Challenge to Judicial Rate of Interest – update on Farstad Supply v Enviroco

Farstad Supply AS v Enviroco Limited [2011] CSOH 153

On 13 October 2011 we reported on the Court of Session’s decision in the case of Farstad Supply AS v Enviroco Limited. At the time, the court had accepted an argument to vary the standard judicial interest rate (of 8%) for a limited period in relation to agreed damages, to take account of the prevailing market conditions during and following the financial crisis in the autumn of 2008. The defender’s appeal of that decision (insofar as the judicial rate was not varied) has now been refused for the reasons noted below.

Background

The decision at first instance arose in relation to a claim for damages following a fire on board an oil rig supply vessel. The parties agreed an amount of damages in settlement on the eve of proof but asked the court to determine the appropriate rate of interest to apply to the settlement. The interest claimed was to be calculated from an agreed date of loss of 31 December 2002. The defenders argued that in light of recent market conditions the rate of 8% (the standard rate applied by the Scottish courts since 1 April 1993) was excessive and would provide the pursuers with a bonus rather than compensate them for their loss. The defenders instead asked the court to adopt the approach which has been taken by the Commercial Court in England and award interest at the base rate plus 1%, or apply a rate of 1.36% (based on an average of the interest rates available on instant access deposit accounts for the relevant period). In response the pursuers submitted that the court should follow the general practice and award interest at 8%.

Lord Hodge considered that there had been a watershed in late 2008 and early 2009 when the base rate plummeted from 5% in early October 2008 to 0.5% in March 2009. He took the view that the market rate on most forms of deposit and on many forms of borrowing had moved so far from the judicial rate that it was no longer an approximation of the loss which the pursuers had suffered. His Lordship therefore awarded interest at 8% until 4 December 2008 and at 4% thereafter.

Opinion of the Court on appeal

The decision of the Inner House of the Court of Session on appeal was published on 20 February 2013. The court’s Opinion, which was delivered by Lord Eassie, refused the appeal and adhered to Lord Hodge’s original decision in 2011.

Lord Eassie observed that both of parties had accepted that in principle the allowance of interest was intended to be compensatory and not penal. Further, neither party had taken issue with the legal basis for Lord Hodge’s decision or his summary of the existing practice in Scotland in relation to the awarding of interest. Lord Eassie stated that it was not possible to say that Lord Hodge had been wrong in the exercise of his discretion. There were no circumstances in the case that called for a departure from the court’s general practice.

Whilst considering the position in England and Wales, Lord Eassie commented that this had itself been the subject of considerable criticism. As regards the suggestion made by the defender’s counsel that the commercial nature of the claim be taken into account, the court refused to draw a distinction between commercial and other claims with regard to the rate at which interest should be awarded.

Lord Eassie also considered and commented on the findings of the Scottish Law Commission which had considered the allowance of interest in its 2006 report “Interest on Debt and Damages” (Scot Law Com No. 203). In the circumstances, Lord Eassie stated that it would be inappropriate for the court to “innovate retroactively” by awarding interest in line with what was arguably an implementation of recommendations of the Scottish Law Commission , which the government had to date been unwilling to adopt.

Lord Eassie also agreed with Lord Hodge’s concern regarding the mismatch between the judicial rate and market rate which had emerged and had continued since the financial crisis in Autumn 2008, and upheld the approach he had taken in light of that to award interest from 2008 onwards at the lower rate of 4% per annum. The pursuer’s cross-appeal was therefore also refused.

Although the defender’s appeal was refused, Lord Eassie commented that in the absence of law reform, responsibility for updating the current judicial rate lies with the Court of Session’s Rules Council, which Lord Eassie suggested should urgently consider the concerns raised in this case. It is worth noting that Lord Eassie also urged the Court of Session’s Rules Council not to feel bound to follow the approach taken by the English courts on this issue.

What will happen next?

While the standard judicial rate in Scottish actions remains unchanged, pursuers and defenders should remain alert to the possibility that the court may amend the judicial rate of interest in particular cases. Meantime, it is envisaged that the Court of Session’s Rules Council will cease to exist later this year when both it and the Sheriff Court Rules Council are replaced by the Scottish Civil Justice Council which is being created as part of the implementation of the recommendations previously made by Lord Gill (now Lord President of the Court of Session) in his report on the Scottish Civil Court’s Review 2009. Therefore, in the absence of any action by either the Scottish Government or the Scottish Civil Justice Council, it seems likely that the Scottish courts will be reluctant to pursue further changes to the existing position or adopt the Commercial Court of England’s principle of allowance of judicial interest rates.