Courts likely to increase awards of discretionary interest

As the era of unusually low interest rates comes to a close, it is worth paying attention to what rate of interest the courts are likely to allow in relation to successful financial claims.

Statue provides that in general terms once judgment has been granted in the English courts, interest of 8% per annum will be awarded on the judgment sum until it is paid.

In relation to the position up to the point of judgment, where a contractual claim has been successful interest might be claimed in different ways:

• The contract might provide for interest at a certain rate and, if it does, that will usually override any statutory basis for claiming interest (subject to rules about penalties – see further below);
• If the contract is silent on interest but is a commercial, business to business contract for the supply of goods or services, then the Late Payment of Commercial Debts (Interest) Act 1998 will imply simple interest at a rate of 8% over the current Bank of England Base Rate into the contract;
• If the Late Payment Act does not apply, then the courts have a statutory discretion to award simple interest at such rate as they think fit. The aim is to compensate claimants for being kept out of their money. The proper rate for commercial cases is usually the rate at which the claimant could have borrowed the sum that it is owed (not the return it would have got from investing it). The maximum amount awarded by the courts has usually been between 1-3% above Base Rate. The Commercial Court in London usually awards 1% over the base rate, but outside London practice has sometimes allowed for a greater rate.

It does seem however that the upturn in Base Rate has filtered through to the courts and their approach to the question of discretionary interest. In the recent High Court case of Harrington Scott Ltd v Coupe Bradbury Solicitors Ltd [2022] EWHC 2275 (Ch), (29 September 2022) the judge said that:

“Certainly, so far as the position going forward is concerned, with inflation currently running at around 10% pa, and forecast to rise to ever dizzier heights, as a result of Putin’s war in Ukraine and the consequent disruption to global energy and food supply chains, a rate of 8% pa may soon fall to be considered as modest“.

Although the case was one involving professional negligence, where higher rates of interest are traditionally awarded, this view may signify a potential departure from the usual practice of the courts when awarding discretionary interest.

A separate issue in this case was also whether a contractual provision that “Interest will be payable by the Client on overdue invoices at a rate of 2.00% for each period of fourteen days’ delayed payment” amounted to an unenforceable penalty. The judge refused to strike out a claim for that amount of interest (which was equivalent to an annual rate of 52%) on the basis that it was a penalty (leaving the issue to be finally decided at trial). The basis for his decision was that at the time the parties entered into the contract, they were unlikely to have envisaged that an invoice would remain unpaid for any length of time after its due date. It remains to be seen whether this reasoning will be adopted by other courts, but it is a helpful indicator for invoice financiers seeking to enforce similar terms in contracts of supply between their assignors and debtors.

Contact our Invoice Finance team.