Interest and Penalties on Late Advance Payments

 

June 30, 2025

BRACE Law Firm ©

 

In contractual relations, cases often arise where a party obligated to transfer an advance payment to another party (the "payer" or the "customer") fails to pay on time or defaults on this obligation entirely. In such a situation, the counterparty (the "counterparty" or the "recipient") naturally seeks to penalize the violator by demanding interest for the overdue payment. At first glance, liquidated damages seem logical and fair: the payer violated a contractual obligation, and the recipient likely incurs losses, as they relied on the advance to perform the contract. For example, a contractor requires financing to purchase materials and hire workers, while a supplier needs funds to acquire goods from a manufacturer and arrange transportation.

Despite the clear violation of the recipient's interests, interest is not recovered by default for late advance payments. This is because an advance is considered a non-standard payment term in market relations, which are built on principles of mutual equivalent exchange. The uniqueness of this problem lies in the fact that, although it is widespread in everyday business and commercial practice (any Customer may violate advancement deadlines), the Civil Code of the Russian Federation (the "Civil Code") lacks a single uniform provision for its regulation. This issue is resolved on a case-by-case basis, and the solution to this practical problem is driven by theoretical concepts and legal constructs such as monetary obligations, reciprocal performance, and the lawful use of funds.

This article examines an advance as a method of contractual payment and distinguishes it from security for obligations and commercial credit. It also analyzes the methodologies used by courts when considering claims for interest on overdue advances and provides an overview of the main approaches and trends in judicial practice for settling such disputes.

What is an "Advance"?

An advance is a form of payment where one party transfers funds to another before the other party actually performs its obligation (e.g., delivers goods or performs work). Sometimes an advance is referred to as "prepayment" or "pre-payment"; these terms are equivalent.

Advancement can be full (100% of the contract price), partial, or staged. It does not matter whether the counterparty has commenced performance. Any payment made before the Customer accepts performance of the contract or its individual stage is considered a prepayment. Therefore, interim payments that the Customer pays before the completion of the specific obligation for which the funds are paid are also considered advancement.

An advance must be distinguished from other types of preliminary payments provided as security for obligations: earnest money (earnest) and security deposits. Earnest money consists of funds that a party transfers to a counterparty toward future payments (Art. 380 of the Civil Code). A security deposit is an amount that secures a monetary obligation, including the obligation to compensate for losses or pay liquidated damages for a breach of contract (cl. 1 Art. 381.1 of the Civil Code).

Let us consider the similarities and differences between earnest money, security deposits, and prepayments.

First, these payments relate differently to the contract price. Earnest money is part of the contract price — it is included in the cost of goods, works, or services. In this sense, earnest money and an advance are similar, as an advance is also transferred toward future payments. Unlike earnest money and an advance, a security deposit is not part of the contract price; it is provided in addition to contractual payments as a guarantee of performance.

Second, the fate of these payments differs if an obligation is not performed. Since earnest money serves a security function, the breaching party loses the earnest money. If the party providing the earnest money fails to perform, the recipient retains it. If the recipient fails to perform, they must return double the amount to the other party. A security deposit is credited toward performance upon the occurrence of certain conditions. If the obligation is performed, the security deposit is generally refundable, although parties may agree otherwise.

An advance does not possess a security function. Therefore, if a person receives an advance but fails to perform their obligation, or if the obligation never arises, the advance must be returned in the same amount regardless of the circumstances. The return must occur even if the party that paid the advance is at fault for the non-performance and the counterparty suffered losses. The recipient of the advance cannot retain or misappropriate these funds. The law may provide specific consequences for non-performance of a contract involving advancement. For example, if a seller defaults on delivering paid goods, the buyer may choose to demand either a refund of the advance or the delivery of the goods (cl. 3 Art. 487 of the Civil Code).

Third, these payments differ in the form of provision. Earnest money may only be paid in cash (cl. 1 Art. 380 of the Civil Code). An advance may consist not only of money but also of goods or property. A security deposit may be made in cash, stocks, bonds, other securities, or items defined by generic characteristics (Art. 381.2 of the Civil Code).

Thus, the primary function of an advance is the payment for contract performance. Earnest money and security deposits fulfill a different function—security. Earnest money also has a payment function, but it is not its primary one. The law establishes a presumption of advancement: if it is impossible to determine whether a paid amount is earnest money or an advance, it is recognized as an advance by default (cl. 3 Art. 380 of the Civil Code).

