Interest on Debt & Damages (Report) [2006] SLC 203(3) (1 September 2006)

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Scottish Law Commission (Reports)

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Cite as: [2006] SLC 203(3)

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Part 3: A statutory entitlement to interest on debt

Introduction

In this Part we set out our recommendations in relation to the introduction of a general statutory entitlement to interest on debt. Such an entitlement already exists under the Late Payment of Commercial Debts (Interest) Act 1998 in respect of business-to-business contractual debts. The principal consequence of our recommendations is to extend an entitlement to interest to non-business debts in respect of which no express provision is made either in a contract between the parties or by any other statutory provision. The entitlement will differ from that conferred by the 1998 Act in respect that our recommendation is that interest should run at a compensatory and not a punitive rate.

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INTEREST ON CONTRACTUAL DEBT

There are two different conceptual bases upon which an entitlement to interest on contractual debt could be based:

(i) interest falls due as soon as the specified date for payment has passed without payment having been made (we refer to this as an "immediate entitlement"); and

(ii) interest for the whole period since the date for payment becomes due as a consequence of an action having been raised for payment of the debt (we refer to this as a "deferred entitlement").

There is no Scottish case in which this distinction has been analysed. It may, however, be said that Scots law has implicitly adopted the "immediate entitlement" approach although, to some extent, this has been masked in recent years by the fact that interest has usually been awarded only for the period since the date of citation. The authorities prior to Blair's Trs v Payne^[2] contain no indication that entitlement to interest was regarded only as an aspect of the giving of judgment in proceedings for recovery of debt. In any event, since 1884 interest has run from the date of citation not because the matter has been brought before a court for judgment but because a demand has been made in what was regarded as the appropriate form. As noted earlier,^[3] there are circumstances in which interest has been held to run from the date of an intimation by the creditor that interest will be charged if the account remains unpaid. It is not suggested in these cases that the effect of such intimation is deferred until such time, if any, as an action for payment is raised.

The approach under English law has been different. At common law a contractual debt carried no entitlement to interest unless the parties agreed that it should. Statutory provisions since the 19th century introducing or extending entitlement to interest have taken the form of conferring power, or imposing a duty, on the court to include an award of interest in the sum for which judgment is given. The present law is contained in the Supreme Court Act 1981,

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In the Discussion Paper we expressed the view that the creation of a statutory entitlement to interest, as opposed to the creation of an enlarged remedy applying only where proceedings have been raised, is more consistent with the rights-based approach traditionally adopted by Scots law. Our reasoning is that it seems unprincipled to assert that on the day before proceedings are raised no entitlement to interest exists and yet to empower or even oblige the court to award interest for the pre-commencement period as soon as the action begins. In President of India v La Pintada Compania Navigacion SA,

^[7]

^[8]

"An ideal system of justice would ensure that a creditor should be able to recover interest both on unpaid debts in case 1, and also in respect of debts paid late or remaining unpaid in cases 2 and 3."

In our opinion, this can best be achieved by creating a statutory entitlement to interest on contractual debt from a specified date regardless of whether the creditor requires to raise proceedings in order to recover the debt. Our consultees agreed. We therefore recommend that, as a general rule:

There should be created a general statutory entitlement to interest on contractual debts except where an entitlement to interest is conferred or, alternatively, excluded either (a) by the terms of the contract itself or (b) by any other statutory provision.

(Draft Bill, sections 1(1), 2(a) and 2(c))

Exceptions to the rule

The general rule as we have stated it in Recommendation 1 above contains two exceptions, namely (i) where the parties to a contract have agreed that interest should run on a basis different from the statutory entitlement which we propose or should not run at all; and (ii) where an entitlement to interest is conferred or excluded by any other statutory provision. As regards the first exception, the question whether the parties to a contract should be permitted to contract out of the general rule is discussed further below,

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The second exception is necessitated by the fact that there are a large number of existing statutory provisions which create an entitlement to interest. Some of these relate to circumstances in which interest is payable as a matter of private law by one person to another (whether under a contract or otherwise) rather than where it is payable as a matter of public law to or by a central or local government body. Where another statute specifies the conditions under which interest is payable on a private law debt, we consider that the provisions of this Act should be excluded. We do, however, recommend elsewhere in this Report that the rate of interest chargeable on such debts should be the statutory rate.

^[11]

In the course of our consultation the question arose whether further exceptions to the general rule were needed. Citizens Advice Scotland expressed concern in their response that the introduction of a general entitlement to interest on all debt might lead to exacerbation of the difficulties of individuals with multiple debts including, for example, utilities debt (especially gas and electricity) and housing debt upon which interest is not usually charged under a contractual provision. They point out that larger debts might result in utility companies applying harsher sanctions more frequently, leading to increases in disconnections and in customers being forced to pay by the more expensive means of pre-payment meter.

In our Discussion Paper we had drawn attention to this issue,

^[12]

We can see no distinction, as a matter of law, between utility and other debts which are incurred by individual debtors. However, we recognise that as a matter of social policy it may be felt desirable to exclude certain types of debt from the scope of statutory interest entitlement. Rather than attempt to define these types of debt exhaustively in the legislation, we have concluded that the matter can best be dealt with by reserving a ministerial power, exercisable by statutory instrument, to exclude specified types of debt from the general rule. Consideration could then be given to whether, for example, utility debts as a category should not bear statutory interest, leaving suppliers to make contractual provision for interest should they so desire. We therefore recommend that:

A power should be reserved to the Scottish Ministers to exempt specified categories of debt from the general entitlement to statutory interest.

