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You are here: BAILII >> Databases >> Scottish Law Commission >> Scottish Law Commission (Reports) >> Interest on Debt & Damages (Report) [2006] SLC 203(4) (1 September 2006) URL: http://www.bailii.org/scot/other/SLC/Report/2006/203(4).html Cite as: [2006] SLC 203(4)

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Part 4: Interest on damages

Introduction

4.1           In this Part we set out our recommendations in relation to re-formulation of the existing legislative provisions regarding interest on damages. Statutory intervention has already taken place in 1958 and 1971 in relation to interest on damages and, despite judicial criticism which was made of the legislation on each occasion shortly after enactment, its operation in practice seems to be broadly satisfactory. The effect of the 1971 amendments to the Interest on Damages (Scotland) Act 1958 was to bring forward the date from which interest may be awarded on damages and, in the case of solatium for personal injury, to bring it forward to the date of the injury. Nevertheless, we considered in the Discussion Paper whether the law relating to interest on damages should be subject to a statutory re-statement in somewhat amended form. We suggested that such re-statement was justified for the following reasons:

(i) The current statutory provisions depend on the exercise of judicial discretion. They do no more than empower the court to award interest during any period since the date when the right of action arose. It is clearly not always appropriate for every head of claim to bear interest from the date when the right of action arose but the law gives no further guidance as to how the discretion ought to be exercised.

(ii) There are uncertainties which remain unresolved, such as the date when interest runs on out-of-pocket expenses which are capable of quantification at a date earlier than the date when they are actually incurred by the person claiming them as a head of loss (such as where a pursuer sues for reimbursement of an expense which has been quantified but not yet actually incurred). Nor is there any clear authority on the commencement date for interest on damages for the destruction of property which is not replaced.

(iii) The current statutory provisions have been judicially interpreted as requiring the court to continue to have regard to the criterion of "wrongful withholding". If, as we are proposing, this is to be abolished as the test for interest to run on sums other than damages, it seems appropriate also to remove it as a requirement for interest to run on damages. The most appropriate way to do so would be to re-cast the statutory provisions in such a way as to leave no room for the application of that test.

(iv) The drafting of the existing legislation, in particular the subsections which were substituted in 1971, has been subject to criticism. Interpretation has required a degree of judicial elucidation and we consider that even as regards aspects of the present law to which we propose no significant change of substance, the law could be more clearly stated than it was in 1958 and 1971.

4.2           For these reasons, we sought views as to whether the law relating to interest on damages is in need of statutory re-statement. Most of our consultees supported our proposal that the law be re-formulated, although the Faculty of Advocates expressed concern that this might cause unforeseen difficulties of interpretation. We have concluded that a re-formulation, substituting a general principle for the present reliance upon exercise of a judicial discretion, is desirable. We recommend that:

The legislation relating to interest on damages should be re-formulated.