The ability to accrue interest on an advance depends directly on two basic theoretical concepts: monetary obligation and reciprocal performance. The relationship between these legal constructs determines the lawfulness or unlawfulness of a claim for interest.

Reciprocal performance is expressed in the following rules (Art. 328 of the Civil Code):

• performance of an obligation by one party is recognized as reciprocal if it is conditioned upon performance by the other party;
• if a party fails to provide the performance stipulated by the contract, the party due to provide reciprocal performance may suspend its obligation or refuse performance and demand damages;
• a party is not entitled to demand performance in court without providing what is due from it under the obligation to the other party.

The essence of reciprocal performance is that one party may only bring monetary claims against another if they have already performed their own obligation. In other words, the "performance first, payment second" scheme applies. The provisions regulating the payment procedure in specific types of contracts are built on this system.

For instance, under a contract of sale, the buyer must pay for the goods immediately before or after the seller transfers the goods (cl. 1 Art. 486 of the Civil Code). The possibility of advancement is provided for in Article 487 of the Civil Code, which implements the reciprocal performance construct: the buyer must pay the advance within the established period, but if the buyer fails to do so, the seller is only entitled to suspend performance (i.e., not deliver the goods). Until the goods are actually transferred to the buyer, the seller cannot demand the transfer of the advance. This is because the obligation to deliver the goods is reciprocal to the obligation to transfer the prepayment. This reflects the meaning of Article 328 of the Civil Code: the seller can only claim recovery of the advance amount after they have performed their own obligation.

A similar approach to advances applies to construction contracts. According to Article 711 of the Civil Code, unless the contract provides for preliminary payment, the Customer pays the amount after the final handover and acceptance of the work. A contractor is entitled to demand an advance only when specifically stated in the law or the contract.

Reciprocal performance leads to a monetary obligation: if a party delivers goods (or performs work/services), the other party is obligated to pay. Since an advance is transferred before the performance of the reciprocal obligation, it is incorrect to bring a monetary claim. Accordingly, an advance is not recognized as a monetary obligation, and the provisions of Articles 317.1 and 395 of the Civil Code regulating interest on the use of funds do not apply.

Distinguishing an Advance from Commercial Credit

The accrual of interest on prepayment is closely linked to the concept of commercial credit. Under Article 823 of the Civil Code, commercial credit may occur in contracts involving the transfer of funds or items defined by generic characteristics. Advances, preliminary payments, and payment deferrals or installments are considered types of commercial credit. By default, the rules on loan agreements apply to commercial credit (cl. 2 Art. 823 of the Civil Code).

At first glance, such credit should always accrue interest. However, in judicial practice, the question of whether an advance is a commercial credit by default or whether commercial credit terms must be explicitly stated in the contract has long been debated.

Clause 12 of the Resolution of the Plenum of the Supreme Court of the Russian Federation No. 13 and the Plenum of the SAC RF No. 14 dated October 8, 1998, On the Practice of Applying the Provisions of the Civil Code of the Russian Federation on Interest for the Use of Others' Funds (the "Plenum No. 13, No. 14") set forth the following interpretation of commercial credit. Interest for the use of commercial credit (which includes an advance) constitutes a fee for the use of funds. Interest is calculated from the moment specified in the contract. If that moment is not defined, interest accrues from the moment goods, works, or services are received (in the case of deferred payment) or from the moment funds are provided (in the case of an advance). Interest stops accruing when the counterparty performs their obligations or returns the advance. These provisions of Plenum No. 13, No. 14 are often used to apply credit rules to advance payments by default.

A similar position (regarding commission agreements) is reflected in Clause 7 of the Information Letter of the Presidium of the SAC RF dated November 17, 2004, No. 85, Review of Practice for Resolving Disputes under Commission Agreements: if a consignee pays an advance to a consignor against future proceeds from the sale of goods, commercial credit rules apply.

Following this approach literally would mean that commercial credit arises in any contract where the timing of payment (advance or prepayment) does not coincide with the timing of reciprocal performance. However, such an interpretation would violate the balance of interests and contradict the principle of reciprocal performance.

Therefore, the relationship between an advance and commercial credit is structured more flexibly. An advance payment is not commercial credit by default. Unless the contract explicitly specifies such credit, Article 823 of the Civil Code does not apply for the purpose of accruing interest.

