Takeaway: Brazil’s Superior Court of Justice (STJ) ruled that annual compound interest is only valid if expressly stipulated in the contract.

The STJ (2nd Panel) reviewed a case involving a loan agreement between a company and a financial institution, in which the bank imposed annual compound interest despite the lack of an explicit provision in the agreement.

The STJ ruled that annual compound interest is only enforceable if it is expressly agreed upon in the contract. According to the Court, the Brazilian Civil Code does not allow financial institutions to apply compound interest—whether monthly, quarterly, or annually—unless the contract explicitly and clearly authorizes this type of interest capitalization.

In practice, the decision strengthens protections for businesses in their dealings with financial institutions. All applicable charges must be expressly set out in the loan agreement. If the contract does not explicitly provide for annual compound interest, such charges may be deemed unlawful and set aside by the courts. The ruling also serves as a warning for banks and other market participants to carefully draft contractual terms to ensure the enforceability of agreed obligations.

To read the full decision, click here.

The MAC Advogados Team is highly specialized in contract law and is prepared to assist clients in reviewing banking agreements, ensuring legal certainty and clarity in contractual relationships