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Impact of interest rates on claims?

Wednesday February 15, 2023

As interest rates in the UK start to climb, parties are increasingly focused on the amount of interest that they can claim in relation to their litigation cases.

The basic position in England is that up until judgment (from which point interest of 8% will be awarded), interest for a contractual claim might be claimed in different ways (and are usually claimed as alternatives in claim forms/particulars of claim):

  • The contract might provide for interest at a certain rate and, if it does, that will usually override any statutory basis for claiming interest (subject to rules about penalties – see further below);
  • If the contract is silent on interest but is a commercial, business to business contract for the supply of goods or services, then the Late Payment of Commercial Debts (Interest) Act will imply simple interest at a rate of 8% over the current base rate into the contract;
  • If the Late Payment Act does not apply or is not pleaded, then the Courts have a discretion to award simple interest at such rate as they think fit. The aim is to compensate claimants for being kept out of their money. The proper rate for commercial cases is usually the rate at which the defendant could have borrowed the sum that they are owed (not the return they would have got from investing it). The maximum amount awarded by the courts has usually been between 1-3% above the base rate (which has not exceeded 1% since 2009). The Commercial Court usually awards 1% over the base rate.

However, in the recent case of Harrington Scott Ltd v Coupe Bradbury Solicitors Ltd, the judge said that: “Certainly, so far as the position going forward is concerned, with inflation currently running at around 10% pa, and forecast to rise to ever dizzier heights, as a result of Putin’s war in Ukraine and the consequent disruption to global energy and food supply chains, a rate of 8% pa may soon fall to be considered as modest“. Although the case was one involving professional negligence, where higher rates of interest are often awarded, this may signify a departure from the usual practice of the courts when awarding discretionary interest.

A separate issue in this case was whether a contractual provision that “Interest will be payable by the Client on overdue invoices at a rate of 2.00% for each period of fourteen days’ delayed payment” amounted to an unenforceable penalty. The judge refused to strike out a claim for that amount of interest (equivalent to an annual rate of 52%) on the basis that it was a penalty (leaving the issue to be decided at trial). The basis being that at the time the parties entered into the contract, they were unlikely to have envisaged that an invoice would remain unpaid for any length of time after its due date.

Parties will certainly have to bear in mind the recent changes in interest rates when issuing claims. It may be that the conservative approach applied by Courts to recovering interest will be changing.

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