Losing interest: advising clients about claims for interest

Lawyers and the courts can be cavalier in their approach to claims for interest. The exceptional circumstances of the global financial crisis that have led to the Bank of England base rate remaining at a record low 0.5 per cent for over three years have provided further excuse in this respect. Interest is an important add on to claims that is almost always available and can be significant, particularly where lengthy claim periods apply or where limitation can be extended including for fraud or concealment.

How much a claim is worth is usually the first question on every client's mind. Interest can contribute a very valuable proportion of that amount and can have a real impact on the assessment of how claims should be pursued or countered

If the Judgements Act 1838 rate of 8 per cent were achievable, on a six-year claim, the interest could amount to a near 50 per cent increase on the total value of a claim. In certain circumstances, a claim might not be restricted to just six years and could extend to times when even the Bank of England base rate reached double figures. More modest interest rates may still generate considerable sums in high value claims. Interest shouldn't therefore ?be ignored.

As lawyers we need to manage our clients' expectations in a realistic and balanced manner. Among other things, clients involved in litigation need to be appropriately advised as to the likely rate of interest so they can fully understand the merits of proceeding to trial and negotiating suitable settlement figures as well as the effect of Part 36 offers. Judging by comments the Law Commission made in 2004, not all of us do so. 'By and large, lawyers pay scant regard to interest' yet 'interest payments, however, can be substantial, especially where there have been long delays between the loss arising and the resolution of the dispute', it said in its Pre-Judgement ?Interest on Debts and Damages report.

No contractual term

In the absence of an express contractual term, interest on a debt or damages is recoverable under the Senior Courts Act 1981 (SCA 1981) or the County Courts Act 1984 (CCA 1984) at such rate as the court thinks fit, if at all, on all or part of the debt or damages. This can include applying the Judgements Act 1838 rate of 8 per cent.

With a record low base rate of 0.5 per cent, is it reasonable to try and claim interest at a rate of 8 per cent? The answer, quite clearly, is no. The Court of Appeal (Reed Executive plc v Reed Business Information Ltd [2004] EWCA Civ 887) has indicated that the Judgements Act rate is, in fact, artificial and concluded that there was no reason for it to be applied unless it must. The uncertainty which naturally follows is therefore: what is reasonable? Given that interest under these statutes is discretionary, the simple answer is unfortunately, whatever the court decides on the day.

Nevertheless, we still need to estimate and advise clients of the potential interest recoverable should they proceed to trial and an award is made.

In exercising its discretion the court should have regard to the purpose of any award for interest, in that it is designed to compensate the claimant for that which they have been deprived of earning. Therefore, thought should be given to current interest rates available in the market in light of the current Bank of England base rate.

There is much case law to suggest that a rate of interest at a per cent above base rate is appropriate, whether that should be 1 per cent (Tate and Lyle Food and Distribution Ltd v Greater London Council [1982] 1 WLR 149), 2 per cent (Claymore Services Ltd v Nautilus Properties Ltd [2007] EWHC 805) or even 3 per cent above base rate (Javra v Ahmed [2002] EWCA Civ 210).

In practice, 1 per cent above base rate should be considered reasonable unless that would be unfair to either party. In that respect, regard will normally be given to the claimant's circumstances and the interest rates that might have been available to them. For example, small businesses might not have the influence to achieve the more competitive rates available to some larger businesses.

The above, of course, does not apply ?to circumstances where interest is payable under terms of a contract or as per the ?Late Payment of Commercial Debts (Interest) Act 1998, where the parties are acting in the course of business and the claim is for a qualifying debt under contract, in which case an implied term can confer statutory interest.

Compound interest

Although the SCA 1981 and the CCA ?1984 state that simple interest is recoverable, it is arguable since the Sempra Metals ?ruling (Sempra Metals Limited v HM Commissioners of Inland Revenue and Anr [2007] UKHL 34) that compound interest is claimable. Obiter the House of Lords recognised that compound interest was a feature of modern commercial life and that, in principle, it was recoverable.

If follows logically that, if the recoverability of interest is designed to compensate the claimant for that which they have been denied, compound interest should be awarded if it would otherwise have accumulated.

The Law Commissions 2004 report on Pre-Judgement Interest on Debts and Damages considered that the court should have the power to award interest. With ?that in mind, the House of Commons Justice Committee recommended in its 'Draft Civil Law Reform Bill: pre'“legislative scrutiny Sixth Report of Session 2009'“10', published on 31 March 2010, that 'there should be power to award compound interest in appropriate circumstances', although, 'we do not think that the case has been made to introduce compound interest as the norm for the generality of larger cases'.

In reality, at present compound interest remains difficult to recover. However, ?there are good arguments to support ?such claims and there appears to be a greater focus by claimants in pressing for interest on this basis. No doubt these will result in greater clarification through forthcoming judgments.

In light of the significant impact that interest can have on the value of a claim, clients should be advised of the recoverability of interest, albeit caution should be taken and a conservative estimate would be most appropriate.

Considering that interest under the SCA 1981 and the CCA 1984 is discretionary,?it may be worth challenging interest ?rates. Certainly this is not an issue to disregard.