(Draft Bill, section 2(e))

Certain taxes and duties payable to local or central government do not presently bear interest. An example is council tax: no interest is charged on arrears but when the sheriff grants a summary warrant authorising recovery a 10% surcharge is added to the arrears.

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Judicial discretion to remit interest

The current position in relation to contractual debts is that there is no scope for the exercise of judicial discretion, except that interest due under the Late Payment of Commercial Debts (Interest) Act 1998 may be remitted by the court if the interests of justice require, by reason of any conduct of the creditor. In contrast, the court has a wide discretion in relation to interest on damages under the Interest on Damages (Scotland) Act 1958.

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Starting date from which interest runs

A central issue in relation to contractual debt is identification of the appropriate date from which the creditor in the obligation should become entitled to interest if payment is not made by the debtor. It is presumed that before interest will run payment by the debtor must have fallen due, either because the creditor has performed his obligation under the contract or because of some other express or implied term of the agreement. In other words, the debtor is in default in failing to have made payment. Our approach has been to attempt to identify the time at which the creditor may be regarded as being deprived of the use of the money which is - or is after court proceedings held to be - due by the debtor. The amount of the debt will usually, but not necessarily, be quantifiable by then. Different considerations apply where the debtor has the use of the creditor's money in circumstances where there is no such default; for example:

• where repayment of a loan has not yet fallen due;

• where the creditor has yet to perform some or all of his obligations under the contract and would not be in a position to sue for payment; or

• where the "debtor" is holding money belonging to the "creditor" with the latter's consent in circumstances in which he will in due course be required to account for it: eg money held by an agent or factor.

Our view is that statutory interest should not run in such circumstances.

Our examination of other legal systems has disclosed no universally accepted criterion for selecting the date from which interest runs. English law and the Commonwealth systems which have adopted its approach provide for interest to be awarded, at the discretion of the court, for the whole or any part of the period from "the date when the cause of action arose".

The principles elaborated by the Commission on European Contract Law (the "Lando Commission") provide for interest to run at a prescribed rate "from the time when payment is due".

^[19]

For certain types of debts, it will be desirable to specify in the legislation the date at which "payment is due". We discuss a variety of different types of contractual debt below. We recommend, however, that as a general rule:

Interest on a debt arising under a contract should run from the date when payment is due by the debtor until payment.

(Draft Bill, section 1(4))

Application of the general rule to particular contracts

We now consider the way in which the general rule stated above, that interest should run from the date when payment is due by the debtor, may be applied to debts arising out of different types of contract.

Supply (including sale) of goods and services

The most common type of pecuniary obligation is the obligation to pay for goods or services received by the debtor. In the Discussion Paper we suggested using as a model the existing provisions of the Late Payment of Commercial Debts (Interest) Act 1998, section 4. These may be summarised as follows:

Where the parties agree a date for payment of the debt (whether fixed or dependent upon the happening or non-happening of an event), interest begins to run on that date;

In any other case, interest begins to run 30 days after the later of:

the day on which the supplier's obligation is performed; and

the day on which the purchaser^[20] has notice from the supplier of the amount of the debt or of the amount claimed by the supplier.

The period of 30 days specified in the Act appeared to us to represent a fair and reasonable time for which to delay commencement of the period during which the creditor of a contractual debt may be said to be deprived of the use of money due by the debtor. It allows the debtor an appropriate period of time to pay after performance of the creditor's obligation and quantification of the sum demanded. At the same time the creditor is not disadvantaged by the continuation of any dispute over the amount properly due. The issue of an invoice by the creditor would constitute "notice" for this purpose.

Consultees were in agreement with this proposal. One consultee suggested, however, that a 28-day period might be preferable to a 30-day period because the latter will start and finish on different days of the week and could finish in a weekend. We understand that the use of a 30-day period for payment is usual in commercial practice. It is not, of course, necessary to take action on the very day when payment falls due. In these circumstances we conclude that there is no strong reason to depart from the 30-day period used in the 1998 Act. We therefore recommend that:

Statutory interest should run on a debt due for the supply of goods or services from the following date:

(a) Where the parties agree a date for payment of the debt (whether fixed or dependent upon the happening or non-happening of an event), that date;

(b) In any other case, 30 days after the later of:

(i) the day on which the supplier's obligation is performed; or

(ii) the day on which the purchaser has notice of the amount of the debt or of the amount claimed by the supplier.

(Draft Bill, section 3(4))

Entitlement to payment for goods or services under a contract may be dependent upon a determination or certification made by a third party. A common example is a provision, such as those which appear in the commonly-used standard-form building contracts, that the contractor's right to payment does not accrue until the sum payable has been certified by the architect. Where the creditor's entitlement to receive payment is dependent upon a determination by a third party such as an arbiter, it has been held that interest did not begin to run until the arbiter had determined the principal sum due.

^[21]

Statutory interest should run on a contractual debt even where the amount of the debt, if found to be due, remains unascertained pending determination by a third party.

