Background

The default judicial rate of interest is currently fixed at 8% which compared with the prevailing market rates appears pretty generous. A recent case in the Court of Session considered this issue.

The parties, Farstad Supply AS and Enviroco Limited, agreed to reach an extra judicial resolution of their dispute which involved the payment of £1,750,000 by Enviroco to Farstad. The Court was asked to give effect to the parties' settlement terms, which included a provision for the rate or rates of interest to be determined by the Court. The Court was asked to decide what rate of interest to apply.

The Arguments

Enviroco's position was that the default judicial rate was excessive and that Farstad should only be entitled to a rate of interest which would put them in the same position as if they had not suffered any loss and damage. The rate should not confer a bonus which could not be obtained on the open market. The Court was invited to exercise its discretion to fix a rate or rates of interest to take account of the discrepancy between the current default judicial rate and the prevailing market rates.

Farstad responded that the court should follow general practice and award interest at the default judicial rate. While there may be some evidence that the judicial rate was over-compensatory, the Court did not have the evidence before it to judge at what point in the years between 2002 (when the loss and damage had arisen) and 2011 (when the action was settled extra-judicially) the rate had become over-compensatory or by how much. Additionally, while the judicial rate was generally meant to be compensatory in nature, it was also said to promote certainty and facilitate settlements.

The Judgment

Farstad were awarded interest at the current default judicial rate of 8% from 31 December 2002 (the date the cause of action arose) to 4 December 2008. By December 2008 the official bank rate had fallen to 2%. The Court decided that from that date onwards interest should be applied at a rate of 4% until the date of the Court's Interlocutor disposing of the action in terms of the extra-judicial settlement to take account of the "clear mismatch between the judicial rate and market rates in recent years".

Comment

In this case, Farstad still benefited from interest being applied at 8% from December 2002 to December 2008. Nevertheless, it is clear that the Court was prepared to look at the wider economic circumstances and apply a revised interest rate from December 2008 onwards to reflect more accurately the market conditions which have prevailed since then.

The judicial rate has been fixed at 8% since 1993, at which time the economic climate was very different. In 2006, the Scottish Law Commission recommended a judicial interest rate of 1.5 above the base rate of the Bank of England. Further developments seem likely.