In October 2011 we reported on the Scottish case of Farstad Supply v Enviroco concerning the 8% judicial rate of interest on financial claims. The decision was appealed, and that was decided on 20 February 2013.
Interest rate of 8% too high
Prior to the economic downturn, a litigant would generally expect to recover interest on a financial claim at the rate of 8% a year, set by the rules of court. This judicial rate had been fixed at 8% since 1 April 1993. However, in view of the financial crisis and consequent reduction in the return on deposits, the Court of Session in this case (both at first instance and on appeal) departed from the usual 8% rate and applied instead a rate of 4% a year from December 2008. In doing so, the court noted the disparity between the judicial rate and that enjoyed by depositors using ordinary bank accounts. The bank base rate fell to 2% in December 2008, which Lord Hodge described as a "watershed".
The interest claim in this case was valuable, as it had been running since December 2002 on a figure of £1.7m. The defenders argued that even applying the 4% rate to a restricted period still afforded the pursuers a massive windfall in the present economic climate.
The appeal court upheld Lord Hodge's decision. However, they aimed some barbed comments at the Scottish Government for not acting upon various representations from bodies such as the Scottish Law Commission, that the judicial rate of interest is wholly mismatched with economic reality. The decision sees the court doing what it can to cater for that reality, within the restricted role they have in interpreting, but not making, legislation. The appeal judges considered that in these circumstances, the responsibility for updating the current judicial rate fell to the body who amend the rules of court, the Rules Council, and they should do something urgently.
Hopefully, this issue will be addressed soon in a formal rule change. Until then, interest continues to be a matter of negotiation.
A confusing twist?
Given the court's approach in Farstad it might come as a surprise that the very next day it issued a judgment refusing to take account of the economic downturn when ruling on the amount a seriously injured pursuer should recover for his future losses in an action for damages. When assessing compensation for a person's future loss of earnings, the court takes account of the fact that a pursuer will likely invest their compensation and enjoy some return on that investment over time. To cater for that a "discount rate" is applied to the sum awarded to recognise the increasing return likely to be enjoyed.
In Tortolano v Ogilvie Construction the pursuer sought to argue that a discount of 2.5% on his award was excessive as it failed to take account of the more limited rate of return which would be enjoyed in the current climate. He argued that reduced rates should be applied to the discount of his future losses. Predictably, the defenders' insurers argued that the rate should not be varied as it was set in stone by unambiguous legislation.
The court agreed with the defenders and in so doing removed the economic background from having any bearing on the assessment of damages.
Does the left hand know what the right hand is doing?
Whilst the decision in Tortolano is contrary to the approach taken by the same court the day before, the devil, as always, was in the detail of the legislation being considered by the court in each case. The court appears to have concluded that the legislation in the injury case afforded far less discretion than the material legislation in the commercial case. In both cases however the court was at pains to point out to Parliament and Government the urgent need to review the law governing issues such as interest or other monetary rates in the light, or perhaps the shadow, of the still harsh economic climate.