Pre-Judgment Interest Rate

In: Bulletin Published: Sunday 01 April 2018

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The Court of Appeal hands down judgment in Carrasco v Johnson [2018] EWCA Civ 87 on how to determine the appropriate pre-judgment interest rate

Where judgment is granted on the principal sum of a claim, and a claim for statutory interest (non Late Payment of Commercial Debts (Interest) Act 1998) on the principal sum has been made, the court will consider whether to award the successful claimant statutory interest on the principal sum and at what interest rate. Typically the claimant will be entitled to both ‘Pre-Judgment Interest’ and ‘Post-Judgment Interest’ on the principal sum awarded, with each having its own separate rate of interest. Post-Judgment Interest was recently considered by Morgan J in ACLBDD Holdings Ltd v Staechelin  [2018] EWHC 428 (Ch), and Pre-Judgment Interest by the Court of Appeal in Carrasco v Johnson [2018] EWCA Civ 87 (‘Carrasco’) – this bulletin will focus on Carrasco and Pre-Judgment Interest.

The Governing Guidance for setting Pre-Judgment Interest Rate

In Carrasco, the Court of Appeal considered an appeal against DJ Langley’s determination that the appropriate Pre-Judgment Interest rate was, in the circumstances of that case, 3%. In considering the appeal, the Court of Appeal helpfully distilled that the guidance that can be derived from the authorities. Hamblen LJ said, at paragraph 17:

‘(1) Interest is awarded to compensate claimants for being kept out of money which ought to have been paid to them rather than as compensation for damage done or to deprive defendants of profit they may have made from the use of the money.

(2) This is a question to be approached broadly. The court will consider the position of persons with the claimants' general attributes, but will not have regard to claimants' particular attributes or any special position in which they may have been.

(3) In relation to commercial claimants the general presumption will be that they would have borrowed less and so the court will have regard to the rate at which persons with the general attributes of the claimant could have borrowed. This is likely to be a percentage over base rate and may be higher for small businesses than for first class borrowers.

(4) In relation to personal injury claimants the general presumption will be that the appropriate rate of interest is the investment rate.

(5) Many claimants will not fall clearly into a category of those who would have borrowed or those who would have put money on deposit and a fair rate for them may often fall somewhere between those two rates.’

Categories

As the guidance provides, the individual and particular attributes of a claimant are not considered as part of the determination, merely the position of persons with the claimant’s general attributes. General attributes include:

(a) the nature of the loss for which compensation was sought – did the loss claimed include a claim for personal injury;

(b) whether the claimant is a ‘private individual’ or a ‘commercial party’;

(c) the broad attractiveness of lending to the claimant – whether they are a first class borrower or somewhere else along the spectrum, including at the start up/small business, riskier and so more expensive, end.

Once categorised using the claimant’s general attributes, the law applies certain general presumptions as to what would have happened had the defendant paid immediately, rather than delayed and necessitated the claim before the court. Where a claimant is a: 

(a) commercial party, it is presumed that the claimant would have borrowing during the relevant period, but had the defendant paid immediately, the claimant would have borrowed less during the relevant period from the claimant’s commercial lenders (reduced borrowing would have meant reduced interest due from the claimant to the claimant’s commercial lenders); or

(b) private individual, it is presumed that they would have would have deposited more with a bank. Had they done so, the bank would have paid the claimant a greater sum in interest.

Correspondingly, the claimant will be categorised as ‘investment category’ for (a), or ‘borrowing category’ for (b). Where the claimant straddles these categories (for instance, as was the case in Challinor v Julietter Bellis & Co [2013] EWHC 620 Ch and Reinhard v Ondra [2015] EWHC 2493 Ch), there is a  ‘mid-category’, where a ‘blended rate’ will be appropriate. 

The Rational for using a General Categorization Approach

By adopting a general attributes and broad categorization with presumptions approach, the court is looking to avoid a mini-trial on the issue of Pre-Judgment Interest rate, and so avoid those attendant additional costs and expenses. The benefits of modest refinement to rates awarded is seen as more than off-set by the significant time, costs and expense such refinement would require. The view taken is that justice is best served by a fair, practical and proportionate approach to Pre-Judgment Interest rates. Hamblen LJ said, at paragraph 27:

‘The Appellant's arguments in this case highlight the importance of the principle that the court does not inquire into the detailed financial position of the claimant, but looks only at general or class attributes. To examine properly, for example, the claimant's financial position throughout the relevant period; the borrowing carried out by her, when and on what terms; whether and how she needed so to borrow; the uses to which she might otherwise have put the money and the financial consequences of so doing; the extent to which any of these matters were known or in the reasonable contemplation of the Respondent etc. would have required a mini or indeed major trial, consumed significant time and expense and may well not have resulted in definitive answers. The broad approach which the court adopts is fair, practical and proportionate.’

