Interest, in the litigated as opposed to romantic sense, is one of those things that tends to be considered after the event. The ability of the courts to award interest has developed incrementally over the past 250 years

The initial position – that interest was not payable between the date that a debt became due and a claimant obtained judgment – was perceived not to reflect economic reality: the debtor had, in essence, an interest-free loan for the duration of the dispute and profited from his own wrong. Subsequently legislation was passed to enable simple interest to be recovered in certain circumstances and the common law and equity also expanded in discrete areas, although it was not accepted that interest as damages could be recovered.

The recovery of compound interest was even more restrictive, applying where the contract stipulated it, fraud or a breach of fiduciary duty had occurred, or it was foreseeable that the claimant would suffer onerous loss.

The award of interest (whether simple or compound) remained a matter of court discretion, rather than a claimant’s right.

Recently in Sempra Metals Limited v HM Commissioners of Inland Revenue the House of Lords indicated a greater willingness to award interest on a compound basis and to expand the scope of claims where simple interest is awarded.

Sempra was a test case against HM Inland Revenue concerning the payment of Advance Corporation Tax (ACT) by a number of UK subsidiaries of foreign registered corporations. After the European Court of Justice held that the ACT regime was illegal under EU law (because UK registered parent companies were able to elect not to pay ACT), Sempra sought to recover interest for the period during which the ACT had been held by Inland Revenue before it had been set off against Sempra’s tax liability.

The case went to the House of Lords who, on the facts of the case, allowed Sempra to recover compound interest in restitution (their claim for damages was time-barred). A number of statements were also made concerning the ability to recover compound interest and interest as damages (as opposed to interest on damages) generally. Several of the law lords noted that compound interest is an economic reality for most individuals and companies, with

Lord Nicholls saying that the law was “out-of-step with everyday life in the 21st century”. A number of law lords referred to the Law Commission’s 2004 recommendation that there should be a rebuttable presumption that claimants were entitled to recover compound interest for debts or damages of £15,000 or more.

Although the extent to which the decision will change the law is not clear (since the five separate judgments made a number of finely distinguished points), it appears the law has taken another incremental step in its handling of interest. The judgment will undoubtedly be drawn upon by future claimants seeking to recover compound interest and/or interest as damages and this could well have implications for insurers’ exposure and reserves.