Sale or lease of heritable property

Sale of heritable property is the situation in which entitlement to interest is most likely to be the subject of express contractual stipulation and a statutory provision applying in the absence of agreement to the contrary may seldom be required. The Late Payment of Commercial Debts (Interest) Act 1998 does not apply to heritable property,

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We also proposed in the Discussion Paper that the general rule set out above would apply to arrears of rent. Once again the landlord's entitlement to interest is likely to be the subject of express provision in the lease but we see merit in having the same statutory default provision for arrears of rent as applies to other sums payment of which is overdue. We did observe that there might be concern regarding the potential effect of extending a statutory entitlement to interest to public sector landlords such as local authorities and registered social landlords who, we understand, do not presently charge interest. It might be thought undesirable for individuals who may already be financially vulnerable to be exposed to a further liability in the form of interest on unpaid rent. The charging of interest would not, of course, be compulsory: a public sector landlord could, if it wished, include a provision in its tenancy agreements that interest would not run on arrears of rent. Tenancy agreements entered into prior to the new legislation taking effect which did not provide for arrears of rent to be interest-free could be amended by agreement to introduce such a provision.

Concern regarding the inclusion of public sector housing debt in the general rule was expressed in responses to the Discussion Paper by Citizens Advice Scotland and the Scottish Consumer Council. Among the points which they made were that the consequence of non-payment of housing debt is likely to be eviction, and that it was impossible to predict how different public sector landlords would react to the introduction of an entitlement to charge interest on arrears of rent. It could not be assumed that all would contract out of the statutory entitlement or decline to enforce it when the time came to collect a debt.

As with utility debt, we see no distinction, as a matter of law, between public sector housing debt and other debts likely to be incurred by individuals upon which there is no contractual right to interest. We recognise that financial hardship could be exacerbated if landlords collecting arrears of rent were also entitled to statutory interest. The ministerial power which we have recommended in paragraph 3.9 above could, if the Scottish Ministers considered it appropriate, be exercised to exclude public sector rents from the scope of the statutory entitlement to interest. In summary, we recommend that:

Interest should run on payments due for the purchase or letting of heritable property as it runs on other sums which have fallen due for payment, subject to any exercise of the ministerial power to exempt a specific category of debt such as arrears of rent owed to a public sector landlord.

(Draft Bill, sections 1(1) and 2(e))

Insurance and other claims for indemnity

The obligation of an indemnity insurer is characterised by Scots law as a contractual obligation to pay a sum of money equivalent to the loss sustained by the insured.

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The question of when payment is due under a contract of insurance or other contract of indemnity is a matter for the underlying law (including the terms of the parties' contract) to determine. There are at least three conditions which must be satisfied before it may be said that payment is due by an insurer:

(i) the event insured against has occurred;

(ii) as regards indemnity insurance, the policyholder has sustained a loss as a consequence of the occurrence. In cases such as third party liability claims this will not occur until the policyholder has had to make a payment (which may itself include an element of interest) to the third party, whether as a result of a court decree or not; and

(iii) the claim has been intimated to the insurer in the manner provided for by the contract. This may require the policyholder to have produced appropriate vouching of the occurrence of the event insured against and of the amount of his loss.

It might also be argued that payment is not due until the insurer has had a reasonable opportunity to investigate the claim. We understand that it is normal for contracts of insurance to contain a term entitling the insurer to a period of investigation before deciding whether or not to make payment. In cases where no express contractual provision is made, the question is whether interest should begin to run before such a period has ended. In the Discussion Paper we expressed the view that a period for investigation should be allowed before interest begins to run. We proposed a period of 30 days as appropriate for investigation. One consultee

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We noted above that one of the conditions which must be satisfied is that the claim has been intimated to the insurer with appropriate vouching. It was suggested to us by the Forum of Scottish Claims Managers that interest should not run during a period when an insurer reasonably declines to make payment because he has not yet been provided with the documentation necessary to satisfy him as to the value of the claim. We see force in this suggestion where the failure properly to vouch the claim constitutes a failure on the part of the policyholder to implement his obligations under the contract of insurance. In such circumstances the insurer is not in default in failing to make payment and, consistently with our other recommendations, it seems reasonable to restrict the running of interest to the period of default. We therefore consider that the 30-day period to which we have referred should not begin to run until the policyholder has met his obligations in relation to provision of appropriate vouching.

It has been assumed in the discussion above that the obligation of the insurer under the contract is to indemnify the policyholder for the loss which he has sustained. In practice, however, in many - indeed most - contracts of insurance, the insurer's obligation will be one of repair, reinstatement or replacement rather than indemnification for loss. For example, buildings insurance will typically provide for reinstatement of the building in the event of damage or destruction. The same is true of house contents insurance and some motor insurance. In such cases there will be no time at which the insurer may be said to be in default as a consequence of failure to pay (because there is no obligation to pay), although he may have delayed unreasonably in failing to meet his obligation of repair or replacement.

^[28]

We therefore restrict our recommendation to circumstances in which a contract of insurance provides for payment of a sum of money, and we recommend that:

Interest on a sum payable under a contract of insurance, or other contract of indemnity, should begin to run from whichever is the later of:

(a) the date 30 days after the date when a claim in respect of the occurrence of the event insured against is intimated to the insurer and vouched in accordance with the conditions of the contract; and

(b) where the insured has sustained a loss as a consequence of the occurrence of the event insured against, the date when the loss was sustained.

(Draft Bill, sections 3(5) and 3(6))

Cautionary obligations: cautioner's right of relief

In accordance with our proposed general rule, we suggested in the Discussion Paper that the date when payment is made by a cautioner should be regarded as the date when payment is due to him by the principal debtor. Our consultees agreed. We therefore recommend that:

Statutory interest should run on a sum paid by a cautioner in satisfaction of a debt due by the principal debtor from the date when payment by the cautioner was made.

