In their opinions in Blair's Trs v Payne (1884) 12R 104, Lord Craighill bemoaned that "nothing can be conceived as less amenable to a settled general principle than our law upon a creditor's right to interest" and Lord Fraser observed that "claims for interest cannot be brought under any general rule". Over a century later, the Scottish Law Commission noted that although interest had "come to be regarded as an appropriate means of compensating a person for the loss of the use of money which he ought to have had...at no time has there been a comprehensive statutory statement of entitlement to interest." As always with Scots law, there is an instructive historical background involving a number of different sources of legal principle competing for influence and acceptance.
The Commission observed that "[t]he origins of the rules of Scots law relating to interest lie in the Canon law prohibition of usury" but there is a longer history than that. Ezekiel (18:13) included usury in his list of “abominable things”. Jews were forbidden to charge each other interest on loans (Exodus 22:25; Deuteronomy 23:19-20; Leviticus 25:35-37). In 1750 BC, the Code of Hammurabi regulated what interest might be charged on money lent. Both Plato and Aristotle viewed usury as immoral and unjust. In 533 Justinian's Code followed the Twelve Tables a century earlier and set a graduated maximum interest rate that was not to exceed 8 1/3 % for loans to ordinary citizens. In the 7th century, the Koran provided (2:275-276) that "God has allowed trade and forbidden usury...whoever goes back to usury will be an inhabitant of the Fire, therein to remain."
Over centuries, and in Scotland particularly after the Reformation, whatever general prohibition there might have been began to relax and the idea of "usury" came to refer to the charging of interest at an exorbitant rate, rather than at all. Usury Acts of 1587, 1594 and 1597 provided penalties for demanding interest at a rate in excess of 10% and by 1681 Viscount Stair's description of "usurary" was reserved for such excessive charges. However, this development was in relation to arrangements for the payment of interest which the parties themselves had conceived: "pactional" interest, a matter of contract between debtor and creditor. During the late 16th and 17th centuries there were a number of statutory provisions for the payment of interest in certain specific circumstances: to a cautioner who made payment to a creditor, in respect of dishonoured foreign, and then domestic, bills of exchange, amongst others. Then, "[a]s attitudes to usury changed, the courts began to hold that interest was due in a variety of circumstances where there was neither contractual stipulation nor express statutory entitlement." Someone taking possession of land without paying the price was liable to pay interest on it, someone receiving money belonging to another was similarly liable and someone who paid money on behalf of another (like the earlier cautioner) was entitled not just to reimbursement of the payment but to interest too. Gradually, there arose an implication that interest was chargeable on money lent even in the absence of express stipulation to that effect and by 1861 Lord Inglis could observe, in Thomson v Geekie (1861) 23D 693 at 701 that:
"It admits of no doubt, that an acknowledgement of money generally presumes that the money was advanced in loan, and it follows that there is, first, an obligation on the party granting it instantly to repay the sum; and secondly, another obligation that, so long as the sum remains unpaid, the party shall pay legal interest. The acknowledgement itself does not express these obligations; but these are obligations which result in law from the loan. This is the general case."There was a separate line of cases giving rise to a right to interest on a professional account after a year and a day had passed. It was in fact such an account which was considered in Blair's Trs and the one year provision was, there, described as "the old rule".
As the SLC noted, "[a]gainst this background of fragmented development, it is not surprising that the Institutional writers found it difficult to achieve a satisfactory categorisation of entitlement to interest". Professor Erskine saw the decisions as examples of an entitlement to interest arising as a matter of law "from the nature of the transaction", whilst Professor Bell categorised the various circumstances in which interest was due as arising nomine damni, from statute, or from contract, express or implied, with his class of contractual implication covering most of Erskine's examples. Still, whatever the academic attempts to create an overarching set of principles, there was little support for such an analysis arising from the case law itself.
Then, came two decisions. In Carmichael v Caledonian Railway Co (1870) 8M (HL) 119, the sum sued for was sought by way of compensation payable to a landowner by a rail company and interest was awarded from a date a decade before the award was made. Lord Westbury, in a passage which was clearly obiter, said:
"Interest can be demanded only in virtue of a contract, express or implied, or by virtue of the principal sum of money having been wrongfully withheld, and not paid on the day when it ought to have been paid."The only Scottish judge, Lord Colonsay, dissented and said:
"It does not require a special contract for it in order to make interest due, nor does it require that there be any clear culpa or blame on the part of the person who has not paid the price at the proper date; as, for instance, the vendor may not be in condition to give a clear title, but the purchaser may have been put in possession of the property purchased."
However, as the Scottish Law Commission noted, it is Lord Westbury's dicta that survived and formed much of the subsequent development of the law on the basis of the idea of "wrongfully withholding".