In 2017, the Supreme Court of the Russian Federation considered a case involving the recovery of interest for the use of commercial credit and provided clarifications. Interest on commercial credit leads to an increase in the cost of goods and is not a measure of civil liability. Therefore, for commercial credit to apply, the condition must be explicitly provided for in the contract.[1]

The issue of commercial credit often arises in the context of returning an unearned advance. If a party receives a prepayment but fails to perform its contractual obligation (the supplier fails to deliver goods, the contractor fails to perform work), such an advance must be returned. Generally, if a contract includes a commercial credit condition, it is linked specifically to the unearned advance. For example, parties may agree that in the event of non-delivery or delivery of substandard goods (provided the buyer rejects the goods), the portion of the advance for the undelivered goods is considered commercial credit. In such a case, in addition to returning the advance, the supplier pays interest under Article 823 of the Civil Code. Interest may accrue for the entire period of the use of funds, from the transfer to the supplier until the full refund. Courts recognize such contractual terms as lawful.[2]

In another example, the parties agreed to apply commercial credit rules if the contractor violated work deadlines. Upon such a violation, the advance payment acquires the status of commercial credit until the date the contractor actually performs its obligations. The courts found that the contractor was not in default, so there were no grounds to apply the credit regime.[3]

Interpretation of the Contract as the Main Method for Resolving Interest Disputes

When considering disputes over the recovery of interest for late advances, courts follow a fundamental rule: the accrual of such interest must be explicitly fixed in the contract. Otherwise, the claim is recognized as unsubstantiated.

The reason is that any agreement on liquidated damages must be made in writing, even if the main obligation is not documented in writing (Art. 331 of the Civil Code). If the parties do not record their agreement on liquidated damages in writing, it will be considered invalid. This rule also applies when interpreting contractual terms regarding interest on advance payments: such a penalty must be recorded in writing, just like any other liquidated damages.[4]

The texts of commercial contracts can be phrased in various ways, and when disagreements arise, each party tries to interpret the condition in its favor. Therefore, in settling such disputes, judges must not only refer to legal provisions but also apply various methodologies for analyzing contractual documents.

When interpreting a contract, courts primarily consider the literal meaning of the words and expressions contained therein. The literal interpretation method is primary and used by courts first. If the literal meaning of the text is unclear, a method of comparing the disputed condition with other terms and the general sense of the contract is applied (cl. 1 Art. 431 of the Civil Code). Literal meaning can be identified through the common usage of similar text by any market participant acting reasonably and in good faith, unless a different meaning follows from the parties' business practices and the circumstances of the case (cl. 43 of the Resolution of the Plenum of the Supreme Court of the Russian Federation dated December 25, 2018, No. 49, On Certain Issues of Applying General Provisions of the Civil Code of the Russian Federation on the Conclusion and Interpretation of Contracts (the "Resolution No. 49").

If the meaning of a contractual term cannot be established through literal interpretation, courts determine the parties' actual intent when they concluded it. All relevant circumstances are considered: prior negotiations and correspondence, the parties' previous interactions, business customs, and the parties' conduct during contract performance (cl. 2 Art. 431 of the Civil Code).

Contract terms are analyzed in their systemic interconnection and must be perceived as integral parts of a single document. This approach is called systemic interpretation. Systemic analysis considers the purposes of the contract and the specifics of the particular type of obligation (cl. 43 of Resolution No. 49).

If a court cannot clarify the contract terms and establish the parties' common intent, the disputed term must be interpreted in favor of the counterparty of the party that drafted the contract or proposed the wording of the disputed term (cl. 45 of Resolution No. 49, cl. 11 of the Resolution of the Plenum of the SAC RF No. 16 dated March 14, 2014, On Freedom of Contract and Its Limits). A presumption exists that such a counterparty is a professional market participant engaged in activities requiring specialized knowledge (e.g., a bank in a loan agreement or an insurer in an insurance contract). As emphasized in Clause 46 of Resolution No. 49, when analyzing a contract, a court may use methods other than literal interpretation to establish the meaning of the text. The court's decision must include a justification for the methodology used.

In resolving such disputes, the court must protect the interests of both parties so that interpretation does not grant a party an advantage from its own illegal or bad-faith conduct. Interpretation should not assign a meaning to contract terms that the parties clearly did not intend upon conclusion.

