Ince

A tale of interest

Question

How do interest rates affect court judgments? What powers do the courts have in relation to awarding interest?

Answer

It is said that "lawyers pay scant regard to interest; interest payments are often the last issue to be negotiated". However, when times are hard, interest could make a significant difference in the sums to be paid/recovered in a dispute, depending on the interest rate used. For instance, an interest rate of 5%, compounded every three months over five years on a principal sum of $3 million, could yield $850,000 in interest - more than 25% of the value of the principal sum. Hence, clients would be interested to know the possible interest rates and period the court would order, and what powers the court has in deciding interest payments. Lawyers could thus find themselves having to be more interested in interest.

Interest payments can be ordered by a court in three areas, which are:

  • interest on judgments;
  • interest awards in judgments (for the period before judgment); and
  • interest on costs.

Interest awards in judgments

Under the Judgment Act 1838 (as amended) and the Civil Procedure Rules, a High Court judgment shall carry a (simple) interest rate of 8% from the date on which the judgment is given. There is some discretion given to the court under the Administration of Justice Act 1970 to use a different interest rate if the relevant principal sums are in a currency that is not the sterling pound.

Under the County Courts Act 1984, county court judgments can carry interest at such rates and for such periods as rules prescribe. The relevant rule is the County Courts (interest on Judgment Debts) Order 1991, which accords that interest will also generally be set at 8% from the date on which the judgment is given.

However, where a contract expressly provides for the contract interest rate to apply after judgment, then the court will order this. In such a case, statutory interest will not be paid when interest already runs under contract.

Interest awards in judgments (for the period before judgment)

Under the Supreme Court Act 1981 and the County Courts Act 1984, the court has the discretion to decide:

  • whether to award interest at all;
  • the period of interest; and
  • the rate of interest.

The principle underlying the court's exercise of its discretion is that interest awarded should be compensation for being kept out of money from the date when it has been established that it was due to the claimant, as in the case of Wentworth v Wiltshire County Council (1993). Interest is "not awarded as a punishment" as established in BP Exploration Co (Libya) Ltd v Hunt

In line with this principle, although a court could impose the 8% rate used in the Judgment Act 1838 (as amended), the preferred approach is to consider the "the rate at which plaintiffs with the general attributes of the actual plaintiff in the case (though not, of course with any special or particular attribute) could borrow money as a guide to the appropriate interest rate" as in Tate & Lyle Food and Distribution v Greater London Council.

In fact, in Claymore Services Ltd v Nautilus Properties Ltd (2007), it was held that the interest rate set out by the Judgments Act 1838 (8%) is not an appropriate rate in a commercial dispute, but is fixed for the benefit of unpaid judgment creditors. In commercial cases, interest should be paid at 2% above base rate, being the minimum rate that the claimant would have to have paid to borrow the same amount as the debt.

Given that the base rate is at a historically low 0.5%, the judgment rate of 8% is not commercial. It is likely that a debtor will be able to argue for lower interest rates for the period before the date when judgment is given.

The court has the power to award interest where an offer to settle under the Civil Procedure Rules has been rejected.  Under these rules, where a judgment against the defendant is at least as advantageous to the claimant as the proposals contained in a defendant's offer, the court will order that the claimant is entitled to interest on the whole or part of any sum of money (excluding interest) awarded at a rate not exceeding 10% above base rate for some or all of the period starting with the date on which the offer expired. However, this is subject to a cap where the total interest levied by the court on the same principal sum and period exceeds 10% above the base rate.

Under the Late Payment of Commercial Debts Interest Act 1998, the court could award a rate of base rate plus 8%, provided the following conditions are present: (i) the debts arise from a contract for the supply of goods or services, and (ii) the purchaser and supplier under the contract are each acting in the course of business.

Interest on costs  

An order for costs is part of the judgment and therefore the judgment rate of 8% in the Judgment Act 1838 would apply. However the interest will run on the costs from the date of the order, not the date at which the costs are assessed.

Where an offer to settle has been made and rejected, the court will also order interest on cost. Under the Civil Procedure Rules, where a claimant fails to obtain a judgment more advantageous than a defendant's offer, the court will order that the defendant is entitled to interests on those costs from the date which the offer expired. Where a claimant obtains a judgment at least as advantageous as the offer, the court will order interest on the claimant's costs at a rate not exceeding 10% above base rate from the date on which the offer expired.

Simple or compound

All statutory interest rates are simple and, in general, the courts tend to award simple interest. However, compound interest rates have been awarded in some cases. Courts have awarded compound interest where it is stipulated by contract (Whitbread v UCB Corporate Services (2000)), by custom and practice or trade usage (National bank of Greece SA v Pinios Sipping Co O, 1 (1990)), for cases where there had been a breach of fiduciary duty (Black v Davies (2005)) or where interest is being claimed as damages (Sempra Metals Ltd v Inland Revenue Commissioners (2007)).

Hsu Mei O'Neill is a second-year trainee at Ince & Co LLP.

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