Not so very many years ago, in the early 1980’s, the courts of England tended to behave as if interest did not exist and would not contemplate awarding interest as a part of the general damages suffered by a claimant as a consequence of a breach of contract. This was despite the fact that it could often take many years for cases to come to court and judgment be given, during which time the claimant was deprived of money rightly due to it, and often suffered real hardship as a consequence. This was exacerbated by the inflation which existed at the time, meaning that by the time a judgment was given the financial award made would be nowhere near enough to compensate the claimant for its losses. A similar situation existed in arbitration. All of this was because of what was described by Lord Justice Stephenson as a “… medieval abhorrence to usury …”, whereby a long line of cases led to the conclusion that the courts would not imply a promise to pay interest, even if that appeared to be the natural interpretation of the contract.
This situation has changed almost beyond belief in the past 25 years.
The first step towards recognising commercial reality was probably the (then) famous case of F G Minter v Welsh Health Technical Services Organisation where a contractor’s claim for loss and/or expense had been unpaid for a very long period before succeeding in arbitration. In that case the contractor was able to convince the Court of Appeal that the cost of financing the loss and/or expense incurred was an integral part of that loss and/or expense. By arguing in this way the distinction was maintained that the award was not in respect of interest on damages, but financing (i.e. interest by another name) as an integral part of its damages.
From this first step there are many ways in which a claimant could seek to recover either interest or financing costs as a part of its claim. These include:
- As financing costs, in accordance with the principles established in Minter, whereby the financing costs form an integral part of the loss and/or expense incurred.
- In reliance upon an express term in the contract. The Late Payment of Commercial Debts (Interest) Act 1998 (“the Act”) requires that all commercial contracts contain provision for the payment of interest where one party fails to pay the other in accordance with the terms of that contract. Where contracts do not contain such a provision or where the provision is drafted in such a way as not to afford a “substantial remedy”, then terms will be implied in accordance with the Act. Provisions intended to afford a substantial remedy are found in all the standard form contracts, including JCT, ICE and the NEC. Sometimes one party is tempted to amend the standard form wording to reduce the interest rate from 5% over base (in the case of the JCT forms) to perhaps 1% over base. In making such amendments they run the risk that the interest offered will no longer constitute a substantial remedy, and that the provisions of the Act will be implied as a consequence.
- The default provisions of the Act will be implied where either a contract does not contain any provision for the payment of interest or where any provision is not a substantial remedy. These default provisions include an interest rate of 8% in excess of the reference rate (approximately equivalent to the base rate) and so are clearly intended to encourage the parties to agree their own contractual terms. As such it is normally in the interests of suppliers and contractors for a contract not to contain any provisions in relation to interest – as agreed terms are rarely likely to be as favourable as those implied by the Act.
- Where court proceedings have been commenced the claimant is able to claim simple interest on its claim from the date the damages were suffered until the date of judgment or payment (if earlier), at a rate of 8% per annum. Once judgment has been given, interest continues to accrue at 8% until the sum awarded has been paid.
- Unless the parties agree otherwise, either in their contract or subsequently, an arbitrator’s powers under section 49 of the Arbitration Act 1996 are even greater than a judge, in allowing him to award either simple or compound interest on such terms as are considered to meet the justice of the case, and not limiting his powers to the award of simple interest.
- Where one party has been made aware by the other of particular financial circumstances such as to bring funding issues into its contemplation then claims for interest can be made as damages arising under the second limb of Hadley v Baxendale.
Armed with these tools, any claimant who has suffered damages ought to feel confident that it will not be disadvantaged by the mere passing of time, whilst any defendant will need to realise that any liability it may have will only increase with time.
- Owen Fox
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