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You are here: BAILII >> Databases >> Scottish Law Commission >> Scottish Law Commission (Reports) >> Interest on Debt & Damages (Report) [2006] SLC 203(5) (1 September 2006) URL: http://www.bailii.org/scot/other/SLC/Report/2006/203(5).html Cite as: [2006] SLC 203(5)

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Part 5: Judicial Discretion

Introduction: The current position

5.1           An issue which arises in relation to all types of pecuniary claim is the extent to which the awarding of interest to a creditor should be a matter of judicial discretion. Some systems, notably those of England and Wales and many Commonwealth jurisdictions, afford the court a wide discretion in relation to the award of interest, in particular as regards the date from which it begins to run. Other systems, such as the Continental systems, make no provision for judicial discretion. Scots law has hitherto adopted differing approaches with regard to different types of claim.

Interest on contractual and non-contractual debt

5.2           Interest on contractual debt, which is a matter of common law, has been held to be due from the date when the principal sum was wrongfully withheld. As discussed above,^[1] payment is not wrongfully withheld unless and until either an action for payment has been raised or express intimation has been given that interest will be charged if payment is not made by a specified date. There is therefore no scope for the exercise of discretion. Interest due under the Late Payment of Commercial Debts (Interest) Act 1998 may, however, be remitted by the court if the interests of justice require, by reason of any conduct of the creditor.
5.3           As regards the various types of non-contractual debt,^[2] it is not possible on the basis of the case law to state any general rule in relation to the existence of a judicial discretion to award interest.

Interest on damages

5.4           By way of contrast with the position regarding debt, the current statutory provision^[3] regarding interest on damages appears to confer a wide discretion on the court: interest may be awarded "at such rate or rates as may be specified in the interlocutor, on the whole or any part of that sum for the whole or any part of the period between the date when the right of action arose and the date of the interlocutor". There are four separate discretions here:

•    whether to award interest at all;

•    the rate or rates of interest;

•    whether to award interest on the whole or on only part of the principal sum; and

•    the period during which interest runs.

As regards damages or solatium for personal injury, the first of these discretions is restricted by section 1(1B): the court must award interest unless there are reasons special to the case why no interest should be given.

5.5           Despite the width of the statutory wording, the courts have been reluctant to interpret it as conferring an unfettered discretion, preferring to apply the provisions of the 1958 Act against the common law background of "wrongful withholding". In practice, certain principles have evolved as to how interest will be awarded on different types of loss: for example, interest will be awarded on out-of-pocket expenses from the date of the expenditure; interest will run on solatium at half the judicial rate throughout the period of past loss, and so on. At one time the courts were inclined to exercise the discretion in such a way as to restrict entitlement to interest where there was unreasonable delay on the part of the pursuer in prosecuting a claim.^[4] However, this approach was disapproved by the Second Division in Boots the Chemist Ltd v GA Estates Ltd^[5] and, since then, the discretion has not been exercised to penalise delay by the pursuer. So far as the rate of interest is concerned, the discretion has been exercised largely to achieve a broadly fair application to periods prior to decree of the judicial rate prescribed by Rule of Court 7.7 in respect of interest payable under a decree. It has also been used to restrict entitlement to interest where an interim payment has been made by the defender.
5.6           We consider, as a matter of principle, that it would be desirable for the same degree of discretion (if any) to be available to the court in claims for interest on debt as in claims for interest on damages. Put another way, we see no reason for retaining a discretion in relation to some categories of claim and not others. It is necessary to consider, firstly, whether there is a need to retain any judicial discretion at all.

