A House of Lords decision has widened the circumstances in which compound, as opposed to simple, interest can be claimed where such a claim has not been contractually provided for. Previously, an award of compound interest was available in certain claims for equitable relief (where there was a fiduciary element) but only exceptionally would it be awarded in other claims, particularly debt claims or breach of contract claims. Now, not only is it clear that compound interest can be claimed in restitution cases, it also appears that it can be claimed as damages for losses actually suffered in claims for breach of contract and in tort.
Sempra Metals Ltd v HM Commissioners of Inland Revenue involved the premature payment of corporation tax by Sempra. In effect, Sempra lost the use of the money it had paid prematurely to the IRC. Its claim to recover a sum equal to the interest that would have been generated by the premature payment was based on unjust enrichment in respect of the use of the money by the IRC for the longer period of time. The claim for interest was the principal (and only) claim.
The House of Lords held unanimously that a restitutionary claim for the award of compound interest was valid. Where a recipient has had the benefit of a sum of money for a longer period than should have been the case then the payer is entitled to recover compound interest on that money for that period of longer use. The recipient has received and should be required to restore that benefit to the payer. Two out of the five Lords held that the presumption is that the benefit received is the cost incurred in borrowing the money, which is assumed to be at a commercial rate involving the payment of compound interest and not (generally) the benefit actually received by the recipient. However, a defence may be available if the recipient can prove that it has not in fact received compound interest on the money or a benefit equivalent to such interest. The general defences in restitutionary claims (change of position, waiver, estoppel by representation, etc) would also apply.
The Lords made it clear that their judgment was a recognition of the commercial reality that money is lent and borrowed on terms requiring the payment of compound interest such as in relation to commercial borrowing, an overdraft, credit cards, a mortgage or when depositing savings with a bank or building society.
Such a claim is an independent and free standing claim. It is not ancillary to or dependent on a claim for return of the principal sum, to which the payer may no longer be entitled, as was the case here. In addition, and very importantly, although the claim in Sempra was not formulated as a debt claim, all five Lords went on to say (albeit on a non-binding basis and contrary to the former view) that in any claim for the non-payment (or late payment) of debts as well as other claims for breach of contract or in tort, interest is, as a matter of principle, recoverable as damages subject to proof of loss, mitigation and remoteness issues. Such claims for interest will have to be specifically pleaded as a separate item of loss. A mere general claim for “damages” will not suffice and the court will not presume interest losses.
Unfortunately, although the decision on the restitution claim was unanimous, the basis of their Lordships’ opinions varied, and particularly in how the interest should be calculated and whether the presumption referred to above should apply. This will lead to some debate about its correct interpretation and application in practice.
On its face though, this is a far-reaching judgment. The nonbinding statement is likely to be followed although, again, we will have to wait and see how this part of the judgment will be approached by the courts in practice. At the very least it appears that the door is firmly wedged open for such claims.
So what could this mean for lenders?
Be more aware of the scope for claims for compound interest
Where a payment has been made under a mistake of fact, for example when a cheque has been honoured in breach of mandate, a claim for restitution against the non-customer will follow. Consider claiming the return of the monies paid away and making a separate claim for compound interest in respect of the use of the money for the period of time since payment. The lender should have no difficulty in showing that it would have earned compound interest had it retained the money. But, there may be a defence, especially if the recipient is an individual and can prove that it has not received compound interest or an equivalent benefit. The onus is on the recipient to prove this.
Remember there may be a free-standing claim
Even if, in the circumstances suggested above, a change of position defence is proved and the principal sum is no longer recoverable, there will still be a free-standing claim for compound interest for the use of the money for the period between the payment and the recipient’s change of position.
Consider limitation issues and disputes over the applicability of terms and conditions
If there is a dispute as to the bank’s terms of borrowing or where perhaps more than six years has expired since a mistaken payment out to a customer occurred, consider the possibility of making a claim for recovery of the benefit obtained by the payee. While a claim based on the contract terms may be difficult or even statute barred, a claim in restitution based on a payment by mistake may not.
Difficulties in avoiding an award
If a restitutory claim is brought against a lender in respect of unjust enrichment, the lender is likely to find it difficult to avoid an award of compound interest against it.
Proving loss in debt claims
In claims for non or late payment of debts against them, lenders should be alert to whether a claimant can actually establish a loss equivalent to compound interest which it will need to do