Interest on debt and damages
[Project now completed]
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.
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.
A summary of the main recommendations can be found in the news release issued with the Report.
For further information, please contact firstname.lastname@example.org.
Page archive date: 7 November 2006