Response by Clifford Chance to the Ministry
of Justice consultation paper on the Civil Law Reform Bill
We write to comment on the provisions regarding
interest in the draft Civil Law Reform Bill. We make no comments
on the other provisions of the draft Bill as those other provisions
relate to areas in which we do not practice on a regular basis.
In general terms, we consider that the courts
should be given the power to award compound interest but we do
not share the view that the current statutes dealing with interest
are unduly complex or, in themselves, lead to inconsistencies.
We are also unconvinced that the solutions offered by the draft
Bill create a "simple and transparent" system, still
less one that will be fair.
Pre-judgment interest
With regard to the provisions in the draft Bill
regarding pre-judgment interest, we do not consider appropriate
to give the courts discretion over
— whether to award interest,
— whether interest should cover the whole
or only part of the sum awarded or paid, and
— whether interest should cover the whole
or only part of the period from accrual of the cause of action
to the date of judgment or payment
but then to deprive the court of discretion over
— the rate of interest, and
— whether the interest should be simple
or compound
giving power over these latter issues to the Lord
Chancellor instead.
Interest is, as the Impact Assessment comments
(paragraph 19), intended to be compensatory, not penal. It can
only be compensatory if the court is in a position to take into
account the actual position of the parties and to consider all
elements relevant to the calculation of interest. The rate of
interest and basis upon which it is to be calculated do not differ
in kind from the other aspects relevant to an assessment of interest.
All matters relevant to interest should be determined within the
judicial process, and not by administrative fiat.
Further, if the court has discretion over some
matters relevant to the sum by way of interest that a party will
receive but no discretion over others, in practice, the court
will use those matters within its discretion to achieve the result
that it considers just, even if doing so involves distorting the
applicable principles. So, for example, if the court considered
that the rate and basis of interest would, in all the circumstances,
give a successful claimant too high a return and the court is
not able to reduce the rate or change the basis, the court will,
instead, not award interest on the whole sum or will reduce the
period for which interest applies. This would, in our view, make
the situation more arbitrary than it might be thought to be now.
To the extent that there is any justification
(though we are not convinced that there is) in the Law Commission's
criticism that the current position is uncertain, arbitrary and
sets rates at an inappropriate level, the draft Bill does not,
in our view, meet that criticism. Discretion can, in its nature,
seem uncertain and arbitrary, but discretion necessarily remains
a core aspect of the assessment of interest in the draft Bill.
Those who regard the current system as uncertain and arbitrary
will not regard the system put in place by the draft Bill any
differently. Further, a rate of interest and basis of calculation
set by the Lord Chancellor will not cure any perception in an
individual case that the amount of interest payable is arbitrary
or inappropriate and, indeed, might increase that perception.
The parties will lack any ability even to argue that the rate
of interest and basis of calculation are inappropriate, which
they can at least do now. There is a risk that the parties will
feel that they are victims of powers taken by a distant politician
who can have no appreciation of what is just in their particular
case.
Further, insofar as interest is set by the court
at an inappropriate level, it is in the main through the (mis)use
of the post-judgment rate. It is not unreasonable in itself for
a court to apply the post-judgment rate before judgment as well
as after judgment: that rate is officially sanctioned, and there
is no obvious reason in many cases why the rate should differ
before and after judgment. The problem is that the judgment rate
has not been changed by the Lord Chancellor for almost 17 years,
and therefore bears no (or a purely coincidental) relationship
to real interest rates in the economy. It is not clear to us why
the Lord Chancellor has not changed the rate for the last 17 years,
but it does suggest that giving more power the Lord Chancellor
is not the obvious solution.
In our view, only one straightforward reform
to the current position on pre-judgment interest is necessary.
The court should be given the discretion to award compound interest
rather than only simple interest. Compound interest will, in most
cases, more fully compensate the claimant for being out of its
money than simple interest. As we have said, interest is properly
a matter for judicial determination, and all aspects of interest
should be left to the judge hearing the individual case.
It may be that in cases of, for example, default
judgment, where there is no judicial determination of interest,
the post-judgment rate should be used, but we do not consider
that this justifies removing all judicial discretion over the
rate and basis of calculation of interest.
In addition, we have the following comments
on the relevant provisions of the draft Bill:
Clause 10(1): This follows section 35A
of the Senior Courts Act 1981 in referring to "debt
or damages". There are many claims that do not fall within
the description "debt or damages", such as restitutionary
claims or claims for equitable compensation (though the courts
have extended the section to apply it to restitutionary claims,
and there is an equitable power to award interest, even compound
interest, in limited cases). We see no reason why the court should
not have power to award interest on all money claims, and therefore
favour amending clause 10(1) to read "… for the recovery
of money, whether by way of debt, damages or otherwise."
This would also modernise the legislation and make it more readily
comprehensible.
Clause 10(3): We assume that the intention
of this clause is to reflect the current law that the court cannot
award interest on any claim paid in full before the commencement
of legal proceedings. If so, we agree, but we consider the clause
to be ambiguous. It would be better if the clause read: "If
the defendant pays the whole sum claimed to the claimant after
the issue of proceedings but otherwise than in pursuance of a
judgment, the court may order…"
Post-judgment interest
We consider that the post-judgment rate of interest
and basis of calculation should be set by the court or, if it
does not do so (eg for default judgments), there should be a default
rate set or reviewed annually by the Lord Chancellor or by the
Civil Procedure Rule Committee with the advice of HM Treasury.
Any default rate should provide for compound interest.
If the court is to set the rate, it may (as
may the Lord Chancellor in any event) need statutory guidance
as to the basis upon which the rate should be set. Paragraph 9 of
the Impact Assessment says that the rate should compensate creditors
and encourage debtors to pay but without unfairly penalising debtors
for late payment. We accept this as an approach, but there is
a fine line between encouragement and punishment; the Late Payment
of Commercial Debts (Interest) Act 1998 goes too in the direction
of punishment in our view. We also consider that any judgment
or order should specify the rate of interest and the basis of
calculation so that the judgment debtor, on receiving a copy,
will know exactly what it must pay.
We see no advantage in leaving it to the Lord
Chancellor to determine rates of interest for particular categories
of case and the basis of calculation in those categories. This
will only add complexity to the system.
February 2010
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