(Draft Bill, section 3(7))

Loans

As we have noted, there is at common law a presumption that a right to interest exists from the date on which a loan of money is advanced until the date of repayment. The presumption may be displaced by circumstances or by agreement to the contrary. Where no rate of interest was agreed, the judicial rate has normally been awarded by the court. In the Discussion Paper we proposed

^[29]

We also proposed, independently of the common law presumption, that statutory interest should run on a loan from the time when it fell due for repayment but was not repaid. We suggested that where no date had been agreed by the parties for repayment, interest should run from the date 30 days after the day when the creditor demanded repayment. Having considered this suggestion further, we have concluded that there is no need to draw any distinction between loans which have not yet fallen due for repayment and those which have. In each case, we consider that the rule should simply be that statutory interest should run so long as the loan remains outstanding unless the parties have intended otherwise. Such contrary intention will normally be demonstrated by express agreement that interest should run on a different basis - or, alternatively, that it should not run at all - but it will remain open to a party to rely upon surrounding circumstances to demonstrate the parties' intention.

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In the absence of agreement to the contrary, statutory interest should run on a loan of money from the date on which the loan is made until the date of repayment.

(Draft Bill, sections 2(a) and 4)

Contracts of employment

In the Discussion Paper we proposed that debts falling due under contracts of employment should fall within the scope of statutory interest, and noted that one consequence of this would be that awards by an Employment Tribunal under the Employment Rights Act 1996, section 13 (unauthorised deductions from wages) would include statutory interest.

^[32]

Consultees were in favour of including employment income within the scope of the statutory interest entitlement. One consultee

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(a) Statutory interest should run on sums due under a contract of employment or apprenticeship.

(b) Unless the contract contains a contrary provision, interest should begin to run 30 days after the end of the period in respect of which the service under the contract is remunerated.

(c) Entitlement to interest should not be deferred by virtue of there having been no agreement as to the amount due under the contract.

(Draft Bill, section 5)

Obligations to account for money belonging to another

In a variety of circumstances, a person may have possession of funds to which another is entitled in respect of which he will in due course be required to account for his intromissions. Some arise out of a contractual relationship, others do not.

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The provisional view which we expressed in the Discussion Paper was that entitlement to statutory interest should be restricted to circumstances in which the debtor is in default in failing to pay the principal sum to the creditor. This would include situations where the agent was initially in possession of the principal's funds with the latter's consent but is overdue in accounting for them. Interest under the statutory scheme would run from the date when payment fell due in accordance with the general rule. Any entitlement of the principal to interest prior to that date would be left to the common law applicable to the particular circumstances in which the funds came to be held. Our consultees agreed. The general rule achieves this result without any further special provision. We recommend that:

Statutory interest should run on funds held by one person on behalf of another from the date when the holder is in default in failing to make them over to the person entitled to them.

(Draft Bill, section 1(4))

Interaction with the Late Payment of Commercial Debts (Interest) Act 1998

A statutory entitlement to interest exists in respect of commercial contracts under the Late Payment of Commercial Debts (Interest) Act 1998. This Act, as amended in 2002, implements a European Directive

^[37]

There is no obligation upon a creditor to demand interest at the rates to which he is entitled by virtue of the 1998 Act. If a creditor were to choose instead to demand statutory interest under our proposed legislation, then we consider that he should be free to do so. Given that the 1998 Act is intended to impose a penal rate of interest for late payment and that our recommendations are intended merely to compensate the creditor for loss of the use of money, it will normally be to the advantage of the creditor to exercise his rights under the existing Act. A research project which we carried out prior to issuing the Discussion Paper indicated that not all creditors who would be entitled to claim interest under the 1998 Act are doing so. Why this should be is unclear. There may, however, be sound practical reasons why a creditor would decide not to do so. He may, for example, have a continuing business relationship with the debtor which he would not wish to jeopardise by demanding interest at a punitive rate.

The legislative technique adopted in the 1998 Act was to make entitlement to what is referred to therein as "statutory interest" an implied term of every contract to which the Act applies (that is, to contracts for supplies of goods and services where both parties are acting in the course of a business). It may therefore be said that there is a prospective entitlement to interest on default throughout the duration of the contract. In other words, it is an immediate entitlement if payment is not made on time and not a deferred entitlement which is dependent upon a declaration by a court that interest is payable. We are proposing, similarly, to make entitlement to interest (on all debts, including commercial debts) a statutory entitlement, not dependent for its existence upon the raising of a court action. We do not recommend use of the "implied term" technique. It would be unsatisfactory for two statutes to create two mutually inconsistent implied terms for every commercial contract. The consequence of our recommendations will be that where a debtor in a commercial contract defaults in making payment when due, the creditor will have two parallel statutory rights to receive interest: one at the punitive rate under the 1998 Act and another at the compensatory rate under the new legislation. Obviously he ought not to be able to claim both. Equally, as noted above, he cannot be deprived of his right to claim at the punitive rate.