In Blair's Trs, a lawyer had died without rendering an account for work carried out over a period of years. (Some things, clearly, never change). No request for payment had been made before the raising of a multiplepoinding action and so the court did not have to decide whether interest might run before action was raised. However, Lord Fraser felt that:
"In my opinion no interest ought to be allowed on such claims on open account, except when there is a judicial demand, or some such intimation given in writing as is required by the English statute, viz., that interest will be claimed from the date of the demand. In such a case the Court would in its discretion allow interest prior to the period of citation."Although it is, at least, doubtful that this was an accurate statement of Scots law, nine years later Lord Shand opined, in the English case of London, Chatham and Dover Railway Co v South Eastern Railway Co [1893] AC 429:
"In [Scotland] it is the common and ordinary practice, in bringing an action for money which is due, to conclude not only for the payment of that money but for the payment of interest upon it from the date of citation or service of the summons, and interest is decreed as a matter of course on whatever balance is found to be due. I may even say that it is a rule which has received general effect, that where money is shewn to have been due and to have been demanded, interest runs if the demand or request of payment is not acceded to. That is the case, even although too large a sum may have been demanded. If it be found that a sum short of what was demanded is due, still the law gives interest unless the amount really due has been tendered. It is not necessary that an intimation must be made that interest will be demanded in order that interest shall run…"So, as the Scottish Law Commission summarised it:
"Lord Westbury's criterion of wrongful withholding came to be regarded as a statement of the general principle according to Scots law. It was reconciled with Lord Fraser's opinion in Blair's Trs v Payne on the basis that as a general rule money is not wrongfully withheld unless and until a judicial demand for payment has been made: ie an action has been raised, at which time wrongful withholding begins."In its view, although:
"the law of Scotland in relation to interest on debt has evolved in a piecemeal fashion and without any general underlying principle [there are nevertheless]...various categories of circumstances in which a sum owed by one person to another will carry interest [which]...are reasonably clear and are as follows: interest may be due on a debt
(a) by agreement between the parties;
(b) by express statutory provision;
(c) by implication at common law; or
Further:(d) by virtue of a principal sum being wrongfully withheld."
"The general rule is that money is not wrongfully withheld unless and until a judicial demand for payment has been made and, accordingly, interest will normally run from the date of citation. The rule has not always been regarded as invariable. In many cases, the task faced by the court has been to attempt to identify a time from which money could be said to have been wrongfully withheld."And:
"The results have not been consistent. In some cases, it has been accepted by the court that interest could not begin to run until the amount due has been agreed by the parties, or certified by an architect, or ascertained by a third party such as an arbiter; in others, that even when the amount claimed was thus ascertained, interest could not begin to run until the date of citation. On the other hand, it has sometimes been accepted that interest might, depending upon the whole circumstances of the case, begin to run before the date of citation."As the Commission noted, this is not instantly reconcilable with the decision in Dean v Borthwick 1983 SLT 533
"There is here a rule of law, a rule that interest runs from citation, and one which does not admit of modification by the exercise of judicial discretion. The pursuer, ex hypothesi of the court's decree, has been deprived of the use and fruit of the sum for which decree has been granted during the period of non-payment, ie since the formal judicial demand was made, while conversely the defender wrongfully has enjoyed that use and fruit."The law regarding entitlement to interest on damages developed in a similar way, with increasing recourse to the idea of wrongful withholding but there was specific statutory intervention in the form of the Interest on Damages (Scotland) Act 1958 and the Interest on Damages (Scotland) Act 1971, the upshot being that interest could be claimed on an award of damages from the date on which the right of action arose, not formal citation in the court action. How to deal with interest on damages claims for breach of contract causing loss other than personal injury proved troublesome, however, and the courts held in some cases that the pre-1958 idea of wrongful withholding was still the determining one. The Commission summarised the law as follows:
"Where a court grants decree for payment of damages other than for personal injury, the interlocutor may include decree for payment of interest, at such rate or rates as may be specified, on the whole or any part of the sum awarded for the whole or any part of the period since the date when the right of action arose. The terms of the section thus give the court a wide discretion in relation to all aspects of the award. However, the court has declined to treat the discretion as unqualified, preferring instead to apply the principles of the pre-1958 case law, and notably seeking to establish the date from which the sum in respect of which damages are being awarded may be said to have been wrongfully withheld...The rate of interest will normally be the full judicial rate from time to time specified by the relevant rules of court."The Commission produced its report on "Interest on Debt and Damages" (Scot Law Com No.203) in 2006. The Scottish Government undertook further consultation, including the publication of a consultative draft Bill, but thereafter proceeded no further.
