Successful challenge to rates of interest on damages

20 September 2011

In Farstad Supply AS v Enviroco Ltd, the defenders challenged court's general practice of awarding interest on damages at 8% (i.e. the current judicial rate) not only from the date of decree, but also in relation to any prior periods. 

The defenders argued that the pursuers were only entitled to a compensatory rate of interest and the rate of 8% was far in excess of that rate and would provide the pursuers with a bonus, rather than properly compensate them for their loss.  It was noted that an average of the interest rates available on instant access deposit accounts for the relevant period in this case was around 1.36%.  It was also noted that the approach taken by the Commercial Court in England was generally to award base rate plus 1%, to reflect the cost of borrowing.  The defenders invited the court to award either 1.36% or base rate plus 1%. The pursuers submitted that  the court  should follow the general practice and award 8%.

Lord Hodge decided that the rate of 8% was indeed not appropriate for the whole period claimed.  His Lordship noted that the award of interest is intended to be compensatory and not penal but that there was a clear mismatch between the judicial rate and market rates in recent years. He did not consider it appropriate to use the rate on instant access deposit accounts, which he held would amount to serious under-compensation for the pursuers. His Lordship, however, stated that it was not within his power as a Lord Ordinary to award interest on a novel basis, such as the rate of 1% above the base rate.  That would require the sanction of the Inner House or could be part of a wider statutory reform of the law of interest.  There was a watershed in late 2008 and early 2009 when the base rate plummeted from 5% in early October 2008 to 0.5% in March 2009.  His Lordship therefore awarded interest at 8% until 4 December 2008 and at 4% thereafter. 

The court has been advised that a reclaiming motion will be marked by the defenders. 

Three members of Axiom were involved in the case, Almira Delibegovic-Broome as junior counsel for the defenders and Alistair Clark QC and Paul O'Brien for the pursuers.

http://www.scotcourts.gov.uk/opinions/2011CSOH153.html