Date for commencement of running of interest

4.3           As with interest on contractual debt, our guiding principle has been that a claimant should be compensated for loss in the whole of the period during which that loss has subsisted. The corollary of this is that interest should not be awarded on any sum for any period prior to the time when the head of loss in question was sustained. For example, where earnings are lost as a consequence of an accident at work, the loss accrues over a period which may continue after the date of the award. In principle, the instalments of past earnings lost should carry interest from the respective dates when they would have been received were it not for the accident. On the other hand, instalments of future earnings should not carry interest. They are not being received late: in fact, they are being received early and should be subject to a discount.^[1]
4.4           Damages are also awarded as a surrogatum for loss which is not patrimonial: the most common example is solatium for pain and suffering due to personal injury. Here the loss which is being compensated may have arisen at any time, or at various times, since the date when the event giving rise to the claim occurred and may also continue into the future. Again, therefore, it is in principle appropriate to divide up the award into its component parts, awarding interest on past losses but not on compensation for losses which will arise or continue to arise in future. A method also has to be found for ensuring that past losses bear interest from an appropriate date or dates.
4.5           The Interest on Damages (Scotland) Act 1958, as amended in 1971, addresses these requirements by permitting the award of interest for any period beginning on or after "the date when the right of action arose". Whilst this has the merit of affording the court the possibility of awarding interest from the earliest possible date, it requires to be applied in practice in such a way as to take account of the fact that not all loss accrues on the date when the harmful event occurs. Most systems, including Scots law, have resolved this by giving the court a wide discretion to award interest from any date or dates after the date when the cause or right of action arose, enabling the court to achieve a just result in individual cases. We have considered alternative formulations which would give greater certainty as to the date of commencement without depending to such a large extent on the exercise of judicial discretion.
4.6           The solution which we proposed in the Discussion Paper is to provide, with as little further elaboration as possible, for interest to run on a particular head of loss from the date upon which that loss was sustained. This would be a principled approach and would moreover have the attraction of simplicity. It makes clear that the court must continue to take the "selective and discriminating" approach to assessment of damages which the case law presently requires and provides a test for the starting date for interest on each head of claim which does not depend upon applying the criterion of "wrongful withholding". Our consultees were supportive of this approach.^[2] We consider that by using the date when the loss is incurred as the benchmark the legislation would provide significantly greater guidance to the court than does the present law. We recommend that:

In an action for damages, interest should run on each head of loss from the date on which the loss in question was sustained.

(Draft Bill, section 6(1))

Application of the general rule to particular types of loss

4.7           The next question which we consider is whether there is a need for elaboration in the legislation of how the principle would apply to different types of loss.

Out-of-pocket expenses

4.8           In the case of out-of-pocket expenses, the application of the principle would be straightforward. The loss is sustained on the date when the expense is incurred. It does not matter that the amount of the expense was quantifiable, or, indeed, quantified, at an earlier date: to award interest prior to the incurring of the expense would be to over-compensate the claimant. For example, assume that A causes a road accident in which B's car is damaged beyond economic repair. B sues for (i) the value of the car, and (ii) the cost of hiring a car during the period prior to purchase of a replacement car. The dates on which B's losses are sustained are (i) in the case of the car itself, the date on which B incurs the expense of purchase of the replacement car, and (ii) in the case of the hire charges, the date or dates upon which these are incurred. Although B has been deprived of the use of his damaged car from the date of the accident, he would be over-compensated by allowing interest to run from that date: his deprivation of the use of the car prior to the purchase of the replacement is in this case compensated by reimbursement of the expense of a temporary replacement; in other cases a different loss (such as increased public transport expenses) might be incurred instead.