It is important to note: regarding liquidated damages, broad interpretation of contract terms is not permitted. This is because liability requirements are more stringent: terms of liability must be expressed clearly and consistently.[5]

Does Article 395 of the Civil Code Apply to Advance Payments?

Because the late payment or non-payment of an advance is not a violation of a monetary obligation, Articles 395 and 317.1 of the Civil Code do not apply in situations where the paying party misses the deadline. This is due to the nature of such interest: it accrues only when funds are used unlawfully.

According to Article 395 of the Civil Code, in cases of unlawful retention of funds or delay in their transfer, interest must be paid on the debt amount. Such interest is essentially liability for non-performance or delay of a monetary obligation and serves as a penalty for the illegal use of funds. In this sense, interest under Article 395 differs from interest accrued for the lawful use of funds, such as a loan or commercial credit.

Judicial practice has established a firm position: interest under Article 395 of the Civil Code may only be accrued on a monetary obligation.[6] Since an advance is not a monetary obligation, it cannot be treated as a debt.[7] Therefore, non-payment of an advance or its delay is not considered unlawful use or retention of funds, meaning interest for the use of funds does not accrue on the advance.[8] Courts always emphasize the need to consider the reciprocal performance rules in Article 328 of the Civil Code. For example, a contractor cannot demand an advance from a Customer, as the law provides other remedies for this situation: the contractor may only suspend work or refuse to perform the contract.

Article 317.1 states that interest on the amount of a monetary obligation during the period of use of funds accrues at the Bank of Russia key rate unless otherwise provided by law or the contract. В 2015, the Ministry of Finance of Russia clarified that when a seller receives an advance from a buyer under a supply contract, no monetary obligation arises; therefore, Article 317.1 of the Civil Code does not apply.[9] A similar position is confirmed by judicial practice: interest under Article 317.1 does not accrue because the Customer does not incur a monetary obligation when transferring an advance.[10]

Thus, Article 395 of the Civil Code does not apply to advance payments as long as the use of those funds remains lawful. If the party that paid the advance makes a lawful demand for its return, the regime of unlawful retention begins. Such funds are considered an unearned (or un-allocated) advance, which is recognized as unjust enrichment.[11]

The payer may demand a refund of the prepayment due to the counterparty's failure to perform. For example, when a seller receives a prepayment but fails to deliver the goods, the buyer has the right to demand a refund of the advance, at which point interest begins to accrue under Article 395 of the Civil Code. Additionally, the need to return an unearned advance arises when a contract is terminated and the obligation for the advance amount remains unperformed. In all these cases, the payer is entitled to recover interest for the use of others' funds.

Accrual occurs for the entire period of unlawful use, calculated from the moment the recipient knew or should have known that the use of the funds was illegal (cl. 2 Art. 1107 of the Civil Code). Regarding a contractual advance, the start of the interest accrual period is not the date the prepayment was transferred (since the use of the advance was legal at that time), but the moment the use of the funds ceased to be lawful. Generally, this is the expected refund date — the deadline established by the party in its demand sent to the counterparty. For paid but undelivered goods, the interest period begins on the date the goods were due to be delivered under the contract. Interest stops accruing once the advance amount is returned. It should be noted that the termination of the contract does not necessarily end the penalty accrual period: if the recipient fails to return the money, interest continues to accrue even after the contract expires.[12]

Notably, the right to recover interest on an unearned and unreturned advance arises regardless of whether this condition is fixed in the contract. Article 395 of the Civil Code applies to any unlawful retention of funds by operation of law. Therefore, contracts generally do not mention the accrual of such interest unless the parties specifically wish to agree on an increased interest rate for failure to return an advance. Such a condition is possible: the contract can specify a penalty exceeding the Central Bank key rate.