So far, so clear. But of course there is another question aside from the point from which interest, if due, can be claimed. What is the appropriate rate? The applicable rate is the "judicial rate". Rule 7.7 of the Rules of the Court of Session provides:
"7.7.Where interest is included in, or payable under, a decree, it shall be at the rate of 8 per cent a year unless otherwise stated."Now, of course, the Bank of England Official Bank Rate has been 0.5% for some years and you won't easily find somewhere to get an 8% return on your money and yet the award of interest by the courts is intended to be compensatory, not penal. It was consideration of the combination of these facts that led the defenders in the case of Farstad Supply AS v Enviroco Ltd to invite the court to exercise a putative discretion to restrict the interest awarded on any sum to 1% above the Bank office rate. Lord Hodge gave a very careful and extensive exposition of the issues arising. he said:
"[23]There is a clear difference in the assumptions which lie behind (a) an award of interest as compensation for income forgone on funds spent on repairs and (b) an award of interest measured by a cost of borrowing to replace those funds. The former assumes that the pursuer has no borrowings to fund his general expenditure and thus is to be compensated for loss of the income he might have earned from those funds. While, absent a contractual entitlement, compound interest is prohibited in judicial awards, it is legitimate for the court to consider whether a set rate of simple interest provides adequate compensation in circumstances in which a pursuer in possession of the funds would have been able to have obtained compound interest in the market. This is an important consideration if many years have passed between the date on which the pursuer or claimant incurred the loss and the date of decree. I note that the Law Commission in its 2004 report (at paragraph 3.2) pointed out that a simple interest rate of 8 per cent would be the equivalent of a compound rate of 7 per cent after five years, and the equivalent of a 6 per cent compound rate after eleven years. It seems to me that historically the judicial interest rate has generally been above the return which most people can obtain on deposited funds, even on longer term deposits, and may have contained an element of protection against inflation which market rates often do not provide. The award of interest related to the cost of borrowing assumes that the pursuer will have to borrow to make up for the withheld funds. If one assumes that the typical pursuer funds part of his lifestyle or business through borrowing, the cost of further borrowing to make up for his disbursements on repairs may be a better measure of compensatory interest. It is well known that as a general rule a private individual or a small business entity pays more to borrow money than he or it could earn by lending it.
[24] The judicial rate has at best been an approximation of compensation for the loss of the income which the expended funds could have generated and has for several years exceeded what is readily available to the unsophisticated investor in the market. But an award of interest by reference to the rate available on instant access deposits would in my view amount to serious under-compensation in a context in which a pursuer has been involuntarily standing out of his money. The reasonably prudent pursuer, if he knew that he would have to wait several years before he could draw on his funds, would not be likely to invest in such an account. It seems to me that the court can properly take account retrospectively of the period between the date of the loss and the date of decree in its consideration of an appropriate rate or rates of interest. The general practice of the Commercial Court and the Admiralty Court in England and Wales in awarding interest at 1 per cent over base rate also is an approximation as many commercial borrowers would consider themselves very fortunate to be able to obtain funds at that rate.
[25] In both jurisdictions the courts have shown no appetite to complicate legal actions by attempting to calculate the value to the individual claimant of the monies withheld. Both have resorted to broad brush approximations. The difficulty which has arisen is that the market rates on most forms of deposit and on many forms of borrowing have moved so far from the judicial rate that the latter is not an approximation of the loss which pursuers have suffered from standing out of their money."
He decided that it was not within his power to award interest on a novel basis such as the rate of 1% above base rate but that the discretion given to him under section 1958 Act" allowed him to take into account the clear "mismatch" between the judicial rate and market rates in recent years. Looking at matters broadly,Lord Hodge saw 4 December 2008 (when the bank rate fell to 2%) as a watershed, after which he might modify the prevailing judicial rate and therefore allowed interest on the principal sum at the rate of 8%a year from 31 December 2002 to 4 December 2008 and at the lower rate of 4% a year thereafter. On refusing both appeal and cross-appeal, the Inner House note that "the law and practice in England and Wales on the allowance of interest [to which it had been referred] has itself been subject to considerable criticism" and explained:
"Reform of the law and practice of interest on debt and damages is thus a matter considered, but not taken up, by government in recent times. In these circumstances we do not consider that it would be appropriate for this court to proceed to innovate retroactively by what would be, at least arguably, in large measure a judicial and retroactive legislative implementation of measures along the lines of recommendations from the Scottish Law Commission which government is as yet unwilling to adopt."But the court concluded:
"[31] We would add that in our view it is plain that the mismatch between the judicial rate and interest rates prevailing in the financial world which has existed following the crisis of 2008 is a matter of concern. In the absence of a wider reaching reform of the law relating to the awarding of interest such as that canvassed by the Scottish Law Commission in its report, (which must be a matter for the Scottish Government and the Scottish Parliament), the responsibility for updating the current judicial rate, to meet that mismatch, falls to the Rules Council. It is for that council to consider - we would suggest urgently - the clear mismatch identified by the Lord Ordinary, which we ourselves would endorse, and which is widely recognised by all engaged in litigation before this court. For our part, having had the benefit of having had a perhaps wider examination of the law and practice in England and Wales than may have been available to the members of the council, we would, with great respect, suggest that in deciding upon a judicial rate applicable in civil proceedings in Scotland, the council should not feel inevitably thirled to the Judgments Act rate applied in some courts in England and Wales."Some commentators have opined that the Court of Session Rules Council is likely to heed this call to action. That seems unlikely, given that it is to abolished shortly and replaced with the Scottish Civil Justice Council envisaged by the Gill Report. In the meantime, the old adage "If you don't ask, you won't get" continues to apply, on both sides of the fence. Pursuers should consider seeking interest from the earliest date from which the wrongful withholding or cause of action tests might allow and defenders ought to have in mind the possibility of challenge on both date and rate. The larger the sum at issue, the greater the point and the more parties should be prepared to argue the case.
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