More interest north of the border? Choosing your jurisdiction carefully…

This article looks at the different approaches of the Scottish and English courts in relation to judicial interest.

Scottish approach

Legislation

4th September 2014

This article looks at the different approaches of the Scottish and English courts in relation to judicial interest.

Scottish approach

Legislation

Section 1(1) of the Interest on Damages (Scotland) Act 1958 as amended in 1971 empowers the courts in Scotland to award interest for any period between the date when the right of action arose and the date of the court decree (i.e. award). This was a change to the common law position which allowed only post- decree interest to be awarded. The rate of pre-decree interest is at the court’s discretion.

Court Rules

Rule of Court 7.7 contains the current default position on the judicial rate of interest in the Court of Session in Scotland. It provides:

"Where interest is included in, or payable under, a decree, it shall be at the rate of 8 per cent a year unless otherwise stated."

It has been the general practice of the courts in Scotland for some time to award both pre-decree interest under the 1958 Act, and post- decree interest, at the judicial rate current at the time of decree.

Judicial rate

The judicial rate of interest in Scotland has changed over time. In 1965 the rate was set at 5%. It was amended to 7% in 1970, 11% in 1975 and 12% in 1983. Between 15 August 1985 and 1 April 1993 the rate was 15%. Since then the rate has been 8%. Until recently 8% was generally applied to both pre and post- decree awards of interest.

Farstad Supply AS v Enviroco Ltd [2013] CSIH 9

The case of Farstad changed the approach of the Scottish courts in this area. Many practitioners and clients will already be familiar with this case. Most notably the court at paragraph 26 of its judgment stated:

I think, however, that in exercising the court's discretion under section 1 of the 1958 Act as amended, I can and should take into account the clear mismatch between the judicial rate and market rates in recent years. In doing so, I take account of the general practice of awarding interest at the judicial rate and also the fact that that rate has, on the occasions when it has been changed, been fixed at levels several percentage points above the base rate”.

Applying its discretion, the court decided that given that the base rate plummeted from 5% in early October 2008 to 0.5% in March 2009 it “should apply the judicial rate in accordance with general practice between 31 December 2002 and 4 December 2008, when the official bank rate fell to 2 per cent. Thereafter I consider that the rate should be 4 per cent”.

Therefore the Scottish courts will now normally apply to damages awards in commercial claims, a pre-decree interest rate of 8% up to 4 December 2008 and 4% thereafter. This reflects the broadly compensatory objective of pre-decree interest. The court in Farstad, however, saw no reason to depart from the normal judicial rate of 8% for post-decree interest, as a mildly penal measure, to encourage prompt payment of a court’s damages award.

English approach

Legislation

Under section 35A of the Senior Courts Act 1981, a party may include a claim for interest in proceedings in the High Court. This interest can be at such rate as the court thinks fit.

Section 17 of the Judgments Act 1838 provides for an interest rate of 8% and this is the default rate unless there are any other contractual or statutory provisions to the contrary. It is quite rare in practice for the court to award this statutory rate of 8% as it will often exercise its discretion and award interest at a lower rate.

Case law

As in Scotland, the courts in England and Wales work on the principle that an award of interest should be compensatory rather than penal. In the 2000 case of Wisely v John Fulton (Plumbers) Ltd, Lord Clyde stated:

"The general purpose of an award of interest at common law is recognised both in Scotland and England as being to compensate the creditor for the loss of enjoyment of the sum to which he was entitled".

The Law Commission in its "Report on Pre-Judgment Interest on Debts and Damages" (2004) recognised that different courts in England have adopted different approaches. The Commercial Court and the Admiralty Court have a general practice of awarding interest at 1% over the base rate. However, the Commercial Court has accepted evidence in support of other rates, particularly in recognition that small businesses typically cannot borrow at that rate. The Law Commission also noted that courts in England used a variety of interest rates, including:

(1) 1% above base: used in the Commercial Court to reflect borrowing by large “blue chip” borrowers;

(2) 3% above base: to reflect the rate at which small businesses borrowed;

(3) 8% above base: set under the Late Payment of Commercial Debts (Interest) Act 1998, to reflect the interest rate paid by the smallest and most vulnerable businesses on their overdrafts;

(4) 10% above base: the maximum rate at which interest can be set where a defendant fails to accept a claimant’s Part 36 offer.  This is intended as a sanction, to force defendants to take claimants’ offers seriously.

Ten years have passed since that report and the position remains much the same in the commercial courts.

The recent case of Yuanda (UK) Co Ltd v WW Gear Construction Limited (2011) is useful when considering what interest rates English courts might award. The court held:

Historically in commercial cases the courts have awarded interest on awards of damages at rates of between 1 per cent and 3 per cent over base, more commonly the former rather than the latter where there is no specific evidence as to the cost to the claimant in question of borrowing money”.

The English courts further emphasised this approach in the 2012 case of Persimmon Homes v Hall Aggregates. The court held:

(1) The appropriate rate of interest should be 2% over base rate (ie 2.5%). Although there has, in the past, been a presumption of 1% over base, the judge said that this presumption should apply only up to 5 February 2009, when the base rate dropped from 1.5% to 1%. From 5 February 2009 onwards, the appropriate rate of interest should remain at 2.5%. His finding reflected a provision in the Commercial Court Guide that there should no longer be a presumption that base rate plus 1% always represents the appropriate measure of a commercial rate of interest.

(2) Previous case law suggested that the English courts, when exercising their discretion under section 35A, had tended to award interest at the Judgments Act rate of 8%. However, those cases did not support the use of that rate in the current climate of lower interest rates.

(3) The court rules allow the English courts to award interest at the Judgments Act rate before the date on which judgment is given. The claimant sought to argue that it would be appropriate to do so in this case because judgment was initially given for damages to be assessed and that assessment did not take place for several years. Ramsey J rejected that argument:

“I do not consider that the fact there has been judgment for liability and a subsequent assessment of damages makes it appropriate for the court to impose Judgments Act interest where, as in this case, that rate would not otherwise be appropriate under section 35A”.

Further, in the Scottish case of Farstad mentioned above, Lord Hodge (now of the Supreme Court) also provided his insight, stating that the Commercial Court in England had formed a practice of awarding interest in commercial cases at between 1 and 3% and it was added that: “The general practice of the Commercial Court and the Admiralty Court in England and Wales in awarding interest at 1 per cent over base rate also is an approximation as many commercial borrowers would consider themselves very fortunate to be able to obtain funds at that rate" .

Comment

Most agree that the Scottish courts were correct in Farstad to lower the traditional judicial rate in Scotland from 8% to 4% for pre-decree interest in order to reflect the prevailing economic conditions. Interestingly, despite this reduction, the Scottish courts still generally offer a higher level of pre-decree interest for commercial damages claims than do their counterparts south of the border, where awards will commonly be at rates of between 1 and 3%, although this varies from court to court and on a case by case basis, and sometimes higher rates than these are awarded.

This is a relevant factor to consider for clients entering into contracts where a choice of jurisdiction is being considered.