Key Trends in Judicial Practice Regarding Late Advance Penalties

Liquidated damages for late advance payments must be clearly fixed in the contract. By nature, liquidated damages are a measure of liability — a sanction. They are aimed at compensating for financial losses incurred by the aggrieved party due to the other party's non-performance. Since an advance is paid before receiving reciprocal performance, it is essentially credit. Therefore, the accrual of liquidated damages for late prepayment is possible only if explicitly stated in the law or the contract.[13]

The wording of such a condition must be clear and unambiguous, leaving no room for dual interpretation.[14] If a contract only includes a general condition regarding the Customer's liability for late payment, this does not automatically mean liquidated damages can be accrued on advance payments.[15] Standard or boilerplate language stating that "a penalty shall be accrued for breach of payment deadlines" or "the Customer shall be liable for breach of deadlines for performing its contractual obligations in the form of liquidated damages" will not allow for interest on an advance. The contract must specify that liability arises not just for any delay or breach of payment deadlines, but specifically for the delay in transferring an advance (or prepayment). Otherwise, the contract will be interpreted in favor of the payer, even if they were indeed in default.[16]

A clear example is a precedent considered by the Far Eastern District Court in 2024. The parties agreed in the contract on a schedule for transferring advance payments. Prepayment was made in stages; the deadline for the first payment was counted from the contract conclusion date, and subsequent payments were calculated from the date of the first transfer. The delivery deadline was tied to the date of the first advance. Later, the supplier demanded liquidated damages from the buyer for late advance payments, and the buyer filed a counterclaim for late delivery. The court analyzed the contract and concluded that the parties had agreed on liquidated damages for late payments generally, without specifying the type of payment (advance or final). Although liquidated damages on an advance do not contradict legislation, this condition must be clearly agreed upon by the parties in the contract. Since this involves liability, the text must not allow for dual or broad interpretation. In the court's view, the disputed contract used standard language to agree on liability for late payment for delivered goods. This language cannot apply to late prepayment, even if the advance payments constitute 90% of the total price. As a result, the supplier's claim was denied.[17]

Instead of a direct statement in the text regarding liquidated damages "for late advance", a phrasing is permitted where a general penalty condition contains a reference to the specific contract clause establishing the prepayment deadline. An example is a case where parties fixed advancement terms in one clause and referred to it in another section regulating liquidated damages. The courts viewed this as the parties' agreement on interest for late advances. The Customer (payer) tried to object, noting that the contractor had not performed or handed over work, meaning such a penalty constituted unjust enrichment (or benefit) for the contractor. However, the court explained that in this case, the collection of interest was lawful, and the contractor was obligated to provide reciprocal performance after receiving the advance.[18]

Sometimes precedents occur where a court accepts general contractual wording for liquidated damages that contains no direct textual reference to an advance payment. But such decisions are the exception to the rule. For example, a court satisfied a claim for interest on prepayment under a subcontract with this wording: "in the event of a breach of obligations by the General Contractor provided for by the contract, as well as in other cases of non-performance or improper performance of obligations by the Customer provided for by the contract, the Subcontractor is entitled to demand payment of liquidated damages." Under the subcontract, the General Contractor was to transfer an advance. Later, the subcontractor delayed work, and the General Contractor terminated the contract unilaterally. However, the subcontractor performed work for the amount of the paid advance, so no unjust enrichment occurred, and the advance was not refundable. Since the General Contractor did indeed violate the advance payment deadlines, the court accrued penalties on that delay.[19]

Another exception is a situation where the advance amount is 100% of the contract price. Based on legal logic, interest in this case should be accrued according to the general rule: only when the contract contains a direct reference to a sanction regarding the advance payment. However, alternative judicial interpretations exist. For example, the Moscow District Court satisfied a claim for penalties on a late advance where the amount was 100% of the price. The decision was motivated by the fact that the contract was concluded on terms of full prepayment before delivery. This means that after receiving the goods, no further transfer of funds was provided for. Since no other payments were stipulated, the parties must have reached an agreement specifically on liquidated damages for violating the advance deadline, even though a direct statement to that effect was absent from the contract.[20]

If contract terms do not allow for the unambiguous determination of the possibility of accruing liquidated damages on a late advance, they are interpreted in favor of the payer. Cases occur where contract terms are so ambiguous that even courts of several instances have different readings of the same text. In such cases, courts interpret the contract in favor of the person being held liable. In disputes over late advance penalties, this person is the payer — the buyer or Customer.[21]

For example, the Central District Court considered a dispute under a contract for the supply of agricultural products. The parties agreed on an advance of 100% of the price. Liquidated damages were provided for "the buyer exceeding the deadlines for the payment of funds under this contract." Later, the parties had disagreements over changing contract terms (including price), and the contract was unilaterally terminated. The supplier demanded penalties from the buyer for the late advance. The delay indeed occurred, but the court decided that the contract lacked a direct reference to such a sanction; therefore, the terms must be interpreted in favor of the buyer. Since the delivery did not take place, no debt arose for the buyer. Furthermore, an advance payment by nature does not constitute debt repayment. Thus, the supplier's claim for liquidated damages was denied.[22]

