Claims for interest are particularly contentious at present as:
- The base rate is 0.5%.
- Banks and building societies are only offering low interest rates on savings.
- The current economic climate has led some to bring previously forgotten claims on the eve of the limitation period expiring.
The four common ways to claim interest
- Under an express contractual term that specifies a rate of interest that accrues on debts (for example, the JCT Standard Building Contract 2005 edition, Revision 2 2009, provides for a rate of interest 5% above base rate).
- As statutory interest on a debt under the Late Payment of Commercial Debts (Interest) Act 1998 (the 1998 Act).
- As statutory interest under section 69 of the County Courts Act 1984 or section 35A of the Senior Courts Act 1981 (formerly Supreme Court Act 1981) on a judgment sum for the recovery of a debt or damages.
- Interest, simple or compound, as damages on claims for non payment of debts, other breaches of contract and in tort.
The Late Payment of Commercial Debts (Interest) Act 1998
Some notable features of the 1998 Act are:
- The entitlement to an award of interest under the 1998 Act arises only in specific circumstances. In particular, both parties must be acting in the course of business and the claim must be for a qualifying debt under a contract (as opposed to a claim for damages).
- The rate of interest is presently set at 8% above base rate and runs from the day after ‘the relevant day’, which (if applicable) is the date for payment agreed in the contract (Ruttle Plant Hire Limited v Secretary of State). As this rate does not vary in line with any variation in the base rate, claims being brought now for stale debts continue to attract high rates of interest until judgment.
- Section 5 of the 1998 Act refers to the conduct of the supplier, and can be used to argue that any right to interest should be remitted in whole or in part in the interests of justice. In Banham Marshalls Services v Lincolnshire County Council, section 5 was used to argue that interest should not be payable on an old debt. The court stated:
“I cannot accept, however, that it is appropriate for a creditor to delay without any particular reason for several years and then to expect to recover interest at the enhanced rate.” (Paragraph 71, judgment.)
If your contract provides for a rate of interest less beneficial than you would receive under the 1998 Act, you should consider arguing that the contract fails to provide a substantial contractual remedy within the meaning of section 8 of the 1998 Act and is therefore void.
Section 69 of the County Court Act and section 35A of the Senior Courts Act
A claim for simple interest on a debt or damages under these statutes is discretionary. As it is for the court to award interest at such a rate and for such a period as it deems fit, it is always worthwhile challenging both the period and the rate of interest claimed.
What about the period for which interest is claimed?
In relation to claims which could and, arguably, should have been brought sooner, Claymore Services Ltd v Nautilus Properties Ltd is a useful authority. Here Jackson J summarised three principles relating to the period during which interest accrues:
“(1) Where a claimant has delayed unreasonably in commencing or prosecuting proceedings, the court may exercise its discretion either to disallow interest for a period or to reduce the rate of interest.
(2) In exercising that discretion the court must take a realistic view of delay… It is not reasonable to expect any party to take every litigious step at the first possible moment, or to concentrate on litigation to the exclusion of all else. Delay should only be characterised as unreasonable for present purposes when, after making due allowance for the circumstances, it can be seen that the claimant has neglected or declined to pursue his claim for a significant period.
(3) When determining what disallowance or reduction of interest should be made to mark a period of unreasonable delay, the court should bear in mind that the defendant has had the use of the money during that period of delay.”
Jackson J held that the claimant was guilty of unreasonable delay between December 2004 and December 2005 and the interest payable to it was reduced by 50% during this period.
What about the rate of interest claimed?
Claymore is also useful authority when challenging the rate claimed. Claimants frequently argue that the judgment debt rate of 8% should be awarded, even though this rate properly applies to unpaid judgments (section 17, Judgments Act 1838) and is really therefore intended to be punitive. Particularly in the present climate, it is sensible for defendants to challenge such a claim.
In Claymore, the defendant challenged the claim for judgment rate interest, arguing that 1% over the base rate was the appropriate rate as this was the commercial rate of interest, namely the rate which the claimant would have had to pay to borrow the money. The court stated:
“The Judgments Act rate does not reflect the loss to the claimant from being kept out of its money…The Judgments Act rate is fixed for the benefit of unpaid judgment creditors. It is not normally an appropriate rate of interest to award in the context of a dispute between two businesses.” (emphasis added)
In deciding the rate to apply, the court took into account that Claymore was a small business within the meaning of the 1998 Act and the rate of interest that Claymore would have had to pay had it sought to borrow the claimed sum over the relevant period. In the exercise of its discretion, the court awarded a rate of 2% over the base rate.
What about interest as damages?
Finally, since the House of Lords’ decision in Sempra Metals v Revenue, claimants should also consider whether to plead interest, simple or compound, as damages. Relevant considerations are:
- Claims for interest as damages as a result of a breach of contract are subject to the rules of remoteness and mitigation.
- Loss must be proved. It will not be assumed that a delay in payment has itself caused damage. If loss cannot be proved, it is better to claim statutory interest.
- Loss may include an element of compound interest.