Our proposed solution, supported by our consultees, is to avoid conflict between the two regimes by providing that a debt does not carry interest under the new scheme if or to the extent that it consists of a sum in respect of which a creditor's remedy for late payment under the 1998 Act is enforced, as opposed merely to being enforceable. It will then remain open to a creditor to choose to pursue his entitlement to demand interest at the punitive rate specified in the 1998 Act or, alternatively, to seek statutory interest under the new scheme. We note that section 7(2) of the 1998 Act, dealing with express contract terms which are inconsistent with the statutory implied term, acknowledges that the parties are free, after the time when the debt is created, to agree terms dealing with the debt. There is, equally, no reason why a creditor should be obliged to exercise his implied contractual right under the 1998 Act if he does not wish to do so. Moreover, we consider that the creditor should be permitted to change his mind. If, having demanded interest on one basis he subsequently chooses to demand it on the other, our proposed legislation will allow him to do so. We recommend that:

A debt shall not carry interest under the proposed new scheme if or to the extent that it consists of a sum in respect of which a creditor has elected to claim interest under the Late Payment of Commercial Debts (Interest) Act 1998.

(Draft Bill, section 2(d))

An amendment to the 1998 Act is also required. Section 3(2) of that Act provides:

"A debt does not carry statutory interest if or to the extent that it consists of a sum to which a right to interest or to charge interest applies by virtue of any enactment (other than section 1 of this Act)."

Left as it is, that subsection would exclude entitlement to interest under the 1998 Act in every case to which the new legislation applied: in other words, the 1998 Act would invariably be overridden. This would, in our view, be a breach of creditors' rights under the Directive and we therefore consider that it is necessary to amend section 3(2) by inserting a reference to the new Act.^[38]

Contracting out of the new scheme

Section 8(1) of the Late Payment of Commercial Debts (Interest) Act 1998

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"Any contract terms are void to the extent that they purport to exclude the right to statutory interest in relation to the debt, unless there is a substantial contractual remedy for late payment of the debt."

Section 9 defines "substantial remedy" by providing that a remedy shall be regarded as a substantial remedy unless (a) it is insufficient for the purpose of compensating the supplier for late payment or for deterring late payment, and (b) it would not be fair or reasonable to allow the remedy to be relied on to oust or vary the right to statutory interest which would otherwise apply in relation to the debt.

In the Discussion Paper we expressed the view that there was no need to prohibit parties from contracting out of the running of interest generally on contractual debt, for the following reasons. Firstly, there is less of an incentive for a party to contract out of payment of interest at a compensatory rather than a punitive rate. Secondly, it would seem to be wrong to prohibit parties from agreeing that one shall have interest-free use of the other's money or property. It seems right, for example, that the parties to a public sector tenancy should remain able to agree that no interest is to be payable on arrears of rent. It should also remain possible for parties to agree that loans shall be interest-free even after the date for repayment has arrived. There will be many circumstances in which debts are outstanding between family members or friends where there is no intention on the part of the creditor to receive interest. Thirdly, the statutory provisions will be in general terms which are unlikely to work equally well in all circumstances. Fourthly, the situation envisaged in the DTI Consultation Paper of a large business putting pressure on a small business to contract out does not seem likely to arise in the case of debts to which the 1998 Act is not applicable. Finally, in business-to-business transactions there will be no incentive to contract out of liability for interest under the new provisions because the punitive liability under the 1998 Act would remain unless some other "substantial remedy" was provided.

Our proposal in the Discussion Paper was that there was no need for statutory provision to prohibit parties from contracting out of the creditor's entitlement to interest under the new legislation. Consultees who responded to this proposal agreed with our view. We now consider that this should be expressly stated, for the avoidance of doubt, in the new legislation. We therefore recommend that:

Parties should be free to contract out of the creditor's entitlement to interest under the proposed new legislation.

(Draft Bill, section 2(a))

INTEREST ON NON-CONTRACTUAL DEBT

Introduction

There are a variety of circumstances in which a pecuniary claim may be made otherwise than as a consequence of a contractual relationship, raising the question of entitlement to interest on the sum claimed. Examples are: certain forms of claim based on unjustified enrichment, notably for repetition of money paid in error or for recompense; claims for salvage; and claims on a fund paid into court following a ship collision. In addition, a person may hold funds on behalf of another in circumstances in which the holder may be regarded as being in default by having failed to hand over the funds. For example, an executor or a trustee may have delayed unduly in winding up an estate or trust and making over the capital to the beneficiaries; or one of the partners of a dissolved partnership may be holding funds properly due to one of his ex-partners. A further example is delay in satisfying a claim for legal rights in a deceased person's estate. A sum claimed by way of aliment or financial provision on divorce is neither of the nature of debt nor of damages. Each of these examples is currently governed, to some extent, by common law or statutory rules.

^[40]

It would be possible to effect a statutory reform of entitlement to interest on contractual debt and interest on damages without altering the existing law in relation to these non-contractual claims for payment. In the Discussion Paper, however, we stated that we saw advantages of certainty and consistency in bringing non-contractual pecuniary claims within the scope of our proposed reforms:

• The present law is lacking in certainty in view of the relatively small number of decided cases in which entitlement to interest on non-contractual debts has been a matter in dispute;

• Some of the examples described above bear a close similarity to contractual debts. For example, there are both contractual and non-contractual situations in which a person may come to hold funds on behalf of another and incur a liability to interest by failing to make them over at the due date. There seems to be no good reason to have differing rules regarding entitlement to interest as a consequence of late payment.

Consultees were in agreement that it was appropriate in principle to extend the statutory scheme to non-contractual debts. As in the case of contractual debt, we do not recommend any amendment to existing statutory provisions which already create an entitlement to interest on non-contractual claims,^[41] except in so far as our proposals could affect the rate of interest payable under certain statutory provisions.^[42] We recommend that:

There should be a general statutory entitlement to interest on non-contractual debts except where an entitlement to interest is conferred or, alternatively, excluded by another statutory provision.