Another example of interpreting a contract in the Customer's favor is a case considered by the West Siberian District Court. In a contract for the technological connection of power-receiving equipment, staged payment was agreed upon, with deadlines for each payment defined by calendar dates. At its discretion, the consumer could also pay the full amount in a lump sum. The contract contained no direct reference to penalties for late payments. The court found that the contractual payment deadlines were both interim and final in nature. At the same time, the consumer bears liability for late payment only after the grid organization performs its obligations for the technological connection. The court took the consumer's side and rejected the claim for liquidated damages for late payments.[23]

General advance rules apply to interim payments: interest is not accrued on their delay by default. Periodic or interim payments transferred before the acceptance of goods, works, or services are equated to prepayment. Even when a contract provides for staged performance where handover occurs in several parts, interim payments transferred before partial acceptance are recognized as prepayment. Therefore, when considering a claim for liquidated damages on an interim payment, it is necessary to correctly qualify its nature: is it an advance for a future part of performance or payment for an already performed part of the contract?

The approach to accruing liquidated damages on interim payments is the same as for a regular advance: such sanctions must be explicitly fixed in the contract, otherwise the court will deny the claim.[24]

Disputes over penalties for late interim payments most frequently arise in energy supply contracts. Practice in such disputes is uniform: since legislation regulating electricity supply contains no direct reference to accruing liquidated damages for violating an advance payment deadline, the possibility of recovery depends on the terms of the specific contract. If the contract lacks a clear condition for penalties on late interim payments, the claim will be denied. Contract terms are subject to interpretation in favor of the Customer; therefore, accruing liquidated damages on prepayment is not permitted by default.[25]

Energy supply contracts have a specific payment system: first, a fixed amount of prepayment is made before the start of the billing period, and subsequently, at the end of the billing period, a final settlement occurs based on the actually consumed volume of electricity. The transfer occurs at the end of the month when the consumed resource is recorded. During the billing month, the volume of services provided is not fixed, so the cost of services for that period is not definitively determined.[26] Consequently, until the final calculation of consumed resources and acceptance of services for the billing period, payments are of an advance or interim nature.

The liquidated damages provided for in Article 26 of Federal Law No. 35-FZ dated March 26, 2003, On the Electric Power Industry, are subject to accrual only for delays in already provided electricity transmission services, the volume of which has been formed and calculated by the time the deadline arrives. The law contains no direct reference to sanctions for violating interim payment deadlines. Therefore, if the parties did not provide for this condition in the electricity supply contract, courts deny claims for penalties.[27]

However, if the parties agreed on a payment schedule and simultaneously fixed liquidated damages in the contract for violating that schedule, the accrual of interest will be lawful. An example is a case involving the accrual of liquidated damages on payments under a contract for technological connection to electrical grids. A schedule with exact payment dates was agreed upon. The contract also established liability for breach of performance obligations (including the payment schedule). The court decided that the parties had agreed on a liquidated damages condition for the late payment of interim installments according to the schedule.[28]

In resolving disputes with resource-supplying organizations, courts generally protect the consumer's interests. An example is a case where a consumer challenged contractual terms for accruing penalties on late advances. The contract provided for the collection of liquidated damages for untimely performance, including violation of prepayment deadlines. Later, the consumer proposed excluding the penalty for late advances from the contract. The grid organization refused, and the parties went to court. The court noted that on the payment dates occurring before the end of the calendar month, the volume of the actually consumed resource is not determined; thus, the payments are recognized as advances. According to general rules, liquidated damages accrue only for the delay of the final payment calculated based on services actually provided. Statutory liquidated damages for breach of interim payment deadlines are not provided for by law. The court also considered the principle of freedom of contract, which allows parties to agree on penalties for late advances since it does not contradict the law. The grid organization tried to justify its position by stating that the consumer regularly missed interim payment deadlines, so the contractual penalty was aimed at protecting the supplier's financial interests. However, the court disregarded these arguments and satisfied the consumer's claims, excluding the prepayment sanction from the contract.[29]

The accrual of interest on a late advance does not depend on the lawfulness of the payer's conduct. Improper performance of certain contractual obligations by the Customer does not, in itself, allow for a demand for interest for violating prepayment deadlines. The right to such liquidated damages is not linked to the violation of other payment deadlines (e.g., violation of a deferred payment). Even if the contract was terminated due to the payer's fault and the performer suffered losses, this does not affect the situation regarding interest on the advance payment.

