Compound Interest available at Common Law

07/08/2007

The House of Lords have ruled in Sempra Metals Ltd v. Inland Revenue Commissioners and Another (18/7/2007) that compound interest may now available to claimants in common law actions. Previously, interest could generally only be claimed in accordance with s.35 of the Supreme Court Act or s.69 of the County Court Act, which was awarded at the court's discretion and calculated at a set rate. Compound damages were previously only available in very limited situations involving equity claims, such as those involving fraud and/or misapplication of funds by a fiduciary. The House of Lords held that these limitations were effectively artificial creations which did not reflect reality of the commercial world.

The general rules in relation to interest which may be recoverable in claims based in tort or breach of contract have been overturned. Lord Nicholls (who gave the leading opinion) sought to remove the anomalous exception within English common law that claims could not be made for loss of interest on an obligation to pay a debt: where the loss suffered is an inability to take advantage of interest, or by paying excessive interest, the common law now allows for recovery of those losses.

Such claims are subject to the same principles as any other head of loss, in that they need to be accurately pleaded, must be mitigated against and must not be too remote.

In this case Sempra claimed money back from HMRC in restitution, and a further personal claim for the benefit that HMRC obtained by unlawfully having control of the money for longer than they should have done. They argued that the benefit was the interest that was available to them.

This case was tried as a test case, thereby ensuring that other parties who had paid advance corporation tax (ACT) prematurely to HMRC were entitled to claim compound interest. However it seems likely that the ambit of the change to the common law rules will be wider than simply restitution claims for premature payment of ACT. The door now appears to have been opened to any claimant who has suffered loss of interest as a result of a sum of money being unlawfully withheld from them. Lord Nicholls held that it did not matter how the interest loss was suffered by a claimant, whether through having to pay a high rate of interest to borrow sums owed from some other party or from being denied the opportunity to invest money at a favourable rate.

The practical implications are relevant in any commercial relationship, not simply in relation to the payment of tax. However claimants must ensure that they continue to mitigate their losses and pursue unpaid debts as diligently as ever. The courts are likely to be even more wary of a claimant's responsibilities now that the recovery potential has increased.

The calculation of such a rate, as it is to reflect the actual loss or unjust enrichment in a given situation, is calculated on a case by case basis. The rate will be approximately the same as the commercial rate for borrowing the sum of money in question, and although the entitlement to compound interest is available as of right, it must first be proved and quantified in the same way as other heads of damage.

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