In a recent judgment, the Supreme Court has held that the fact that a guarantor’s liability was capped had no legal bearing on the application of s22 of the Courts Act 1981 which permitted the court to award Courts Act interest in excess of that cap and that the guarantor could not rely on interest provisions in the principal contract to exclude the application of the Act to him.

S22(1) of the Courts Act 1981(“the 1981 Act”) gives a court discretion to award interest on a monetary judgment in respect of the period between the accrual of a cause of action and the date of that judgment. However, under s22(2)(b) this provision does not apply “in relation to any debt upon which interest is payable as of right whether by virtue of any agreement or otherwise”.

In First Active plc v Cunningham,1 the defendant had provided a capped personal guarantee for the debts of certain companies which he controlled. The High Court granted judgment to the plaintiff on foot of this guarantee up to the full amount of the cap. It subsequently ordered that, in addition to this amount, the defendant should also pay Courts Act interest on this amount then set at 8%. This resulted in a final award some 43% above the cap.

On appeal, the defendant argued that this rate was punitive and that Courts Act interest was excluded here under s22(2)(b) of the 1981 Act as there were existing interest arrangements in the loan agreements which he had guaranteed. The fact that no interest accrued as part of the guarantee arrangement itself was irrelevant. The court must look to the terms of underlying debt arrangement to determine whether Courts Act interest could be awarded.

McKechnie J rejected this argument. He held that in any surety situation there were at least three parties involved, and most probably at least two contractual arrangements. The first contract was between the creditor and the principal debtor. In the vast majority of cases, it was only where there was a default here that recourse was necessary to the second contractual arrangement, which, although part of the overall transaction, was legally separate and distinct from the first arrangement.

When demand was made under a guarantee, the rights of the creditor and the obligations of the guarantor were to be found solely within that contract. The terms and conditions of the first arrangement were irrelevant. Accordingly, any requirements placed on the principal debtor, including any obligation to pay interest, could not be imputed to the guarantor unless the same or comparable provisions were contained in the guarantee document.

He also held that the fact that the guarantor’s liability was capped had no legal bearing whatsoever on the application of s22 of the 1981 Act and rejected an argument that the rate of 8%, since reduced to 2%, was penal in nature.

Finally, he set out examples of matters which may be relevant to the exercise of the court’s discretion, either in the granting of Courts Act interest per se or in respect of the period for which interest might be appropriate. These were:

  • The nature of the case;
  • The reasons why the debt was not discharged at an earlier date;
  • The conduct of each party to the litigation;
  • The reason for the passage of time or delay in the processing of the litigation;
  • The absence of any contractual clause dealing with interest in circumstances where its existence might be expected;
  • The desire to achieve full restoration, but no more, for the judgment creditor; and
  • The avoidance of penalising the judgment debtor.