Arguments for and against a judicial discretion to remit interest

5.7           The arguments in favour of a discretion may be categorised as either economic or non-economic. Economic arguments support the retention of a discretion to ensure that the creditor is neither over- nor under-compensated. It may be, though, that this can be ensured by means other than a judicial discretion; for example, by maintaining rates of interest in line with current market rates and by appropriate definition of the starting date for the running of interest. Non-economic arguments support the retention of a discretion to cover cases where, for a reason other than ensuring the accuracy of compensation, it might be regarded as unfair to the debtor to have to pay interest on the whole sum due for the entire period to the date of payment or decree. One of these is that the debtor has been in good faith in refusing to pay. For example, assume that A carries out work for B and submits a bill which B refuses to pay because he considers it to be excessive. After several months, A sends a bill for a lesser amount which B pays. A demands interest on the sum eventually paid from the date of the previous, excessive bill. B could not have paid earlier because A would not have accepted a cheque for a lesser sum than that initially demanded. On one view, A should not be entitled to interest because he has himself to blame for his failure to receive earlier payment. On the other hand, it could be argued that where the rate of interest is compensatory and not penal, A should be entitled to interest on the lesser amount eventually paid. A has gained nothing by submitting an excessive bill for unsatisfactory work. B loses nothing because he has had the use of the money for a longer period.
5.8           The question whether there should be an element of judicial discretion also arises in relation to delay by trustees and executors in making over funds to beneficiaries entitled to them. If, as we have recommended,^[6] the statutory scheme is to apply where the holder is in breach of his obligation to account, this requires a judgment to be made as to when the breach occurred. It might be regarded as harsh for persons such as trustees and executors to be told, with the benefit of hindsight, that they were in default in failing to make payment by a particular date and are personally liable for interest as a result. On the other hand, if the matter is looked at primarily from the point of view of the pursuer/creditor, it should make no difference what kind of claim is being made: the entitlement to interest should be uniform.
5.9           In the Discussion Paper we referred to another argument against the inclusion of a judicial discretion to remit interest. With the exception of the limited discretion in the 1998 Act, the systems in which a discretion is conferred are all "deferred entitlement" systems, that is, systems where entitlement to interest arises only if proceedings have been raised. We are proposing an "immediate entitlement" system in which statutory interest runs irrespective of the raising of proceedings. Inclusion of a judicial discretion might be regarded as inconsistent with a statutory entitlement to interest. In any event, it might lead to uncertainty as to the parties' rights in the absence of court action and thus discourage the resolution of claims for interest on debts paid late without recourse to the court.
5.10           Our consultees were divided on this issue. Those in favour of the retention of a discretion pointed out that what we are proposing represents, at least in relation to interest on debt, a significant change in the law. The results might not always be predictable and judicial discretion could address any consequences of our proposals which would lead to injustice. Judicial discretion allows the law to be adapted to suit varying and unpredictable circumstances. Those against retention of a discretion argued that if what we are proposing is fair, and interest is intended to compensate for loss and not to penalise, then there should be no scope for judicial discretion. Discretion creates uncertainty. Citizens Advice Scotland expressed a preference for judicial discretion which would allow the courts to take account of individual circumstances and suggested that courts could consider the effect of an inequality of power between the parties.
5.11           As mentioned above,^[7] the Late Payment of Commercial Debts (Interest) Act 1998 contains a discretion to remit interest on commercial debts, but only by reason of any conduct of the supplier. For example, A Ltd carries out work for B Ltd (without having agreed a price in advance) and then submits a bill which B Ltd refuses to pay on the ground that the charge is exorbitant. A Ltd does nothing about this for more than four years but eventually raises an action for payment of a lesser, reasonable sum within the prescriptive period. Because the rate of interest under the 1998 Act is set intentionally high to penalise late payment, it may be regarded as unfair to require a debtor to pay interest at such a rate when the delay is wholly or mainly due to the conduct of the creditor. It is not so obviously unfair to require a debtor to pay interest at a rate which merely compensates the creditor for not having had the use of the money during the period since the debt fell due. It may be argued therefore that no judicial discretion to remit interest is required.

Conclusion

5.12           Having considered the matter in the light of consultees' responses, we have decided that if judicial discretion is to be retained, then the legislation should specify limits within which the discretion may be exercised. If the courts were left free to apply common law principles, the effect could be to revive rules which our recommendations are intended to replace, such as "wrongful withholding". We have sought to identify a principle which can be applied to all the circumstances in which judicial discretion is an issue and have concluded that a limited discretion, similar to that contained in the 1998 Act, should be retained. We are attracted by this approach, which allows an element of judicial discretion in the interests of justice but limits it to the conduct of the creditor. It addresses most of the circumstances which have occurred to us in which it might be thought unjust to award statutory interest.

Example 1

C is informed by her electricity supplier that due to an administrative error she has been undercharged for the last two years and now owes over £2,000 in arrears. C is unable to afford to pay this as a lump sum and has to pay by instalments over a period of more than a year. The supplier demands interest on the instalments. Under our recommendations, statutory interest would not start to run on any part of the arrears until 30 days after the demand for payment has been made. In addition, the court would have a discretion to remit some or all of the interest accruing thereafter in the interests of justice because the debt arose as a result of the creditor's negligent conduct.

Example 2

D orders goods from a website. In terms of the contract of sale, payment of £1,500 is due 30 days after receipt of the goods. The company supplying the goods sends an invoice showing the sum due to be £2,500. D immediately complains and requests an invoice for the correct amount. After four weeks the company's accounts department sends a reminder which also demands payment of the wrong amount. D complains again and asks for an invoice for the correct amount. After another four weeks the company sends an invoice for the correct amount which D pays promptly. The company demands interest from the date when payment was due in terms of the contract. The court would have a discretion to remit some or all of the interest demanded if it were considered to be in the interests of justice to do so.

5.13           It would be for the courts to determine the types of conduct which justified remission of interest, but since the rate of interest will be set at a level which is merely compensatory, we would not envisage that mere delay in prosecuting a claim would be regarded as sufficient to warrant remission. We recommend, whether the claim is for contractual debt, non-contractual debt or damages, that:

There should be a judicial discretion to remit interest in whole or in part in respect of a period for which it would otherwise run where the interests of justice so require, but only by reason of any conduct of the creditor.

(Draft Bill, section 9)

Note 1   See para 2.5.     [Back]

Note 2   Discussed at para 2.12.    [Back]

Note 3   Interest on Damages (Scotland) Act 1958, s 1(1), as amended in 1971.     [Back]

Note 4   Nacap Ltd v Moffat Plant Ltd 1986 SLT 326; Buchan v J Marr (Aberdeen) Ltd 1987 SLT 521; M & I Instrument Engineers Ltd v Varsada 1991 SLT 106.     [Back]

Note 5   1992 SC 485 at 497 (Lord Justice Clerk Ross).     [Back]

Note 6   See paras 3.57-3.60 and recommendations 17 and 18.    [Back]

Note 7   Para 5.2.     [Back]