COMPOUND INTEREST OR SIMPLE INTEREST? COUNTING THE COPPERS: CLAIMANT’S ARGUMENT MISSES THE NET

In Ipswich Town Football Club Company Limited -v- The Chief Constable of Suffolk Constabulary [2017] EWHC 375 (QB) Mr Justice Green considered the question of whether a claimant was entitled to compound interest or simple interest. The judge gave that particular argument the red card. It is an important judgment in that it reviews the (sometimes conflicting) judgments on the basis on which compound interest should be awarded. It is also another case in which an argument as to damages failed because of the lack of evidence.

“If a court is to order that a claimant be paid compound interest then at the very least the claimant must adduce some evidence which establishes the loss of the time value which is used to quantify the claimed for loss.”

THE CASE

The claimant football club was successful in seeking recovery of money that had been paid to the police. The police had made charges which were outside the relevant area,   The claimant claimed to be entitled to compound interest in relation to the money paid

THE JUDGMENT ON INTEREST

(i) The issue
    1. I turn now to the question of interest. The Club claims compound interest, and if not that then simple interest. The Police strongly reject any suggestion that they pay compound interest. They very faintly (indeed) suggested that as an alternative simple interest should also not be ordered. I have decided that compound interest is not appropriate but that simple interest is.
(ii) Sempra Metal Ltd v Inland Revenue Commissioners et or [2007] UKHL 34 (“Sempra”)
    1. The starting point is to consider the jurisdiction and the test. Both were considered by the House of Lords in Sempra Metal Ltd v Inland Revenue Commissioners et or [2007] UKHL 34 (“Sempra”). In this case the House of Lords held that compound interest may be ordered in any claim based upon tort, contract or restitution. The Court had jurisdiction to award compound interest where a claimant sought restitution of moneys paid under a mistake (per Lord Hope, Lord Nicholls and Lord Scott) in the exercise of the Court’s common law discretionary jurisdiction; or (per Lord Walker and Lord Mance) in the exercise of the Court’s equitable discretionary jurisdiction. Their Lordships were not ad idem as to the conceptual basis pursuant to which a payee might not be required to pay compound interest but all were agreed that even where a prima facie case for recovery of compound interest arose it could be defeated depending upon the circumstances of the case including whether the Defendant benefited from the receipt and holding of the moneys in question. Notwithstanding the absence of complete consensus there is sufficient commonality for me to determine this issue in favour of the Police.
    2. The main points of relevance, for present purposes, are as follows.
    3. Lord Hope (at page [581] Paragraph [17]) stated the broad proposition: “ the loss on the late payment of a debt may include an element of compound interest“. However, he emphasised the limitations including that the claimant bore the burden of proof of establishing actual loss and that this would exceed simple interest under Section 35A:
But the claimant must claim and prove his actual interest losses if he wishes to recover compound interest, as is the case where the claim is for a sum which includes interest charges. The claimant would have to show, if his claim is for ancillary interest, that his actual losses were more than he would recover by way of interest under the statute. In practice, especially where the period over which interest is sought is short or where the claimant does not have to borrow money to replace the debt, simple interest under section 35A of the Supreme Court Act 1981 is likely to be the more convenient remedy.”
    1. Lord Nicholls (whose judgment was endorsed by Lord Hope) at page [606] paragraphs [118], [119] held that there would be no injustice in not requiring a payee to pay compound interest where that person has not benefited and would be “out of pocket” if compound interest were ordered:
“… a recipient of a payment made by a mistake shared by both parties might make no actual use of the money. He might pay the money into a current account at a bank yielding little or no interest. When the mistake comes to light he repays the money. In such a case, depending on the circumstances, it might well be most unfair that he should be out of pocket by having to make an additional payment, whether as compound interest or even simple interest, in respect of the ‘time value’ of the money he received.”
    1. Lord Nicholls emphasised that the law was “flexible” and set out to achieve a “just result”. He commented that the benefit to the recipient might not always reflect the “market value” and it might be unjust simply to assume that the benefit to the recipient is that which the money might have had in the hands of others::
“119. … To avoid what would otherwise be an unjust outcome the court can, in an appropriate case, depart from the market value approach when assessing the time value of money or, indeed, when assessing the value of any other benefit gained by a defendant. What is ultimately important in restitution is whether, and to what extent, the particular defendant has been benefited: see Professor Burrows, The Law of Restitution, 2nd ed, (2002), page 18. A benefit is not always worth its market value to a particular defendant. When it is not it may be unjust to treat the defendant as having received a benefit possessing the value it has to others. In Professor Birks’ language, a benefit received by a defendant may sometimes be subject to ‘subjective devaluation’: An Introduction to the Law of Restitution (1985), page 413. An application of this approach is to be found in the Court of Appeal decision in Ministry of Defence v Ashman [1993] 2 EGLR 102. Whether this is to be characterised as part of the ‘change of position’ defence available in restitution cases is not a matter I need pursue.”
