The Evolution of Late Payment Compensation in Iran:

Shari’ah Compliance, Inflation and Legal Challenges

Morteza Shahbazinia

Mehraveh Shahbazinia

 

Abstract: The Iranian legal system faces considerable challenges in resolving late payment compensation issues within an Islamic framework prohibiting Riba (usury). This article examines historical and contemporary approaches, with a particular focus on Supreme Court decision No. 805. Following the 1979 Islamic Revolution, the abolition of statutory late payment compensation created difficulties for creditors, primarily due to inflation and currency devaluation. Remedies proposed to address these challenges include penalty clauses, debtor imprisonment, and compensation for currency devaluation due to inflation, all of which have been discussed within the framework of Shari’ah principles. The Supreme Court’s 2020 decision, which validates penalty clauses in monetary obligations, fills gaps in earlier jurisprudence but has been criticised for potentially enabling exploitation and misalignment with fundamental legal principles. Although this ruling represents progress by harmonising judicial interpretations, it underscores the need for mechanisms to prevent abuses and to ensure fairness in creditor-debtor relationships. This study highlights the intricate interplay between Islamic jurisprudence, financial systems, and contemporary legal frameworks.