Following the US Federal Reserve’s increase in interest rates by 0.75% on 20 September 2022, the prime rate at JPMorgan Chase & Co, Citigroup Inc and Wells Fargo & Co has risen to its highest level since 2008. What has this to do with English law? Simple. If you contract in currencies other than sterling, the chances are that a court or tribunal determining an English law dispute will find that the rate applicable to that currency will be valid when determining applicable interest. So, if a party contracts in US dollars, then when interest is assessed (absent express provision), it will potentially be dealt with by reference to the US prime rate, which as at 22 September 2022 is 6.25%.

The Bank of England raised its base rate on 22 September by 0.5%, its highest level since the 2008 financial crisis, meaning that it has been raised by 2% since the beginning of 2022. The US Federal Reserve rate is now in the 3-3.25% range, having increased in May for the first time since 2000 and again on 20 September. Where parties do not provide effectively for an applicable interest rate in their contract, they risk interest on the sum which is or has been in dispute becoming subject to centrally controlled interest rates. As these appear to be on an upwards trajectory, the potential liability could be significant. This is a particular risk where the principal sum is considerable or the claim is not brought or concluded for some years from the date on which the cause of action accrued.

Pre-judgment interest

Section 35A of the Senior Courts Act gives the court wide discretionary power to award interest but not for a period to which interest has already attached, meaning that where a rate of interest is validly provided for in the contract, the court will award interest at that rate.

Where the contract does not provide or does not validly provide for a rate of interest, the Commercial Court has followed the principle of awarding interest at 1% above the Bank of England’s base rate, although this is not a presumption and can be displaced (Kitcatt and others v MMS UK Holdings Ltd and another [2017] EWHC 786 (Comm)). Any volatility as to the base rate will have ramifications as to what this rate would represent by the time any dispute arose. Parties should therefore have the trends affecting the base rate in mind at the agreement stage, particularly going forward in the current climate.

For claims for overdue payment relating to the sale of goods or services, the Late Payment of Commercial Debts (Interest) Act 1988 will imply terms into the contract for interest on the unpaid debt to accrue from the due date of payment. This will be at a rate of 8% above the Bank of England’s base rate. Parties should be wary of the potential effects of increases to the base rate; currently the rate of interest should the Late Payments Act apply would be approaching 10% and may increase further.

There is scope to contract out of the Act, but under section 8(1) the contract must provide some ‘substantial contractual remedy for late payments and should it not, exclusion of the Late Payments Act will be void and the full rate of interest provided for in the Act will apply. Nonetheless, a carefully drafted alternative which satisfies the requirements of section 8(1), while unlikely to successfully exclude the provisions of the Act in favour of a significantly reduced rate of interest, should offer greater certainty as to potential liabilities.

Post-judgment interest

The underlying principle of a judgment debt is that once judgment is given, the debt flows from the judgment itself rather than from the contract, and the successful party becomes a creditor under the judgment. The statutory rate of interest on High Court judgment debts has been 8% since April 1993. Parties may agree by express provision that a covenant to pay interest will not merge with the judgment debt and that the creditor will then remain entitled to contractual interest. The courts now have the power to award statutory interest on a judgment debt, and have made clear that the existence of an express provision as to post-judgment interest will not have the effect of depriving a creditor of its right under a judgment debt to receive statutory interest (Standard Chartered Bank v Ceylon Petroleum Corp [2011] EWHC 2094 (Comm)).

The practical effect of this is that, if the contractual rate of interest is less than the 8% judgment rate, the creditor under the judgment debt is likely to be entitled to the difference. It is therefore difficult to avoid at least a judgment rate as the paying party, although it does remain open to the parties to agree that a contractual rate will apply post-judgment. As described above, a contractual rate below 8% is likely to be overcome by a creditor’s statutory entitlement whereas if a contractual rate is greater than the judgment rate, parties potentially risk becoming involved in costly arguments in the course of litigation that it is a penalty rate.

The effect of currency

Where a contract does not expressly provide for a relevant rate of interest, the proper question for the court to identify the rate has been established as a ‘borrowing rate’. In Tate and Lyle Food and Distribution Ltd v Greater London Council [1982] 1 WLR 149¸ the court considered that the appropriate rate in commercial claims is the applicable interest had the claimant borrowed the withheld funds during the relevant period. The court will look at the rate at which claimants, in general, borrow money rather than considering the circumstances of that particular claimant and the specific borrowing rate which they might attract.

The court in Tate and Lyle held that the ‘borrowing rate’ in that case was 1% above the minimum lending rate, or the Bank of England base rate. Following that principle, sums in non-sterling currencies will attract a rate of interest relevant to that currency rather than being based on the Bank of England rate as explained at the start of this article. In Kuwait Airways Corp v Kuwait Insurance Co [2000] Lloyds Reps 678, the court found that the nearest equivalent of a commercial ‘borrowing rate’ of base rate plus 1% in respect of US dollars was the US prime rate.

Under section 44A of the Administration of Justice Act 1970, the court has discretion as to the rate of interest it awards on judgment debts in other currencies. As demonstrated by Standard Chartered, even where the contract provides for English jurisdiction, this would not in itself be sufficient to award the applicable statutory judgment rate of 8%. The court in that case rejected the contractual rate of interest post-judgment and followed the principle in Miliangos v George Frank (Textiles) Ltd [1977] QB 489, [1976] 5 WLUK 45 to award the US prime rate to that judgment debt. This resulted, at that time, in a significantly lower rate of interest post-judgment than the 8% which would have been anticipated on a claim in sterling.

A few further thoughts

Uncertainty about applicable interest rates has the potential to expose parties to unexpected liabilities at the end of the dispute resolution process. In the current inflationary environment and where rates seem likely to keep climbing, this is worth considering now, as many will have forgotten the days of higher rates and the impact that these can have.

While considering these questions, do also take time to review whether the dispute resolution clause that you are using is suitable for the particular transaction or trade. As part of this process, it will be worth considering the cost of any dispute resolution procedure, the enforcement landscape and, of course, the Bilateral Treaty position, should you be investing out of your home jurisdiction.

There may be trouble ahead but steps taken to mitigate future risk should allow you to face the unknown with more confidence.