Judicial Interest at 8%: Fair Compensation - Or A Bonus For Pursuers?
A recent Court of Session case takes account of the "clear mismatch" between the rates of interest awarded by the Court and market rates in recent years. The Court decided to award interest at 4% after December 2008.
Farstad Supply AS v Enviroco Ltd: The Background
Farstad sued Enviroco to recover losses resulting from a fire on an oil rig supply vessel in 2002. The action settled for £1.75 million plus interest from 31 December 2002 “at such rate or rates as the Court shall think fit”.
Unsurprisingly, Farstad sought interest at 8% per annum, the current judicial rate. Enviroco argued that Farstad were “only entitled to that rate of interest which would put them into the same position in which they would have been if they had not suffered loss and damage”. The rate of 8% amounted to a bonus, rather than proper compensation for their loss. Enviroco invited the Court to adopt a "selective and discriminating" approach to fix the rate of pre-decree interest.
The Decision
Lord Hodge decided that, in the exercise of his discretion under Section 1 of the Interest on Damages (Scotland) Act 1958, he was able to take account of the ‘clear mismatch’ between the judicial rate of interest and market rates in recent years. Taking a "broad brush approach" he identified a watershed in late 2008 and early 2009 when the base rate plummeted from 5% to 0.5%. He awarded interest at 8% until December 2008 and thereafter at 4%. Interest would apply at 8% post-decree as a means of encouraging prompt implementation of the award.
This exercise of discretion addressed the circumstances of this case - the fact that Farstad had paid for the repairs almost nine years ago and had lost the ability to earn compound interest on that sum. However, the Court did not require evidence about the circumstances of the particular pursuer; the Courts had “no appetite to complicate legal actions by attempting to calculate the value to the individual claimants of the monies withheld.”
Comment
The decision will be welcomed by defenders who have long been concerned that judicial rates of interest give excessive compensation. For those considering a similar challenge, it’s worth noting that the judge took account of the need for predictability in facilitating settlements. In this case Enviroco flagged up the challenge to judicial rates in their defences and the judge felt that this met the requirements of predictability.