An example is a case involving a dispute under a construction contract. The contract was unilaterally terminated by the contractor due to the Customer's fault, as the Customer failed to pay advance payments in full and on time. The court confirmed that the contractor's termination was legal and justified and that the Customer's actions were blameworthy. As a result of the termination, the contractor suffered losses, which the court recognized for compensation. In addition to losses, the contractor claimed interest for the late prepayment. However, the contract's wording established the contractor's right to recover liquidated damages only for late payment for performed works. Since a direct reference to interest for late advances was absent from the contract, the court denied the contractor's claim.[30]

Final Conclusions

In conclusion, the main rules regarding the accrual of liquidated damages on late advance payments can be summarized as follows:

• Although a late advance is a violation of contract terms, an advance is not considered a monetary obligation, and the recipient cannot demand prepayment from the payer until they have performed their own obligation (the reciprocal performance rule);
• interest on a late or unpaid advance is not accrued unless explicitly stated in the law or the contract;
• the contractual wording for interest on a late advance must be clear and unambiguous. It must be directly stated in the text (e.g., "a penalty shall accrue for the delay of an advance payment") or include a reference to the specific contract clause establishing the advance deadline;
• if contract terms are contradictory and ambiguous, they will be interpreted in favor of the party paying the advance;
• general contractual phrases such as "penalties for breach of payment deadlines" or "liability in the form of liquidated damages for late performance under the contract" are viewed as conditions for liquidated damages on the payment of already performed and accepted obligations (i.e., post-payment) and do not allow for interest on an advance;
• interim payments are equated to prepayment by default if their payment deadline precedes the handover and acceptance of performance. When a contract provides for multiple payments (a payment schedule) and multiple performance stages, it is necessary to correctly qualify the status of the interim payment: an advance for subsequent performance or payment for an actually performed stage. General rules on interest accrual apply to interim payments that are advance-based in nature;
• by default, an advance is not commercial credit; therefore, the mere fact of transferring a prepayment does not automatically trigger an obligation for the counterparty to pay interest for the use of those funds;
• when a counterparty becomes obligated to return an unearned advance, interest under Article 395 of the Civil Code accrues on those funds. Interest begins to accrue not from the date the advance was paid, but from the moment the use of the funds became unlawful, continuing until the moment of refund.

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References

[1] Resolution of the Judicial Board for Economic Disputes of the Supreme Court of the Russian Federation dated December 19, 2017, in case No. 306-ES17-16139, A12-50782/2016.

[2] Resolution of the SAC RF dated May 12, 2012, No. VAS-5381/12 in case No. A20-1949/2011.

[3] Resolution of the Arbitration Court of the West Siberian District dated February 2, 2023, No. F04-7416/2022 in case No. A45-15812/2022.

[4] Resolution of the Ninth Arbitration Appellate Court dated December 7, 2023, No. 09AP-74937/2023 in case No. A40-302636/2022.

[5] Resolution of the Supreme Court of the Russian Federation dated June 7, 2017, No. 302-ES17-6131.

[6] Resolution of the Arbitration Court of the Moscow District dated February 15, 2017, No. F05-21753/2016 in case No. A40-231722/2015.

[7] Resolution of the Arbitration Court of the West Siberian District dated April 25, 2019, No. F04-919/2019 in case No. A46-11909/2018.

[8] Resolution of the Arbitration Court of the Moscow District dated July 24, 2018, No. F05-10740/2018 in case No. A40-207814/2017; Resolution of the Arbitration Court of the Central District dated September 5, 2017, No. F10-2225/2015 in case No. A09-8569/2014.

[9] Letter of the Ministry of Finance of Russia dated December 9, 2015, No. 03-03-RZ/67486.

[10] Resolution of the Thirteenth Arbitration Appellate Court dated February 5, 2016, No. 13AP-32127/2015 in case No. A56-38381/2015.

[11] Resolution of the Supreme Court of the Russian Federation dated March 7, 2024, No. 303-ES24-431 in case No. A24-6063/2022.