    1. Lord Walker essentially agreed with Lord Hope and Lord Nicholls. He did however “feel some apprehension” (ibid page [63] paragraph [187]) about the proposal of those two judges to “ cut through the thicket of problems by recognizing a restitutionary remedy available as of right at common law, subject to the Court’s power to resort to ‘subjective devaluation’ in order to avoid injustice in hard cases” (ibid page [629] paragraph [184]). Nonetheless he also was clear that given the discretionary nature of the remedy its application should be unproblematic (ibid paragraph [187]): “The discretionary nature of an equitable award of interest provides the necessary flexibility, though I would expect the principles for the exercise of the discretion to develop along familiar and predictable lines“. And he was also of the view that compound interest should not be awarded if the facts were such that the Defendant would not have earned interest (ibid paragraph [186]).
    2. Lord Scott agreed with much of the historical analysis set out by other judges, including Lord Hope and Lord Nicholls, but he disagreed that the jurisdiction lay in the common law, as opposed to in equity. Nonetheless he was quite clear that (even if equitable) the right to compound interest had significant limits and was subject to, inter alia, change of position and evidence that the recipient had not benefited: See pages [608] and [609] paragraph [132]. Lord Mance also disagreed that the power was derived from common law as opposed to equity, given that the basis for restitution in cases of mistake was not premised upon a tortious or contractual breach by the payee but, rather, by reference to broader principles of unjust enrichment: See, for example, ibid page [649] paragraph [231]. But, yet again, he was also clear that the existence of a prima facie right to recover was subject to significant limits based upon the principles of unjust enrichment (of the payee). At paragraph [231] he thus observed: “In my view (and in agreement with my noble and learned friend Lord Scott of Foscote), if any claim to restitution is to be recognised in relation to the use of money had and received, at common law or in equity, it must refer to any actual benefit obtained by the recipient, here the Revenue. The critical point is that Sempra’s restitutionary claims – based on the Revenue’s demand or on Sempra’s own mistake – are not for damages or in respect of any wrong“. And later in the same paragraph: “ restitution on the basis of unjust enrichment looks, carefully and advisedly, at the recipient’s actual benefit“. He was also unpersuaded of the concept of “subjective devaluation” (ibid page [650] at paragraph [233]). (The concept has been considered in some detail by Lord Reed JSC in Benedetti v Sawiris [2014] UKSC 50 at paragraphs [110ff]).
    3. The majority view was that the jurisdiction was under the common law. But, in any event, it is evident that the test is one of fairness and justice and that a court takes into account a variety of factors which would include: whether the claimant has actually sustained a loss (over and above loss of the principal sum) or can prove whether it has sustained such a loss; and whether even if the claimant has sustained such a loss the defendant has benefited from the time value of the money or would, otherwise, be “out of pocket” if required to pay compound interest on the principal.
(iii) Analysis
    1. In my judgment this is not a case where I should order compound interest.
    2. First, I accept the analysis of the Police that there can be no assumption that it has benefited from receipt and possession of the overcharge in any conventional sense. I accept the submission that the Police are subject to budgetary constraints (and there was no serious challenge to this from the Club) and that it had not used the overcharge to make a profit. The Police are not equivalent to a bank or, for that matter, central government which has the ability and incentive to use funds received to generate further funds. Mr Basu QC argued that the proper inference to draw was that the overcharge would simply have been used to defray ordinary operational or preventative policing measures, which would benefit the public and amount to a discharge of its public duties and responsibilities. If forced to pay compound interest it would be “out of pocket” and this would impact prejudicially upon the performance of its present public duties which were being performed under conditions where difficult decisions were made daily as to the allocation of resources.
    3. Second, there is no evidence before the Court that the Club has in actual fact sustained any real or tangible loss from being deprived of the time value of the money in question (and certainly over and above simple interest). If a court is to order that a claimant be paid compound interest then at the very least the claimant must adduce some evidence which establishes the loss of the time value which is used to quantify the claimed for loss.
    4. The position is thus: (i) that the Claimant has either not sustained a time value loss or has not proved it; but in any event (ii), any prima facie claim that might arise is defeated on the justice/fairness/unjust enrichment grounds, namely that the Police have obtained no incremental benefit from possession of the overcharge, and, they would be out of pocket if required to pay compound interest and this would adversely impact upon the provision of an important public service. Nor is there any other public interest reasons to order payment of compound interest.
    5. This then raises the question of simple interest under Section 35A. Although this is also discretionary it is recognised in the case law that the much more carefully performed scrutiny of where the benefits and burdens lie is reserved for claims of compound interest. Where simple interest is being sought the gist of the judgments in Sempra was that if compound interest was not awarded (because for instance “the Claimant does not have to borrow money to replace the debt“) then the award of simple interest was likely to “be the more convenient remedy“: See per Lord Hope in Sempra page [581] paragraph [17]. In this case Mr Basu QC did not argue strongly or with any real conviction that if I did not award compound interest I should also not award simple interest. I order that interest on the sums overpaid attract simple interest pursuant to section 35A.

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