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You are here: BAILII >> Databases >> The Law Commission >> Pre-Judgment Interest on Debts and Damages (Report) [2004] EWLC 287(9) (23 February 2004)
URL: http://www.bailii.org/ew/other/EWLC/2004/287(9).html
Cite as: [2004] EWLC 287(9)
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PART IX
TRANSITIONAL ARRANGEMENTS
THE POLICY ISSUES9.1 The final issue is to what extent compound interest will apply retrospectively, to causes of action that have already arisen. This involves a difficult balance between the need to implement one single simple system, and the need to respect existing arrangements made on the basis of the current law.
A single system9.2 On the one hand, it is important that litigants and their representatives should only have to deal with one interest regime. The continued dominance of the 8% figure suggests that many lawyers find it difficult to cope with more than one interest rate. It is important to provide a reasonably simple system that lawyers can grasp and implement without undue difficulty. We fear that if the old and new systems co-exist for a long transitional period, this will represent a complexity too far.
9.3 We particularly wish to prevent a system arising whereby the same damages carry interest under two separate regimes. This could bring the compound interest system into disrepute as, for the first few years, litigants were forced to carry out relatively complex calculations for paltry results.
9.4 Yet if compound interest is introduced only for causes of action that arise after a particular date, it would take many years for the system to have any real effect. By that time, many lawyers will have forgotten that compound interest has been introduced. The reforms could suffer from the same lack of awareness that has bedevilled the introduction of the Late Payment of Commercial Debts (Interest) Act 1998. Ideally, compound interest would be available for all cases issued after the start date, for the whole period of the debt or damages. This would mean that system would start with "a bang" and could be given maximum publicity.
Respect for existing arrangements9.5 On the other hand, it is important to respect existing arrangements. Where defendants have organised their affairs on the basis of one law, it may be unfair to change that law retrospectively.
9.6 For example, if defendants have delayed paying their debts in the expectation that they will be required to pay only simple interest, would it be unfair to impose compound interest retrospectively? In most cases, the answer will be no. Unlike the 1998 Act, these reforms are not intended to impose a penalty. Defendants were aware that if they delayed payment, they would be liable to compensate the claimant for the loss. These reforms are simply intended to provide a more accurate measure of compensation. In many cases, reductions in the rate will offset the effect of compounding.
9.7 The argument is different, however, where defendants have insured against their loss for a specific premium, assessed on the basis of existing law, and where compound interest would add significantly to their costs. This problem is most likely to arise in personal injury claims, where there have been long delays between the loss arising and the issue of the claim because the claimant is a child or under a disability. As discussed in Part VII, compound interest starts to add significantly to costs after 15 years. In practice, these very long cases tend to concern birth or other childhood injuries caused by clinical negligence.
9.8 Similar arguments do not apply to other areas. Although there may be some long-tailed professional negligence claims against lawyers or accountants, for example, they are much less common because the victim is unlikely to be a child or under a disability. In industrial disease claims, there may be long delays between accident and issue because the loss takes time to reveal itself. However, for current purposes, the crucial interval is between loss and payment, not between the accident and payment, so very long interest payments will only arise occasionally. Our concern here is not with the occasional individual case but where the possible cost increases are sufficiently large or widespread to disturb the basis on which the insurance is issued. Outside the area of clinical negligence, cost increases in a few very longrunning claims will be offset by savings in the rate paid on more recent claims.
THE OPTIONS9.9 There are several ways in which the reforms could be introduced. Furthermore, the recommendations for a specified rate and for compounding could be introduced in different ways. Either (or both) could apply
(1) only to cases in which the cause of action arises after the start date;
(2) to cases in which claims are issued after the start date, whenever that cause of action arose; or
9.10 In the case of (2) or (3), the specified rate and/or compounding may be available either(3) to any award or settlement that takes place after the start date.
(1) to the whole debt or damages, from when the cause of action arose; or
9.11 In our view, the first option (applying only to causes of action after the start date) would seriously reduce the benefits of the reforms. On a practical level, the co-existence of two separate interest regimes for up to twenty years would be too complex for litigants, lawyers and the courts to cope. Similarly, we have rejected the final option, of mixing compound and simple interest in a single case. This would make the system so complex as to bring it into disrepute.(2) only to the period after the start date. This would mean that cases with a cause of action before the start date which were settled after the start date would carry simple interest for part of the time, and compound interest for part of the time.
OUR VIEWS9.12 We recommend that the specified rate should apply to all judgments or payments made after the commencement date. We do not think this would be an unwarranted retrospective change. At present, the rate is discretionary: our reforms would simply replace an open-ended discretion with a more structured discretion. The rate we propose is the same as the rate most commonly used in large commercial cases, and averages out as very similar to special investment account rate since 1980. If there is a good reason for using another rate, the court may do so. The reform is designed to stop the court from using another rate (such as 8%) when there is no good reason to.
9.13 Our recommendations in Part VI are designed to ensure that tables are widely available showing the specified rate for the last 20 years. We expect that once the reforms are introduced, lawyers, judges and court staff will rapidly become used to tracking the specified rate over time.
9.14 Our reforms on compound interest should apply to most types of case (such as contract, intellectual property) where proceedings are issued after the commencement date.
9.15 For clinical negligence cases, the introduction of compound interest could be delayed for up to, say, five years. In other words, if in contract cases compound interest were available for any proceedings issued after 1 January 2006, for clinical negligence cases it might be available for any proceedings issued 1 January 2011. We hope that this would allow (and encourage) clinical negligence defendants to clear the current backlog of long-standing cases without incurring the expense of compound interest.
9.16 As a long-stop, the Secretary of State should have the powers to make special transitional provisions for particular classes of case. If it becomes clear that current level of long-running clinical negligence claims is unlikely to reduce in the medium-term, they could be treated differently. For example, clinical negligence claims could be subject to compound interest only if the cause of action arose after the commencement day.
9.17 We recommend that:
(1) the specified rate should apply to all judgments or payments made after the commencement date.
(2) in most types of case, compound interest should apply to any case where proceedings have been issued after the commencement date.
(3) The Secretary of State should have the power to make special provision for some classes of case, so that they are only subject to compound interest if the cause of action arose after the commencement day.
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