[12] Clause 3 of the Resolution of the Plenum of the SAC RF dated June 6, 2014, No. 35, On the Consequences of Termination of a Contract.

[13] Resolution of the Supreme Court of the Russian Federation dated May 17, 2024, No. 301-ES24-7602 in case No. A17-569/2022; Resolution of the Arbitration Court of the Volga-Vyatka District dated February 7, 2024, No. F01-9315/2023 in case No. A17-569/2022.

[14] Resolution of the Supreme Court of the Russian Federation dated May 29, 2024, No. 305-ES24-7956 in case No. A40-302636/2022; Resolution of the Arbitration Court of the Moscow District dated February 19, 2024, No. F05-35588/2023 in case No. A40-302636/2022.

[15] Resolution of the Supreme Court of the Russian Federation dated August 19, 2022, No. 302-ES22-17128 in case No. A33-10460/2021; Resolution of the Arbitration Court of the East Siberian District dated May 31, 2022, No. F02-2078/2022 in case No. A33-10460/2021.

[16] Resolution of the Supreme Court of the Russian Federation dated September 21, 2018, No. 308-ES18-14060 in case No. A53-31931/2017.

[17] Resolution of the Supreme Court of the Russian Federation dated July 18, 2024, No. 303-ES24-12170 in case No. A59-437/2023; Resolution of the Arbitration Court of the Far Eastern District dated April 15, 2024, No. F03-6574/2023 in case No. A59-437/2023.

[18] Resolution of the Supreme Court of the Russian Federation dated October 14, 2019, No. 301-ES19-18534 in case No. A39-8515/2018; Resolution of the First Arbitration Appellate Court dated March 14, 2019, No. 01AP-835/2019 in case No. A39-8515/2018.

[19] Resolution of the Supreme Court of the Russian Federation dated November 24, 2023, No. 303-ES23-24566 in case No. A73-20260/2020; Resolution of the Arbitration Court of the Far Eastern District dated August 21, 2023, No. F03-3637/2023 in case No. A73-20260/2020.

[20] Resolution of the Arbitration Court of the Moscow District dated June 14, 2019, No. F05-11429/2018 in case No. A40-254893/2017.

[21] Resolution of the Judicial Board for Economic Disputes of the Supreme Court of the Russian Federation dated September 27, 2018, No. 305-ES18-8863 in case No. A40-49067/2017.

[22] Resolution of the Supreme Court of the Russian Federation dated November 8, 2024, No. 310-ES24-18995 in case No. A35-4316/2023; Resolution of the Arbitration Court of the Central District dated August 27, 2024, No. F10-3288/2024 in case No. A35-4316/2023.

[23] Resolution of the Arbitration Court of the West Siberian District dated March 20, 2020, No. F04-144/2020 in case No. A03-239/2019.

[24] Resolution of the Judicial Board for Economic Disputes of the Supreme Court of the Russian Federation dated November 29, 2018, in case No. 305-ES18-11668, A40-204570/2017.

[25] Resolution of the Judicial Board for Economic Disputes of the Supreme Court of the Russian Federation dated January 19, 2018, No. 310-ES17-11570 in case No. A62-434/2016.

[26] Resolution of the Supreme Court of the Russian Federation dated September 14, 2018, No. 305-ES18-10447 in case No. A40-100282/2017.

[27] Resolution of the Supreme Court of the Russian Federation dated September 21, 2022, No. 308-ES22-17482 in case No. A77-1473/2021; Resolution of the Arbitration Court of the North Caucasus District dated July 26, 2022, No. F08-6795/2022 in case No. A77-1473/2021.

[28] Resolution of the Supreme Court of the Russian Federation dated February 25, 2020, No. 306-ES19-27966 in case No. A49-15959/2017.

[29] Resolution of the Supreme Court of the Russian Federation dated May 13, 2025, No. 310-ES25-3778 in case No. A09-519/2024; Resolution of the Arbitration Court of the Central District dated February 11, 2025, No. F10-5775/2024 in case No. A09-519/2024.

[30] Resolution of the Supreme Court of the Russian Federation dated July 8, 2024, No. 303-ES24-12168 in case No. A51-15766/2023; Resolution of the Arbitration Court of the Far Eastern District dated April 25, 2024, No. F03-781/2024 in case No. A51-15766/2023.