0 8000 12 11

On June 12, 2018, the RA Constitutional Court rendered a decision on the application filed by HCA Vanadzor advocate Syuzanna Soghomonyan, who is the representative of Armine Atoyan, a customer of VTB-Armenia Bank, and the person who stands as a guarantor for her loan in the bank. The appeal questioned the constitutionality of Article 887 § 2 of the RA Civil Code, which refers to loan contracts.

In 2013, a credit contract and a guarantee contract were concluded between the appellants and VTB-Armenia Bank. Those contracts set the norms on non-performance of the obligations pursuant to the contracts.

When concluding the agreements, the bank made use of the provisions established by Article 887 § 2 of the RA Civil Code and set a 73% interest rate for an overdue loan as well as liability measures for breaching the obligations undertaken under the credit contract.

In the application submitted to the Constitutional Court, S. Soghomonyan, the representative of the bank customers, mentioned that Article 887 § 2 of the RA Civil Code contradicts Article 60 of the RA Constitution as it deprives persons of the right to freely own, dispose of the property belonging to them and gives the opportunity for credit agreements to impose for non-performance of obligations penalties that violate the rights and legitimate interests of the other party to the contract, leading to adverse consequences for the latter.

By decision of June 12, 2018, the RA Constitution did not declare unconstitutional Article 887 § 2 of the RA Civil Code as, according to the Court, the RA legislation sets other provisions which fulfill a “restraining” function.

Thus, the RA Constitutional Court finds that Article 437 of the RA Civil Code establishes that the parties are free not to conclude a contract if its conditions are unacceptable to them. However, it also stresses that the parties are free […] to determine any contract terms that do not contradict the law.

Besides, the scope of freedoms provided for by Article 887 is limited by Article 438 of the same code. Under Article 438 of the RA Civil Code, a contract must comply with rules obligatory for the parties established by law and other legal acts (imperative norms); otherwise, the contract is void.

Pursuant to Article 372, the maximum amount of a penalty cannot exceed the rate that is four times as high as the one set by the RA Central Bank, i.e. 48% (12×4), and VTB-Armenia Bank used a rate of 73%.

The RA Constitutional Court also finds that, in accordance with Article 372, if a penalty is clearly disproportionate to the consequences of violation of an obligation, then, upon the demand of a defender, a court or a financial system mediator can reduce the amount of the paid penalty or the penalty subject to payment as determined by the contract. Following this, recounting shall be done.

As regards the possible violation of the right of ownership, the Court finds that banks do not have the right to freely dispose of funds available in bank accounts at their own discretion; rather, they can dispose of only the unpaid amount as prescribed by the contract.

The Constitutional Court also addressed the examination of the claim filed by VTB-Armenia Bank on confiscation of funds. During the examination of that claim, S. Soghomonyan, the representative of the loan takers, had filed a counter-claim on the problematic points of the contract. The decision reads, “Despite the fact that the appellants have also raised the issue of the contract contradicting the imperative norms of law during the trial, the courts have not addressed this issue in any way in the judicial acts.”

The Constitutional Court concluded, “Firstly, credit contracts cannot contradict the requirements of the imperative norms of the RA legislation. Secondly, penalties imposed for overdue loans cannot exceed the limits determined by the aforementioned norms and should be effective and restraining without violating the constitutional principle of proportionality.