AN INTERESTING ISSUE: CLAIMANT WHO FAILS TO PLEAD CONTRACTUAL INTEREST – DOESN’T GET INTEREST AT ALL

August 1, 2023 · by · in Civil Procedure, Interest, Statements of Case

The judgment of Mr Justice Foxton in Rolls-Royce Holdings Plc v Goodrich Corporation [2023] EWHC 2002 (Comm) illustrates an important issue in relation to interest.  If a successful party has a contractual right to interest, but has not pleaded that right, the court does not have power to award interest under s.35A of the Senior Courts Act 1981.   This is an important issue for anyone bringing (or defending) a claim based on contract. Check carefully to see if there are any contractual provisions relating to interest. If the contractual terms are not pleaded then it is likely that the successful party will not recover any interest at all.

“… that provision reflects a more general principle, that if the parties have reached a contractual agreement as to when interest should be paid, the court will not award interest on some different basis under s.35A”

THE CASE

Goodrich had obtained judgment for $112,285,440 at trial. It sought pre-trial interest on those sums.   The respondents (“the RR entitities” ) argued that Goodrich had no entitlement to interest.  This is because it had a contractual right to interest, which it did not plead.  The argument was that,  given that there was a contractual right to interest, there was no power to award statutory interest.  That argument succeeded.

THE LAW

The judge found that Goodrich had a contractual right to claim interest.  This had not been claimed, reliance had been placed on Section 35A of the Senior Courts Act 1981.

    1. Section 35A of the Senior Courts Act 1981 provides as follows:
“35A.— Power of High Court to award interest on debts and damages.
(1) Subject to rules of court, in proceedings (whenever instituted) before the High Court for the recovery of a debt or damages there may be included in any sum for which judgment is given simple interest, at such rate as the court thinks fit or as rules of court may provide, on all or any part of the debt or damages in respect of which judgment is given, or payment is made before judgment, for all or any part of the period between the date when the cause of action arose and— (a) in the case of any sum paid before judgment, the date of the payment; and (b) in the case of the sum for which judgment is given, the date of the judgment …
(3) Subject to rules of court, where— (a) there are proceedings (whenever instituted) before the High Court for the recovery of a debt; and (b) the defendant pays the whole debt to the plaintiff (otherwise than in pursuance of a judgment in the proceedings), the defendant shall be liable to pay the plaintiff simple interest at such rate as the court thinks fit or as rules of court may provide on all or any part of the debt for all or any part of the period between the date when the cause of action arose and the date of the payment.
(4) Interest in respect of a debt shall not be awarded under this section for a period during which, for whatever reason, interest on the debt already runs.”
  1. The effect of s.35A(4) is to prevent interest being awarded under s.35A when it is already “running” for some other reason on the debt. That could be because a contractual rate of interest is running or because it is a statutory debt on which interest runs. Section 35A(4) avoids interest being recovered twice on the same debt.

WHAT HAPPENS WHEN SECTION 35A IS ENGAGED?

The judge reviewed previous cases on the question of contractual interest.
ii) In Starbev GP Limited v Interbrew Central European Holdings BV [2014] EWHC 2863 (Comm), a claim was brought under a Contingent Value Right or CVR. At trial, both parties sought declarations as to their rights, one party saying that nothing was due and the other that further sums were due, the amount of which was dependent on the court’s findings. No money claim was pleaded. After the main judgment, the parties were able to agree the amount due. ICEH sought permission to claim interest pursuant to contract and/or statute after trial.
iii) Blair J noted at [45] and [46] that there is no requirement to plead a claim to statutory interest, but that there is such a requirement to claim contractual interest. At [46] he stated:

“However, a contractual claim for interest must be pleaded. Where a contract provides for the payment of interest, the agreed terms will normally displace the court’s discretionary power to award interest under section 35A of the Senior Courts Act 1981. This is because the court respects what the parties have agreed as to interest rather than substituting its own discretion. This is recognised in part by s.35A(4), which provides that, “Interest in respect of a debt shall not be awarded under this section for a period during which, for whatever reason, interest on the debt already runs”. This means that, where the contract itself fixes interest, the court can only enforce that provision: its statutory power does not override the contractual provision, so that it cannot fix a different interest rate (Standard Chartered Bank v Ceylon Petroleum Corporation [2011] EWHC 2094 (Comm) at [10], Hamblen J). What applies to interest rates also applies where the parties have agreed as to the circumstances in which interest is payable. Where the parties have agreed that interest is to be payable in particular circumstances, or not payable in particular circumstances, the court will give effect to the parties’ agreement. (Different considerations may apply post-judgment.)”

    1. The words “recognised in part” reflect the fact that a contractual interest rate is not only capable of removing the power to award statutory interest because it engages section 35A(4), but will itself condition the exercise of the statutory discretion. If, for example, the parties had agreed in their contract that no interest was to be awarded on damages, or that interest on damages would run at the rate of 2%, that would tell very strongly against any attempt to obtain statutory interest under s.35A, or to do so at a more favourable rate, even though s.35A(4) would not be engaged.
  1. If s.35A(4) is engaged, the statutory discretion to award interest does not arise. Where it is not engaged, but the parties have entered into a contract addressing the circumstances in which interest is to be recoverable, it is possible to approach the issue on the basis that a contractual agreement that interest is payable when certain conditions are met amounts to an agreement that no interest is otherwise payable (cf Barton v Morris [2023] UKSC 3), which agreement the court should enforce by refusing to award statutory interest where the relevant conditions are not met. An alternative, and in my assessment the better, analysis is that the issue is to not be approached on the basis that the court must enforce the parties’ contractual promise, but on the basis that the parties’ agreement is a powerful factor when determining whether the court should exercise its procedural discretion and on what basis. The procedural power to award interest under s.35A is not dependent on the existence of a substantive right to interest under the law governing the relevant obligation (Maher v Groupama Est [2009] EWCA Civ 1191). Further, when discretionary determinations are required in a procedural context, the parties’ contractual arrangements are generally treated as a factor of great weight, rather than determinative (e.g., agreements not to argue that a particular forum is not conveniens: Bank of New York Mellon v GV Films [2009] EWHC 2338 (Comm)).

THE JUDGE’S CONCLUSION IN THIS CASE: REACHED WITHOUT ENTHUSIASM

The judge found that there were contractual provisions for interest, which could have been pleaded, but which were not.  Accordingly Goodrich had no right to statutory interest.
  1. For the reasons I have set out above, the principle reflected in the decisions in Standard Chartered and Starbev GP is not dependent on the application of s.35A(4). Rather that provision reflects a more general principle, that if the parties have reached a contractual agreement as to when interest should be paid, the court will not award interest on some different basis under s.35A (absent, at least, some compelling public policy consideration).
Conclusion
  1. In circumstances in which there has been no attempt to assert or prove an interest claim permitted by clause 44, I have concluded that no award of interest should be made under s.35A. I have not reached this conclusion with any degree of enthusiasm, and do not find it particularly satisfying. However, I have not found any of the suggested means of avoiding that conclusion satisfactory. As I confirmed at the hearing, I will give Goodrich permission to appeal on this point.
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