, the study analyzes Kosovo’s Law No. 05/L-110 on Late Payments in Commercial Transactions and Law No. 04/L-077 on Obligational Relationships, supported by comparisons to European Union (EU) directives. Findings show that while late payment interest is formally compensatory, the fixed 8 percent surcharge above the reference rate gives it a punitive character. This hybrid model causes disparities, especially with older debts calculated under inflation-based methods, undermining legal certainty. The study concludes that Kosovo’s objective liability model, applying interest regardless of fault, protects creditors but can overly burden debtors. To improve fairness, it recommends indexing interest to economic indicators if intended as compensation, or framing it as punitive. These findings have broader implications for legal reform, financial stability, and international harmonization.

Keywords: Late Payment Interest, Contractual Obligations, Compensatory vs. Punitive Interest, Legal Certainty, Kosovo Commercial Law

Authors’ individual contribution: Conceptualization — M.D.; Methodology — B.D. and A.E.; Investigation — M.D. and B.D.; Writing — Original Draft — M.D.; Writing — Review & Editing — M.D. and B.D.; Visualization — A.E.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: L48

Received: 27.06.2024
Revised: 24.02.2025; 26.04.2025; 21.05.2025
Accepted: 09.06.2025
Published online: 12.06.2025

How to cite this paper: Dërmaku, M., Dërmaku, B., & Emini, A. (2025). Interest on late payments in commercial transactions: Economic and legal implications. Corporate Law & Governance Review, 7(2), 127–135. https://doi.org/10.22495/clgrv7i2p13