(Draft Bill, sections 1(1) and 2(c))

Date from which interest runs

For contractual debts we have recommended the general rule that interest should run from the date when payment is due by the debtor.

^[43]

Unjustified enrichment

A claim founded on the principle of unjustified enrichment may take the form of a demand for money: for example, repetition of money paid in error or in contemplation of an event which did not take place, or recompense for the value of a benefit unjustly received by the defender and by which he has been enriched.

^[44]

Repetition. In the simplest situation in which a claim for repetition may be made, namely of money paid by one party to another in error, it will normally be the case that the appropriate date for the commencement of the running of interest is the date of payment. From that date the creditor has been deprived of the use of the money and the debtor has had the benefit of its use. This accords with what is probably the current position under Scots law.

^[45]

Recompense. As regards claims for recompense, the measure of the claim is the value of the benefit to the defender

^[46]

An alternative approach to that outlined above would be to leave the awarding of interest in unjustified enrichment claims to be determined by the exercise of judicial discretion. The argument in favour of such an approach is that the outcome of the action in relation to the principal sum will be heavily influenced by considerations of equity. In a response to our Discussion Paper, Professor Robin Evans-Jones questioned whether it was fair to treat all debts arising from unjustified enrichment in the same way. He cites by way of example the situation of a pensioner who, through the negligence of an employee of the Department of Work and Pensions, is overpaid his pension and spends the money in good faith on food. Unless the pensioner is able to claim change of position, the Department will be entitled to recover the overpayment. Having suffered the hardship of making such a repayment, should the pensioner also be obliged to pay interest?

The argument against the inclusion of a discretion is the same as that for excluding it in relation to claims for payment of contractual debt and/or damages: the function of an award of interest is simply to recognise that the pursuer has been deprived of the use of money. Although we see the force of the contrary argument, we consider that, as a general rule, whilst it is appropriate for equitable principles to determine whether any sum is payable to the pursuer and, if so, how much, there is no reason to deprive him of the full financial compensation which an award of interest ensures. However, in line with our recommendations in relation to other forms of debt, we have concluded that there should be a measure of judicial discretion to remit interest which would otherwise be payable, by reason of the conduct of the creditor. This would, we believe, enable the court to reach an equitable solution in hard cases such as the one described above.

Accordingly, subject to the exercise of the general judicial discretion discussed below,

^[47]

Where a sum of money is due by way of redress for unjustified enrichment, interest should be payable, in accordance with the general rule, from the date when payment of the principal sum is due by the debtor to the creditor.

(Draft Bill, section 1(4))

Salvage

In The "Ben Gairn",

^[48]

^[49]

Limitation funds

In actions arising out of ship collisions, oil pollution and other events causing loss, the party alleged to be at fault may be entitled under various enactments, including the Merchant Shipping Act 1995, to limit his liability by paying into court a limitation fund of an amount determined by factors which include the tonnage of the vessel. It is settled by case law in both England and Scotland

^[50]

The new statutory scheme should not apply to interest on claims on limitation funds established under the Merchant Shipping Acts or similar legislation.

We do not consider that any express provision is required in the Bill in order to achieve this result.

Obligations to account for money to which another person is entitled

At paragraph 3.35 above, we considered circumstances arising out of a contractual relationship in which a person may have possession of funds to which another person is entitled and in respect of which the holder will in due course be required to account for his intromissions. Such a situation will also arise where there is no contractual relationship or, alternatively, no continuing contractual relationship. Examples include:

• funds held by executors administering an estate;

• funds held by trustees under express trusts;

• funds held on constructive trust;

• funds of a child administered by a parent or guardian as the child's legal representative in terms of the Children (Scotland) Act 1995, section 10;

• the right of an outgoing partner to be paid the value of his share in the partnership.

In the Discussion Paper we suggested that it would be inconsistent to include in the proposed statutory scheme obligations to account which arise out of contract but to exclude other circumstances such as those instanced above which are closely analogous. We remain of that view. However, as with obligations arising out of contract, we consider that entitlement to statutory interest should be restricted to circumstances in which the debtor is in default in failing to pay the principal sum to the creditor. The general rule which we have recommended will apply, and no specific statutory provision applying it to non-contractual obligations to account is required. The date when payment by the holder of funds falls due will be determined by the underlying substantive law. Entitlement of the owner to interest in respect of any period prior to the date when payment became due would be left to be regulated by the substantive law applicable to the parties' relationship: the law of trusts or otherwise as the case may be.

We therefore recommend that:

Where a claim is made for payment based upon a non-contractual obligation to account for funds, statutory interest should be payable from the date when the holder is in default in failing to make over the funds to the person entitled to them.

(Draft Bill, section 1(4))

Legal rights in a deceased's estate

The general rule under Scots law has been that legal rights carry interest from the date of death. Where there has been delay in payment which is not attributable to any fault on the part of the executors, it has been held that interest should not run at a rate higher than that which the funds have in fact earned.

