Void Clauses in Consumer Credit Agreements

Consumer credit agreements — and quick-loan contracts in particular — frequently contain penalty clauses, contractual interest provisions, express-processing fees and default compensation terms whose combined effect results in total repayment obligations many times greater than the principal advanced. Where the amount owed exceeds the amount borrowed by more than 30–40%, the agreement very likely contains void clauses. This article examines the three most common categories and the criteria applied by Bulgarian courts in assessing them.

1. Void penalty clause

A penalty clause is void for violation of good morals where it is stipulated at a level that exceeds the clause's proper security, compensatory and punitive functions (Art. 26, para. 1, item 3 of the Obligations and Contracts Act).

Under point 3 of Interpretive Decision No. 1/15.06.2010 of the Supreme Court of Cassation (SCC), Joint Commercial Chambers, the assessment of voidness is made for each individual case as at the date of contract conclusion. The relevant criteria include:

• the nature and amount of the obligations secured by the penalty;
• whether performance is secured by other means — guarantee, pledge, mortgage;
• the type of penalty (compensatory or moratoria) and whether the non-performance is material or minor;
• the ratio between the stipulated penalty and the damages expected from non-performance.

In quick-loan agreements, penalty clauses are typically set at 20–80% of the entire loan amount, regardless of the extent of non-performance, while the contractual interest is calculated separately — often on a daily basis. In these circumstances the stipulated penalty vastly exceeds any foreseeable damages and does not serve the clause's legitimate functions. It is void under Art. 26, para. 1, item 3 OCA and has produced no rights for the lender from the date of contract conclusion.

2. Void contractual interest clause

A contractual interest clause is void for violation of good morals where the agreed rate is disproportionately high. The common practice of expressing interest as a daily percentage (1–5% per day) produces effective annual rates running into hundreds of percent.

In its consistent case law, the SCC holds that a contractual interest clause is void where the agreed rate exceeds:

• three times the statutory interest rate — for unsecured loans;
• twice the statutory interest rate — for secured loans.

This position is established in: SCC Decision No. 906/30.12.2004, case No. 1106/2003, 2nd Civil Division; Decision No. 378/18.05.2006, case No. 315/2005; Decision No. 1270/09.01.2009, case No. 5093/2007; Decision No. 1291/03.02.2009, case No. 5477/2007, 5th Civil Division; and Order No. 901/10.07.2015, case No. 6295/2014, 4th Civil Division. The non-equivalence of the parties' mutual obligations and the unjust enrichment of the lender constitute an independent ground for voidness.

3. Void default compensation clause

Under Art. 43, para. 1 of the Consumer Credit Act, where a consumer is in default the lender is entitled to compensation only on the overdue amount for the period of the delay. That compensation may not exceed the statutory interest rate (Art. 43, para. 2).

Notwithstanding this mandatory rule, many consumer credit agreements stipulate default compensation of 1–5% per day calculated on the full loan amount — not merely on the overdue instalment. Such a clause conflicts with Art. 43 of the Consumer Credit Act and is void.

How we can help

We review credit agreements to identify void clauses and represent borrowers in proceedings to have those clauses declared void and to recover amounts paid without legal basis. Contact us for an assessment of your specific agreement.