Inflation of Money as Damage: The Legal Position of the Constitutional Court

 

The Baku Court of Appeal submitted a request to the Constitutional Court of the Republic of Azerbaijan seeking clarification on whether the concept of “damage” as defined in Article 21.2 of the Civil Code also encompasses the depreciation of money due to inflation. This request followed the rejection of a claim by the Khatai District Court, where R. Salimov sought compensation for material damages resulting from an 8-year delay in the enforcement of a debt. In the claim, the depreciation due to inflation was included as part of the damages, and calculations were based on the consumer price index provided by the State Statistics Committee.

 

The court of first instance rejected the claim, stating that according to Article 232.1 of the Civil Procedure Code, indexation may only be applied to monetary amounts determined by a court decision. Since the claim was based on an enforcement note issued by a notary authority, the norm was deemed inapplicable.

 

However, the request to the Constitutional Court pointed out that the interest rates stipulated in Articles 445.7 and 449.1 of the Civil Code do not exclude the application of Article 21.2. Nonetheless, due to the absence of a clear indication as to whether inflation-related depreciation falls under the definition of “damage,” legal uncertainty arises in practice.

 

The Plenum of the Constitutional Court emphasized that the inviolability of property and freedom of contract are enshrined in the Constitution. Loan agreements, their subject matter, and the reciprocal obligations of the parties are regulated by Articles 739–743 of the Civil Code. From a legislative perspective, money is a type of property, and inflation — meaning a decrease in the purchasing power of money — causes real harm to property and results in a violation of property rights.

 

In assessing the loss of purchasing power due to inflation as a form of damage, the Constitutional Court refers to several key principles:

1. Article 21.2 of the Civil Code provides for compensation of damages related to loss or harm to property. The creditor's actual loss resulting from the depreciation of money should be assessed within this context.
2. Consistency with prior decisions: The Constitutional Court's rulings in 2009 and 2014 also affirmed that damage suffered due to the creditor's inability to use money must be compensated.
3. Link between the discount rate and inflation: The Civil Code’s provision that interest rates be calculated based on the central bank's discount rate, which takes inflation indicators into account, serves the purpose of protecting the creditor from inflation. However, in some cases, this rate is insufficient to fully compensate for the actual inflation-related loss.
4. Application of Article 449.3: If actual damage, including that caused by inflation, exceeds the amount of interest stipulated in Article 449.1, the creditor has the right to demand compensation for the difference.
5. Legal status of enforcement notes: Although a notarial enforcement note is considered an enforcement document, it does not constitute a court decision. Therefore, while direct indexation of the enforcement note may not be possible, compensation may still be claimed for damages resulting from delayed enforcement.

 

As a result, the Constitutional Court concluded the following:

• The term “actual damage” in Article 21.2 of the Civil Code also includes the creditor’s loss of purchasing power due to the debtor’s failure to fulfill obligations on time.
• If the creditor's losses exceed the default interest, they may, under Article 449.3 of the Civil Code, claim additional damages.
• If a debt under a notarial enforcement note is not repaid, the creditor may seek compensation for inflation-related losses in court based on Article 21.2 of the Civil Code.

 

In conclusion, this decision of the Constitutional Court establishes a significant legal precedent in recognizing inflation-induced financial losses as compensable damage and in the protection of property rights.