^[51]

The peculiarity of legal rights is that payment may be delayed for many years through the fault of no-one, for example during the period when a potential claimant lacks the capacity to make an election. The funds which are potentially subject to the claim will normally be capable of earning interest during the period of uncertainty and it seems reasonable that whoever eventually becomes entitled to those funds should also receive the interest which has accrued on them regardless of the period during which the uncertainty has subsisted. Consistently with our other proposals, we make no recommendation for amendment of the substantive law rules which determine a legal rights claimant's entitlement to interest in circumstances where there has been no default on the part of the executors in making timeous payment. Where, however, there has been delay on the part of the executors in making payment, the position is in our view no different from any other where a person holding funds to which another is entitled delays in making them over. Our recommendation, supported by our consultees, is that in these circumstances statutory interest should run at the prescribed rate. As with obligations to account for trust funds, we consider that the general rule that interest runs from the date when the principal sum is due is sufficient without the need for a specific legislative provision. Nor do we see a need for a wider judicial discretion than that which we propose for all claims and which is related to the conduct of the creditor.

^[52]

Where a claim is made for a sum due in respect of legal rights in a deceased person's estate, statutory interest should be payable from the date when the executor or trustee is in default in failing to make payment to the claimant.

(Draft Bill, section 1(4))

Rate of interest where trustee or executor in default

As regards trustees and executors, a further complication which requires to be addressed is that, depending on the circumstances, a beneficiary's demand for interest may take the form either of a claim against the trust estate or of a claim against the trustee personally. For example, the claim of a legatee for interest on a pecuniary legacy is a claim against the executry estate, thus ensuring that the benefit of interest earned by the legacy during the period between the date of death and the date of payment accrues to the legatee and not to the person entitled to the residue. The same applies to a claim for interest on legal rights. On the other hand, where a trust has come to an end and the capital falls to be made over to one or more beneficiaries, any demand for interest arising out of delayed payment would be made against the trustee personally. We are concerned here only with situations in which there is default by a trustee or executor in failing to make payment when it has fallen due. If an executor were to delay unreasonably in distributing the estate, it would not be appropriate to penalise the residuary beneficiary by awarding the legatee interest, payable out of the estate, at a rate higher than that which had actually been earned. A claim for such excess ought to be a claim against the executor personally in recognition of the fact that the delay in distribution is a breach of trust.

We recognise that the position of a trust beneficiary is not on all fours with that of a party to a contract. Nevertheless, it seems to us, as a matter of principle, that a beneficiary who has been deprived of the use of funds which ought to have been paid over by a trustee or executor should have the same entitlement to interest as persons in other circumstances where payment is overdue. Although we are proposing that statutory interest should be payable at a compensatory rather than a punitive rate, this may still exceed the yield (whether in the form of interest or otherwise) actually achieved by the money in the trustee's hands. If so, the difference should be payable by the trustee personally rather than out of another beneficiary's share of the fund. We are satisfied that this result would flow from the general rule that interest runs from the date when payment is due, when applied against the background of the law of trusts.

Aliment and financial provision on divorce

Entitlement to a sum by way of aliment

^[53]

^[54]

^[55]

Where an award of aliment has been backdated, statutory interest should be payable from the date or dates when the instalments ought to have been paid.

(Draft Bill, section 1(4))

One of our consultees

^[56]

^[57]

Under the present law, arrears of aliment which are recoverable by court action probably carry interest.

^[58]

DEBTS DUE UNDER STATUTE TO PUBLIC AUTHORITIES

We have taken the view that existing statutory provisions which provide for interest to be paid to or by a public body (such as interest on taxes and financial penalties) lie outside the scope of our reference.

^[59]

^[60]

There are also, however, statutory provisions which impose taxes (such as council tax) or fines and penalties payable to public authorities without making express provision regarding interest. Without such express provision, interest will not presently run on the debt due. It is not our intention to create an obligation to pay interest in such cases: this, too, would lie outside the scope of our reference. We propose to deal with this by a further specific exclusion from entitlement to statutory interest. We therefore recommend that:

Where any enactment imposes a tax, fine or penalty but makes no provision for interest to run on the sum due, statutory interest should not run on that sum.

(Draft Bill, section 2(b))

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Note 1   Our recommendations in relation to rate of interest are in Part 7 below.     [Back]

Note 2   (1884) 12R 104: see para 2.5 above.     [Back]

Note 3   See the cases discussed at para 2.5, fn 18.     [Back]

Note 4   Section 35A, inserted by the Administration of Justice Act 1982, s 15(1); Sch 1, Part I. For county courts there are parallel provisions in the County Courts Act 1984, s 69.     [Back]

Note 5   Eg New Zealand (Judicature Act 1908, s 87); British Columbia (Court Order Interest Act 1996); Ontario (Courts of Justice Act 1990, s 128); New South Wales (Supreme Court (Interest) Amendment Act 1983). The same applies in most other Australian states and Canadian provinces.     [Back]

Note 6   Eg France (Code Civil, art 1153); Belgium (Code Civil, art 1153); Germany (Bürgerliches Gesetzbuch, § 288(1)); Italy (Codice Civile, art 1224); Netherlands (Burgerlijk Wetboek, art 6:119); also Quebec (Civil Code, art 1617).     [Back]

Note 7   [1985] 1 AC 104 at 122.     [Back]

Note 8   Ibid at 129.     [Back]

Note 9   Paras 3.42-3.45.     [Back]

Note 10   Paras 3.37-3.41.     [Back]

Note 11   See para 7.25.    [Back]

Note 12   Discussion Paper, para 4.35.     [Back]

Note 13   Local Government Finance Act 1992, Sch 8, para 2(2).     [Back]

Note 14   Section 1(1), as amended in 1971.    [Back]

