Pre-Judgment Interest on Debts and Damages - the Government's Response

18/09/2008

On 16 September 2008, the Government released its response to the Law Commission's 2004 report entitled "Pre-Judgment Interest on Debts and Damages". The Government agreed that the rate for simple interest should be rationalised, but has refused to commit itself or make any changes on the more controversial question of compound interest.

The Law Commission made 25 recommendations, with two principal recommendations. The first of these was that the rate of simple interest should be set each year, preferably at 1% above the Bank of England base rate. This means that section 35A of the Supreme Court Act 1981 and section 69 of the County Court Act 1984, which had previously set the interest at a rather arbitrary 8%, will be amended to allow the Lord Chancellor to set a rate that reflects current economic conditions. It is likely, according to the Government, that this will be based on the Bank of England rate. The ability for the Lord Chancellor to be able to change the rate will "provide greater certainty and rationality". This will be particularly true if the Government allow the rate to track the Base Rate, rather than being set annually, as the Law Commission recommended.

The second principal recommendation was that the Courts should be able to award compound interest as standard is certain circumstances. The Commission suggested that for awards and settlements above £15,000 there should be a rebuttable presumption that the interest is compound. This, they suggested, is reflective of commercial life and expands on the House of Lords decision in [i]Sempra Metals Limited v Her Majesty's Commissioners of Revenue and Customs and another (2007) UKHL 34, which states that compound interest is available in restitutionary claims for over-paid tax. The Government, however, rejected this proposal on the grounds that it would be too large a step to introduce without further consultation and research. They also said that "the issue does not command sufficient priority to justify the necessary work on impact assessment and IT development". The Government did say that the power to prescribe rates for compound interest should be within the order-making remit of the Lord Chancellor, but did not commit to when, or indeed if, such an Order would be made.

For the foreseeable future, therefore, the Government can be expected to change the rate of simple interest whilst not making any commitments on compound interest. Simple interest will continue to be used when calculating interest for pre-judgment or settlement debts and damages in the great majority of cases.

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