STATUTORY INTEREST: THE AIM IS TO COMPENSATE NOT TO PUNISH
In Carrasco v Johnson  EWCA Civ 87 the Court of Appeal considered the appropriate rate for statutory interest. It reiterates important principles in relation to the court’s discretion in deciding the appropriate rate for the award of interest.
“… interest is awarded to compensate the claimant for being kept out of money rather than for damage done, such as alleged lost investment opportunities, or to punish or to call the defendant to account for his use of the money. The merits of the underlying case are not relevant to the award of interest, but delay in the prosecution of that case may well be.“
The claimant was suing on two loans. The terms of the loan provided for repayment of £20,000, repayment within two months with interest of £3,000. In the event of default interest was to run at £2,000 a month. The defendant defaulted. The claim was originally for over £300,000. Shortly before trial the claimant abandoned the claim for contractual default interest. The claim then became one for the £34,500 balance due, plus statutory interest.
THE DECISION AT TRIAL
The District Judge rejected the defendant’s defence. Judgment was entered for the principal sum of £28,500 outstanding on the loan, contractual interest of £6,000 and statutory interest of £5,470.84 – awarded at 3% per annum.
THE JUDGMENT ON APPEAL
The defendant appealed against the award of statutory interest. Lord Justice Hamblen considered the position.
(1) The court has a discretion as to the rate to be awarded and the period on which it is payable.
(2) Bank lending rates are much lower now than they were in early 2009 when the loans were repayable.
(3) Interest is not awarded as compensation for damage done but for the claimant being kept out money that ought to have been paid.
(4) The loans were between private individuals. This was not a commercial loan and commercial loan rates were not appropriate.
(5) The Respondent was aware that the Appellant wished to buy out her sister’s share in a property and that she needed the £40,000 loan to be repaid to enable her to do so.
(6) The present bank base lending rate was 0.5%. The judgment rate was 8%.
(7) Taking into account all the circumstances of both parties and the findings of fact made, the appropriate rate of interest was 3%.
(1) From 17 February to 4 March 2009: 1%.
(2) From 5 March 2009 to 4 August 2015: 0.5%.
(3) From 5 August 2015 to 20 April 2016: 0.25%.
The grounds of appeal
(1) An award of 3% did not reflect the findings of fact made by the judge as to the actual cost to the Appellant of being kept out of her money.
(2) The judge failed to take any or any proper account of the expert evidence before the court as to the borrowing rates in 2008.
(3) Although the judge accepted that this was a case of private individuals rather than commercial parties he awarded a rate that was at or near the commercial rate.
(4) The judge failed to have regard to relevant matters in considering the overall fairness of the result.
(5) The judge failed to have any or sufficient regard to the fact that the Appellant obtained an order for interim payment in January 2011.
(1) The expert evidence of Mr Palette as to the limited availability and high cost of loans for unsecured borrowers in late 2008 and as to credit card interest rates.
(2) The evidence as to the actual cost of borrowing to the Appellant, and, in particular, of a £25,000 8 year loan taken out by the Appellant with Abbey National in July 2015.
(3) The evidence of investment opportunities which the Appellant contended were lost as a result of the failure to repay the loan.
(4) The use of the loan by the Respondent to repay another loan, contrary to what she had told the Appellant, and consequent overall unfairness.
The relevant principles
In relation to the exercise of the court’s discretion we have been referred to the commentary to CPR Part 7 in the White Book at 7.0.14-16. We have also been referred to and/or have considered various cases, including Tate & Lyle Food and Distribution Ltd v Greater London Council  1 WLR 149 (Forbes J); Banque Keyser Ullman SA v Skandia (UK) Insurance Co Ltd (Steyn J); Jaura v Ahmed  EWCA Civ 210 (Rix J);Claymore Services  EWHC 805 TCC (Jackson J); Fiona Trust and Holding Corporation  EWHC 664 Comm (Andrew Smith J); Attrill v Dresdner Kleinwort  EWHC 1468 QB (Owen J); Sycamore Bidco Ltd v Breslin  EWHC 174 Ch (Mann J); Challinor v Julietter Bellis & Co  EWHC 620 Ch (Hildyard J) and Reinhard v Ondra  EWHC 2493 Ch (Warren J).
(1) Interest is awarded to compensate claimants for being kept out of money which ought to have been paid to them rather than as compensation for damage done or to deprive defendants of profit they may have made from the use of the money.
(2) This is a question to be approached broadly. The court will consider the position of persons with the claimants’ general attributes, but will not have regard to claimants’ particular attributes or any special position in which they may have been.
(3) In relation to commercial claimants the general presumption will be that they would have borrowed less and so the court will have regard to the rate at which persons with the general attributes of the claimant could have borrowed. This is likely to be a percentage over base rate and may be higher for small businesses than for first class borrowers.
(4) In relation to personal injury claimants the general presumption will be that the appropriate rate of interest is the investment rate.
(5) Many claimants will not fall clearly into a category of those who would have borrowed or those who would have put money on deposit and a fair rate for them may often fall somewhere between those two rates.
The exercise of the judge’s discretion
In my judgment, this was a case in which the judge would have been entitled to treat the claimant as falling somewhere between the borrowing and investment category of claimant. The rate awarded may have been lower than the borrowing rate for an individual over the relevant period but it was well above the deposit rate.
(1) The actual cost of borrowing – the court is concerned with the general attributes of a claimant, not what the particular claimant actually did or otherwise would have done or, in this case, the claimed actual cost of borrowing.
(2) The expert evidence – this addressed the cost of long term unsecured borrowing or bridging finance at the time of the loans in 2008. This was relevant to various of the defences raised but not to the appropriate interest rate to be awarded over the period 2009 to 2016. The relevant starting point for those purposes is the Bank of England base rate over that period.
(3) The commercial rate – although borrowing rates for individuals may be higher than for businesses, that is one of the reasons why, having regard to general attributes, it is often unrealistic to approach the issue on the basis that the money would all have been replaced by money borrowed. A blended rate may well result in rates comparable to the commercial rate, given the much lower deposit rate.
(4) Overall fairness – interest is awarded to compensate the claimant for being kept out of money rather than for damage done, such as alleged lost investment opportunities, or to punish or to call the defendant to account for his use of the money. The merits of the underlying case are not relevant to the award of interest, but delay in the prosecution of that case may well be.
(5) The order for interim payment – this does not attract interest at the judgment rate and that rate is accordingly not relevant to the order made. The fact that it does not do so made it all the more important for the Appellant to pursue the proceedings with expedition, which she did not do.
The Appellant’s arguments in this case highlight the importance of the principle that the court does not inquire into the detailed financial position of the claimant, but looks only at general or class attributes. To examine properly, for example, the claimant’s financial position throughout the relevant period; the borrowing carried out by her, when and on what terms; whether and how she needed so to borrow; the uses to which she might otherwise have put the money and the financial consequences of so doing; the extent to which any of these matters were known or in the reasonable contemplation of the Respondent etc. would have required a mini or indeed major trial, consumed significant time and expense and may well not have resulted in definitive answers. The broad approach which the court adopts is fair, practical and proportionate.