Note 15   For fuller details of the statutory provisions in Commonwealth and United States systems, see the Discussion Paper, para 4.11.     [Back]

Note 16   Code Civil (France), art 1153; Code Civil (Belgium), art 1153.     [Back]

Note 17   Bürgerliches Gesetzbuch (Germany), § 288(1); Burgerlijk Wetboek (Netherlands), art 6:119.1.     [Back]

Note 18   Codice Civile, art 1224.     [Back]

Note 19   Lando and Beale (eds), Principles of European Contract Law Parts I and II, art 9:508. A similar formulation is used by many US states.     [Back]

Note 20   "Purchaser" is defined as the buyer in a contract of sale or the person who contracts with the supplier in any other contract for the supply of goods and services: s 16.    [Back]

Note 21   British Railways Board v Ross & Cromarty County Council 1974 SC 27; Farrans (Construction) Ltd v Dunfermline District Council 1988 SC 120.     [Back]

Note 22   The term "goods" is defined as in the Sale of Goods Act 1979, s 61(1).     [Back]

Note 23   See the discussion of Cadzow v Wilson (1830) 5 Mur 98; West Highland Railway Co v Place (1894) 21R 576; Grandison's Trs v Jardine (1895) 22R 925 and Prestwick Cinema Co v Gardiner 1949 SC 645 (affd 1951 SC 98) at paras 4.19–4.20 of the Discussion Paper.     [Back]

Note 24   Scott Lithgow Ltd v Secretary of State for Defence 1989 SC (HL) 9 at 20 (Lord Keith of Kinkel).     [Back]

Note 25   Eg The Rosarino [1973] 1 Lloyds Rep 21.     [Back]

Note 26   The Faculty of Advocates.     [Back]

Note 27   It is also consistent with our recommendation at para 3.19 above that interest should run pending a determination or certification by a third party.     [Back]

Note 28   The case of Davidson v Guardian Royal Exchange Assurance 1979 SC 192 affords an example of such a failure.    [Back]

Note 29   Para 4.51.     [Back]

Note 30   In cases such as Smellie's Trs v Smellie 1933 SC 725 where the common law presumption was displaced by evidence of the circumstances of the making of the loan, it is clear that what the court was seeking in the surrounding circumstances was evidence of the parties' intention.    [Back]

Note 31   Bank of Scotland v Davis 1982 SLT 20.     [Back]

Note 32   At present the entitlement to interest of a claimant in an Employment Tribunal in such cases is conferred by the Employment Tribunals (Interest) Order 1990 (SI 1990/479), in terms of which interest does not begin to run until 42 days after the date of the Tribunal's determination. This entitlement would be superseded by our recommendations.     [Back]

Note 33   Aberdeen University School of Law.     [Back]

Note 34   Circumstances not arising out of a contractual relationship are discussed at paras 3.46-3.65.    [Back]

Note 35   Bowstead and Reynolds, Agency (16th edn), para 6-101.     [Back]

Note 36   (1856) 19D 187.     [Back]

Note 37   Directive 2000/35/EC of the European Parliament and Council, 29 June 2000, on combating late payment in commercial transactions.     [Back]

Note 38   Draft Bill, sch 1, para 9.    [Back]

Note 39   Implementing Art 3(3) of Directive 2000/35/EC.     [Back]

Note 40   See para 2.12.     [Back]

Note 41   Eg Trusts (Scotland) Act 1921, s 29; Adults with Incapacity (Scotland) Act 2000, s 81.     [Back]

Note 42   See paras 7.24-7.31.     [Back]

Note 43   Paragraph 3.14 and recommendation 3.    [Back]

Note 44   Useful examples of both are found in Shilliday v Smith 1998 SC 725.     [Back]

Note 45   See para 2.12.     [Back]

Note 46   See R Evans-Jones, Unjustified Enrichment, Vol 1, chapter 9.     [Back]

Note 47   See Part 5.     [Back]

Note 48   1979 SC 98, Lord Ordinary (Allanbridge).     [Back]

Note 49   See paras 3.49–3.54.    [Back]

Note 50   The "Olga" v The "Anglia" (1905) 7F 739, following The "Crathie" [1897] P 178.     [Back]

Note 51   Ross v Ross (1896) 23R 802.     [Back]

Note 52   See Part 5 of this Report.     [Back]

Note 53   A lump sum could be payable where, for example, the court has backdated an award of aliment or where the claim is for arrears of aliment payable under a previous decree.     [Back]

Note 54   See the Discussion Paper, paras 7.48-7.52.     [Back]

Note 55   Family Law (Scotland) Act 1985, s 3(1)(c): see para 2.12.     [Back]

Note 56   The Faculty of Advocates.     [Back]

Note 57   See Part 5 of this Report.     [Back]

Note 58   See the Discussion Paper, para 2.41.     [Back]

Note 59   See for example the Taxes (Interest Rate) Regulations 1989 (SI 1989/1297), as amended. These regulations set out formulae for the purposes of s 178 of the Finance Act 1989 which provides an interest rate for various (mainly tax) statutory provisions. The formulae are complex and frequently amended.     [Back]

Note 60   Section 2(c): see para 3.6.     [Back]

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You are here: BAILII >> Databases >> Scottish Law Commission >> Scottish Law Commission (Reports) >> Interest on Debt & Damages (Report) [2006] SLC 203(3) (1 September 2006) URL: http://www.bailii.org/scot/other/SLC/Report/2006/203(3).html Cite as: [2006] SLC 203(3)