Other pecuniary losses

4.9           The principle would apply in the same way where the loss consists not of an out-of-pocket expense but rather of the loss of money which would have been received but for the event giving rise to the claim, such as wage loss or loss of profits. The main obstacle to the straightforward application of this principle in such cases is practicality: actual pecuniary losses may consist of a large number of individual items the loss of which was sustained at different times. For example, each instalment of past wage loss will have been sustained on the date when that instalment would have been received. This is a difficulty which must be addressed by any system in which interest is awarded on past losses. Precise calculation of interest due on each instalment is tedious but entirely feasible. The current Scottish practice, encouraged by court decisions during the period following the legislative amendments in 1971, is for a broad measure of accuracy to be achieved by calculating the total wage loss over the whole period of past loss and then awarding interest on that total at half the judicial rate.
4.10           In its response to the Discussion Paper, the Faculty of Advocates expressed a number of concerns regarding our proposal. Even in simple cases there would require to be 12 calculations per year (or 52 if the claimant was paid weekly) over what might be a lengthy period of years. The fact that the calculation of wage loss is inevitably an approximation of the claimant's actual loss, based upon the best available comparators, suggests that such detailed calculation is inappropriate. Moreover, the need to carry out calculations in greater detail would lead to increased expense and reduced prospects of extra-judicial settlement, because advisers might no longer be able to adopt a broad-brush approach in the face of legislation which prescribed a specific method of calculation. Other consultees also indicated concern regarding the complexity of the calculation.
4.11           We are, of course, anxious that any legislative change which we recommend should not result in increased expense or create an obstacle to extra-judicial settlement. We believe that what we are proposing merely reflects the current practice, which forms part of existing Scots law because it has been utilised consistently by judges as the means of calculating wage loss. As matters stand, the court is prepared to take "short cuts" in the calculation not because judges consider that the discretion conferred on them by the 1971 Act entitles them to award a pursuer more or less than he has actually lost, but because, as the Faculty points out, the whole calculation requires a degree of approximation and so adopting practices such as calculating interest at half rates over a given period may avoid an impression of spurious accuracy. There may be cases in which strictly accurate calculation is both feasible and desirable, but in most cases we see no reason why parties should not continue to settle claims on the basis of a more approximate calculation; nor, indeed, why they should not invite the court to employ a degree of approximation where this will not cause material prejudice to either party. In short, we do not consider that our recommendations effect any material change in the law except that they make the claimant's statutory entitlement express, rather than depending upon the courts' application of the power currently conferred on them.
4.12           In the Discussion Paper we invited comment on whether special legislative provision was required in relation to losses accruing periodically during the time since the date of the event giving rise to the claim. The majority of our consultees did not consider that this was required, although some suggested that special provision might be desirable for losses consisting of a large number of individual items of loss sustained at different times, such as wage loss or costs of care. Such special provision could take the form of an express sanction to the court to adopt a method of "averaging" such as awarding interest on the total loss over the whole period at half rates.
4.13           We do not consider that such averaging is precluded by our proposed statutory re-formulation. We reiterate that we do not see it as a change in the law but rather as a statutory expression of the existing practice. For the avoidance of doubt, however, our draft Bill includes a provision confirming that the court may continue to treat a loss in respect of which an award of damages is made as having been sustained over a period of time. A degree of approximation will thus continue to be acceptable in calculating the pursuer's loss.

Solatium

4.14           Section 1(1A) of the 1958 Act requires interest to be "included" in the damages awarded in respect of solatium for personal injury.^[3] In the Discussion Paper we asked whether clarification was required with regard to the application to awards of solatium of the simply-expressed test which we are recommending. On the one hand, it could be argued that the loss which is compensated by an award of solatium is sustained on the day of the accident. On the other hand, it might be said that the loss is sustained on every day following the accident unless and until the claimant makes a full recovery. The latter interpretation is the one which seems to us to represent the reality. Our consultees agreed that this was the better interpretation. We do not wish to interfere with the existing practice of treating solatium as compensating a loss which is sustained over a period of time, and, as with pecuniary losses, we have concluded that it would be desirable for this to be made clear in the Bill. We envisage that solatium would continue to be calculated at a rate which is one-half of the statutory rate or, indeed, at such other fraction of the statutory rate as the court considers appropriate in the circumstances of a particular case.^[4] We recommend that:

The existing practice whereby the court when awarding damages in relation to personal injury may treat a loss (including a non-patrimonial loss) as having been sustained over a period of time should be preserved.

(Draft Bill, section 6(2))

