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Interest on Debt and Damages
Commissioner
Mr Colin Tyre QC
The Commission's Report on Interest on Debt and Damages (Scot Law Com No 203) has now been published. The report embodies our recommendations for reform of the law of interest on debt and damages and includes draft legislation designed to give effect to those recommendations.
Purpose and Scope
This project derives from a reference from Scottish Ministers in November 2003 which requested the Commission examine the current law on how interest is applied to claims for payment arising from contractual and other obligations and make recommendations for reform.
In scope the project encompasses claims within the jurisdiction of tribunals and courts, and claims submitted for decision to arbitration, adjudication and other forms of dispute resolution.
Background
Following consideration of the current legal position, the Commission identified three main deficiencies in the law in this area:
- The treatment of interest is, unjustifiably, inconsistent between claims arising from debt and claims arising from damages.
- In debt claims, interest is not payable unless the sum has been "wrongfully witheld." For contractual debts this means that interest does not begin to run from the date payment fell due, but rather from the date on which court proceedings were commenced.
- The current judicial rate of interest (8%) is inconsistent with prevailing commercial rates and the idea that the purpose of an award of interest should be to compensate the claimant in realistic commercial terms. In the Commission's view interest should not be punitive.
In light of this critique the Commission formulated the set of draft proposals set out in the Discussion Paper on Interest on Debt and Damages (DP 127) which was published for public consultation between January and April 2005.
Respondents to the consultation paper generally endorsed the Commission's appraisal of the current problems and proposals for reform. Taking into account consultees' views the Commission proceeded to formulate the recommendations now contained in the Report on Interest on Debt and Damages (Scot Law Com No 203)
Summary of main recommendations
-
To provide consistency in treatment, interest should run on different types of
claim for money during the same period and at the same rate regardless of
whether the claim is for payment of a contractual debt, a non-contractual debt
or damages.
This period should commence on the date on which the
person lost the use of his or her money. Thus in cases of contractual debt
entitlement to interest will arise from the date on which payment fell due and
in damages claims from the date on which the loss in question was sustained.
The current judicial rate of
interest should be abolished and replaced by a statutory rate which would
fluctuate in line with the Bank of England base rate. Running at 1.5% above
base rate, it would reflect the rate at which businesses and consumers can
borrow and would provide adequate compensation to the claimant without being
punitive to the debtor.
The court's discretionary power in damages cases
(and its duty in personal injury cases) to award interest should be replaced
by an entitlement to interest on each head of loss.
In respect of all
claims there should be a judicial discretion to refuse, or reduce an award of
interest by reason of the conduct of the claimant. The conduct of the debtor
would not be a relevant factor.
Further Information
A summary of the main recommendations can be found in the news release issued with the Report.
Page last updated: 7 November 2006