Turning to some specific potential factors.

Actual Cost of Borrowing and Claimant Actions

Given that the court is not concerned with the claimant’s individual and particular attributes, but only with the general attributes of the claimant, the actual cost of borrowing incurred by the claimant during the relevant period, is not relevant, nor is what the claimant actually did. Evidence as to the cost of actual claimant borrowing therefore is not relevant.

Claimant Missed Investment Opportunities and Defendant Usage

Given that Pre-Judgment Interest is not awarded as compensation for damage sustained by the claimant, the court does not take into account any opportunities missed because the claimant couldn’t take up the opportunity because the defendant had delayed payment. Evidence of investment opportunities missed by the claimant because the claimant didn’t have the defendant’s money earlier, is not taken into account by the court. Moreover, the court does not take into account how the defendant used the money he ought to have paid but did not, during the relevant period.

Merits of the Underlying Claim Against the Defendant

Pre-Judgment Interest is awarded to a successful claimant, so the claim must have been a good claim. However, the extent of the merits in the claimant’s favour, for instance, that the claimant had a compelling case, is not taken into account in setting the appropriate Pre-Judgment Interest rate. Though not raised in Carrasco, readers might want to note here the potential application of CPR r.36.17 (4) - a claimant’s entitlement, unless the court considers it unjust to do so, to ‘interest on the whole or part of any sum of money (excluding interest) awarded, at a rate not exceeding 10% above base rate for some or all of the period starting with the date on which the relevant period expired’ where the claimant beats his own Part 36 at trial.

Delay in the Prosecution of Proceedings

A court is entitled to take into account whether the claimant is guilty of delaying prosecution of the proceedings, such that a reduced rate of interest will be appropriate. The pace of the claimant’s claim may be taken into account, in that, the court may award a lower rate of interest in respect to a period of delay in the prosecution of that case by the claimant.

Appealing the First Instance Determination

Once the claimant is categorized, determining the appropriate rate of Pre-Judgment Interest is a discretionary exercise, involving the consideration and weighing up of the various factors affecting what the appropriate pre-judgment interest rate should be. An appeal court will not intervene with such a determination, unless the first instance court has made an ‘error in approach’, or the decision is ‘outside the wide boundaries of the legitimate exercise of the court's discretion’ (paragraph 25). To put it another way, the first instance court is afforded a ‘generous ambit of …discretion’ (paragraph 28).

Facts of Carrasco

In Carrasco, judgment was entered for the claimant on a claim that the defendant had failed to repay the claimant £28,500 of principal sum lent to the defendant. Originally the claimant had made two unsecured loans to the defendant of £20,000 each (total lent £40,000). £11,500 of the principal sum had been repaid and so the claim was for the balance. Each of the two loan agreements provided for repayment within 2 months, and a fixed interest sum of £3,000 for the hire of the money for those 2 months. Accordingly, judgment was for £28,500 plus £6,000 contractual interest. The claimant had also claimed statutory interest for the pre-judgment period, and DJ Langley awarded the claimant 3% interest (totalling £5,470.84). The claimant appealed the Pre-Judgment Interest rate of 3%. The claimant appealed, running various arguments that 3% did not take into account: (a) the actual cost of the claimant’s intervening borrowing; (b) expert evidence of borrowing rates in 2008; (c) investment opportunities lost due to the defendant’s delay in paying; (d) that though the claimant was a private individual - 3% was closer to the commercial rate; (e) the defendant’s use of the original loan money, contrary to what the defendant had told the claimant; nor (f) existence of the claimant’s interim payment order. All these argument proved unsuccessful, and the appeal was dismissed

SIMON HILL © 2018

BARRISTER

33 BEDFORD ROW 

NOTICE: This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by any member of Chambers or by Chambers as a whole.