Property lost or destroyed

4.15           Another situation with which the re-formulated provision will require to deal is that of property which is destroyed or lost and not replaced. An example is provided by James Buchanan & Co v Stewart Cameron (Drymen) Ltd.^[5] The pursuers engaged the defenders to carry a load of whisky and advertising material by road. The defenders' lorry was stolen and the goods lost. It was held that where, as here, there was no suggestion that the defenders were enjoying an advantage from the pursuers' loss, the principal sum could not be said to be wrongfully withheld from any date prior to the date of citation. The Lord Ordinary (Lord Maxwell) noted also that he had no grounds for assuming that the whisky and advertising material, if not lost, would have earned profit for the pursuers from any particular date. Applying the principle which we are proposing to the facts of this case, it becomes necessary to determine when the owner's loss was sustained: was it the date of the theft or was the loss sustained only at the date when the stolen goods would have been used for profit? As between these two alternatives, we consider the latter to be a better reflection of reality: if interest were to be awarded from the date of the theft, the claimant could be better off than if the goods had not been stolen. It may, however, be more accurate still to regard the loss of the cost of the goods (which will usually constitute the greater part of the loss) as occurring on the date of the theft but to treat the loss of profit on their re-sale as occurring at the time when they would have been used for profit.
4.16           Different dates might be appropriate for different types of goods lost: it would in each case be for the pursuer to prove when a financial loss actually occurred. In the circumstances of the James Buchanan case, interest might not run from the same date in respect of the loss of the whisky as in respect of the advertising material. So far as the whisky is concerned, the appropriate date for commencement of the running of interest seems to us to be the date when it would have been sold in the course of the pursuers' business. The advertising material is perhaps more difficult. If, for example, the pursuers proved that they required to incur expense on ordering replacement material then interest would run from the date when that expense was incurred on the normal principle for out-of-pocket expenses.^[6] If, on the other hand, the material was not replaced then, as discussed in paragraph 4.18 below, the only possible date for the calculation of interest on whatever loss was claimed would appear to be the date of the theft.
4.17           The principle may be further tested by applying it to the facts of Boots the Chemist Ltd v GA Estates Ltd.^[7] The pursuers were tenants of shop premises who suffered loss when their premises were flooded as a consequence of a blocked culvert. Seven of the eight heads of loss claimed from the landlord consisted of out-of-pocket expenses, such as shopfitting costs, which had been incurred during the two months following the flooding incident. The eighth was a claim for loss of stock. The court held that interest on the seven heads of out-of-pocket expenses ran from the dates when these expenses were respectively incurred. As regards the loss of stock, there was no evidence before the court as to when that stock could have been turned to profit, and accordingly, following James Buchanan & Co v Stewart Cameron (Drymen) Ltd, interest was allowed only from the date of citation. Applying the new principle which we are proposing, the situation as regards the out-of-pocket expenses will be no different. The position as regards the lost stock will depend (a) upon whether or not the stock was replaced, and, if not, (b) upon proof of the date when the stock would have been likely to have been turned to profit. A difference from the existing law is that there will be no "safety net" of date of citation for a pursuer who fails to prove when the loss was sustained.
4.18           The examples in the two previous paragraphs concern property whose loss can be compensated by reference to its commercial value. This will not always be possible. Assume that in the example in paragraph 4.8 above, B does not purchase a replacement car and simply sues for the value of the car which was damaged beyond repair, with no intention of expending the sum recovered on a car. There would seem to be only one possible date upon which B's loss could be said to be sustained, namely the date of the accident. It might be thought anomalous that interest runs from different dates depending upon B's decision whether or not to replace his car. However this is because a different type of loss is being compensated. In the first case, it is a permanent financial loss which does not occur immediately, accompanied by the temporary loss of use of an asset; in the second, it is a permanent loss of an asset which occurs immediately. On reflection, we do not regard it as anomalous that the commencement dates for the running of interest should be different,^[8] and it seems to us that the statutory provision which we propose is capable of applying in all of the foregoing circumstances in a fair and reasonable way.
4.19           Another example is afforded by the English case of Metal Box Co Ltd v Currys Ltd.^[9] Goods belonging to the plaintiffs which were stored in the defendants' warehouse were destroyed by a fire caused by the negligence of the defendants' employees. It appears that the goods were stock intended for sale. The plaintiffs were compensated for the value of the goods destroyed and the question was whether interest was due on the compensation and, if so, in respect of what period. The defendants contended that no interest at all was due because payment had not been wrongfully withheld. Alternatively, since the plaintiffs were insured, it was due only from the date when the insurers made payment to the plaintiffs. It was argued that unless the plaintiffs had intended to sell the goods on the day of the fire, they were not entitled to interest. The plaintiffs contended that interest should run from the date when their loss adjusters wrote to the defendants' insurers to intimate a claim. There were further arguments as to whether the plaintiffs had delayed unduly in prosecuting their claim and McNeill J, in exercise of the statutory discretion,^[10] awarded interest from a date midway between the date of the fire and the date when the action was raised. Applying our proposed statutory rule, interest would be awarded on the compensation for the destruction of the stock from the date when the stock would have been used for profit. The question whether delay on the part of a pursuer in raising proceedings should affect the running of interest is discussed below.^[11] Leaving that matter aside, however, it seems to us that our result would have been reasonable in the circumstances of the Metal Box case.
4.20           In the light of this discussion, we proposed in the Discussion Paper that:

•    Where loss is sustained as a consequence of the loss or destruction of an item of property which is replaced, the loss should be taken to occur on the date when expense is incurred on replacement.

•    Where loss is sustained as a consequence of the loss or destruction of an item of property which is not replaced and which consists of a loss of proceeds of realisation of the item, the loss should be taken to occur at the time of loss or destruction but any lost profit on realisation should not be taken to have occurred until the date when the proceeds would have been received.

•    Where loss is sustained as a consequence of the loss or destruction of an item of property which is not replaced and which was not intended for realisation, the loss should be taken to occur at the time of loss or destruction.

4.21           Our consultees agreed with all of these proposals. We also invited comment on whether there was a need for express statutory provision setting out these proposals or, alternatively, whether they could be regarded as following naturally from the general principle that interest runs from the time when loss is sustained. Consultees who responded to this question were of the view that no special statutory provision was required, and we accept this view.

Judicial discretion to remit interest

4.22           The current statutory provisions afford a wide discretion to the court to restrict the period during which interest on damages runs. This is necessary because the 1958 Act simply permits the awarding of interest from any date after the right of action arose. Our view is that under our recommendations there is no need for such a wide discretion and further that the same degree of discretion should apply to awards of interest on damages as applies to awards of interest on debt. Our recommendation, which is that judicial discretion should be exercisable only where the interests of justice require by reason of any conduct of the creditor, is discussed in Part 5 below.
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Note 1   In current practice tables of multipliers (notably the "Ogden tables") are often used to achieve an appropriate discount for early receipt of damages attributable to future loss.     [Back]

Note 2   Mr Harvey McGregor QC regarded it as "an excellent proposal".     [Back]

Note 3   For criticism of this formulation see Smith v Middleton 1972 SC 30 at 39 (Lord Ordinary (Emslie)).     [Back]

Note 4   Where, for example, the pursuer has made a full recovery prior to the date of the hearing, the court might award solatium at half rate up to the time of full recovery and solatium at full rate thereafter, which equates to a rate somewhere between half and full rate over the whole period to date.    [Back]

Note 5   1973 SC 285.     [Back]

Note 6   If in addition the pursuers had sustained consequential loss as a result of being deprived for a period of the use of the advertising material (for example, because they were unable to run an intended sales promotion event), then that would constitute a separate head of claim whose admissibility would depend upon application of normal Hadley v Baxendale rules. Interest would also run on this head of claim.     [Back]

Note 7   1992 SC 485.     [Back]

Note 8   A parallel may be found in English admiralty cases. Where a ship is destroyed, in a collision or otherwise, interest is awarded from the date of destruction: Straker v Hartland (1864) 11 LT 622. Where on the other hand a ship is damaged, interest is awarded from the date when the plaintiff incurred the cost of the repairs: The Hebe (1847) 2 W Rob 530; The Norseman [1957] P 224.     [Back]

Note 9   [1988] 1 WLR 175.     [Back]

Note 10   Supreme Court Act 1981, s 35A.     [Back]

Note 11   Paras 5.5 and 5.13.    [Back]