Interest: are you getting enough?

No, this headline has nothing to do with the latest offer from the Southern Sand Building Society but a reminder about some aspects of claims for interest. If interest '“ and pigs '“ are your thing, read on.

If you want interest, you must claim it in your claim form, state the basis and set out a calculation of the interest you are claiming up to a date no later than the date of issue, and the daily rate from then on.

Do not be greedy; do not forget that statutory interest on debts and damages can only be simple interest although the court does have jurisdiction to award compound interest in some types of case. If you claim contractual interest at too high a rate the court is quite likely to declare the rate penal and substitute a lower rate; but the court will in claims by businesses generally allow up to 3 per cent over base lending rate.

One obvious advantage of limiting your claim for interest to the statutory rate is you can get default judgment for interest at that rate on top of the debt or specified damages, otherwise you have to make an application if you want a higher rate.

You cannot sue for statutory interest under the Supreme Court Act 1982 s 35 (SCA) or the County Courts Act 1984 s 69 by itself; in other words if you were owed a debt which was paid late you cannot sue simply for the statutory interest on that debt; although if the debt is still unpaid when you issue proceedings, you can of course get judgment for the interest if the principal debt is paid after issue but before judgment. The position is different however for debts to which the Late Payment of Commercial Debts (Interest) Act 1998 (LaPaCoDIA) applies.

Since August 2002 the LaPaCoDIA applies to all debts owed by one business to another. It is pleasingly short and provides that where a debt arises on a contract between two businesses and payment is made late, the creditor can recover, by means of a term implied into the contract, interest at a heart-warming 8 per cent over bank base rate, together with a penalty of £40 on a debt up to £1,000, £70 on a debt up to £10,000 and £100 above that level. There are provisions restricting contracting out, but businesses are free to provide a different contractual remedy for late payment provided the remedy is sufficient to compensate the creditor for the late payment or to deter late payment, and provided it is fair to substitute the contractual remedy for the statutory one. Fairness is to be judged having regard to all the circumstances including the relative bargaining strengths of the parties, whether the alternative remedy was imposed by means of standard terms and whether the creditor received 'an inducement to agree to the term'. The court does have a residual discretion under s 5 to reduce or disallow interest for reasons of conduct on the part of the creditor.

So where do the pigs come in?

Ruttle Plant Hire Ltd v The Secretary of State for the Environment, Food and Rural Affairs [2008] EWHC 730 (TCC) is a case on s 4(5) of LaPaCoDIA which concerns the start date from which interest will run. Frequently the contract will stipulate when the debt is payable and that is the 'relevant day'; interest under the Act starts to run on the following day. Where the contract does not stipulate the date for payment, s 4(5) provides that the relevant day will be 'the last day of the period of 30 days beginning with the day on which the obligation of the supplier to which the debt relates is performed; or the day on which the purchaser has notice of the amount of the debt or (where that amount is unascertained) the sum which the supplier claims is the amount of the debt, whichever is the later'.

It was the final provision that Ruttle was concerned with. There was argument between Ruttle and DEFRA about the rates at which Ruttle should be paid for the provision of plant and machinery for dealing with the results of the outbreak of classic swine fever and a subsidiary argument about interest which was claimed under the LaPaCoDIA, alternatively under the SCA.

What was the date from which interest should run? Ruttle had decided to send out interim invoices for only 65 per cent of the rates set out in faxes exchanged at the outset of the story. Ruttle argued that they should be entitled to interest on the full amount that was eventually found to be due (not just the 65 per cent invoiced) from the date of the original interim invoices on the basis that DEFRA knew from the outset what the contract provided as to the full rate at which the debt itself was accruing.

The judge firmly rejected that argument and decided that notice 'of the amount of the debt or the sum which the supplier claims is the amount of the debt' was essential. An invoice for 65 per cent could not be taken as notice to set interest running for the remaining 35 per cent; notice in respect to the 35 per cent was required.

The moral seems to be to work out what you are entitled to and invoice for that amount, not something less, promptly.

A further point to note; the Act imposes interest at a rate fixed by Statutory Instrument; that is subject to s 5 which applies 'where, by reason of any conduct of the supplier, the interests of justice require that statutory interest should be remitted in whole or in part'. Section 5 appears to indicate the need for the court to make a finding of some (presumably reprehensible) conduct on the part of the supplier before the rate of interest can be reduced. The court clearly thought that Ruttle had behaved inappropriately in some way as interest was awarded at a modest base rate plus 2 per cent.

So there is a further moral '“ do not make such a mess of your billing (or pursue such improbable arguments before the court) that the court finds your conduct warrants some mitigation of the full-fat base rate plus 8 per cent.