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Cite as: [2008] ScotCS CSIH_27, [2008] CSIH 27

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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

Lord Kingarth

Lord Reed

Lord Marnoch

[2008] CSIH 27

A13/00

OPINION OF THE COURT

delivered by LORD REED

in the cause

RONALD EVAN WILSON

Pursuer and Respondent;

against

DUNBAR BANK PLC

Defenders and Reclaimers:

_______

Act: Haddow, Q.C, Davidson; Drummond Miller W.S. (Pursuer and Respondent)

Alt: Sandison; DLA Piper Rudnick Gray Cary Scotland LLP (Defenders and Reclaimers)

26 March 2008

Introduction

[1] During 1995 the pursuer completed a residential development in Edinburgh, comprising six flats. He had carried out the development with the assistance of borrowings from the defenders, which were secured over the development. As the pursuer was unable to repay the borrowings, the defenders called up their security, and took possession of the subjects in September 1996. The subjects were subsequently sold. In the present action, the pursuer seeks damages from the defenders on the basis that they failed to sell the subjects for the best price that could reasonably have been obtained, contrary to their duty in delict and under section 25 of the Conveyancing and Feudal Reform (Scotland) Act 1970.

[2] That contention was upheld by the temporary judge. He found that the development had been sold as a whole to an investor, without any meaningful attempt to sell the individual flats on the residential market, where a higher price could have been expected to be achieved. He quantified damages on the basis that the subjects should have been sold by 31 December 1996 for a total sum of about £255,000 (which would have enabled a net balance to be paid to the pursuer after satisfaction of his debt then due to the defenders), rather than (as was in fact the case) being sold in October 1997 for £195,000 (all of which was applied in satisfaction of the debt then due to the defenders). After taking account of the pursuer's borrowings at the relevant dates, and the additional expense which would have resulted from a sale at a higher price than was in fact achieved, the resultant award of damages was £66,400. The judge also granted decree for interest on that sum at the rate of 8 per cent per annum for the period from 31 December 1996 to the date of decree. The interest so awarded amounted to £50,600. The judge in addition specified that interest should run on the aggregate of the damages and the interest to the date of decree (a total sum of £117,000) at the rate of 8 per cent per annum from the date of decree until payment.

[3] In the present appeal, no issue is taken with the judge's conclusion that the defenders failed to perform the duties in question. It is however maintained that he erred in his assessment of damages and in his treatment of interest.

Damages

[4] A number of arguments were advanced in criticism of the judge's approach to the assessment of damages. First, it was submitted that he had erred in deciding that proof of loss could be found in the evidence of a valuation expert, Mr Watt, who had provided a report to the defenders in September 1996, advising them on the value and marketing of the flats. Counsel drew attention to the language used by the judge at paragraphs 178-179 of his Opinion:

"[178] In my opinion the evidence given by Mr Watt as to what might have been achieved had adequate marketing to the residential market taken place, provides a sound basis for the quantification of the pursuer's loss.

[179] Furthermore, in assessing the pursuer's loss as a result of the defenders breach of duty, I consider that an appropriate yardstick is the acceptable evidence on what the flats ... could have realised in the residential market if adequate marketing had been put in place."

While the language used by the judge in that passage ("might" and "could") permits the argument to be advanced, it is clear from other parts of his Opinion that he understood the need for loss to be established on a balance of probabilities. At paragraph 176, for example, he said:

"The critical questions are whether there is sufficient proof of the existence of an available market, which as a result of breach of duty on the part of the creditors, has not been approached, and which, if approached, would have been likely to have produced a better price than was in fact achieved".

[5] Secondly, it was submitted that the judge had fallen into error in assessing damages on the basis of the price achievable in an available market, when there was no evidence that there was some person in the market who would have paid more than was actually paid. Counsel referred in that regard to the Opinion of Lord President Hope in Dick v Clydesdale Bank plc 1991 SC 365. That case concerned the sale of agricultural land on the open market. The sale was criticised by the pursuer on the basis that the land had been sold without regard to what he described as its "hope" value for development. The pursuer's averments were held to be irrelevant, the Lord President stating (at page 371):

"The pursuer's averments about the hope value indicate that the amount of the discount from the net developable value of the subjects, which is substantial, all depends upon how high the purchaser considers the hope to be. This in turn raises the question whether there was in fact anyone in the market at that time who was willing to pay more than the agricultural value of the land to reflect this. It is this question which the pursuer's averments completely fail to address....It is clear that, because of the planning history of the land and the lack of positive indications in favour of permission for development at the time of the sale, it would have been a wholly unreasonable restriction on the defenders' right to sell the subjects for them to be required to have insisted on a price which reflected a hope value for development before they accepted any offer received by them after advertisement. In my opinion the creditor is not to be subjected to the risk of challenge simply on the theory that the subjects may have had a greater value than was realised by the sale. What matters is the reality of the market place in which the subjects are exposed at the time when he decided to sell. So long as he takes all reasonable steps to attract competition in that market it can be expected to find its own level and establish what the property is worth. The creditor is to be criticised for not taking further steps to attract an appropriate purchaser only if there is evidence to show that had these steps been taken a better bargain would have been achieved. So it would only be if the pursuer is in a position to prove that there was somebody in the market at the time who could be reached by advertisement in the manner described by him, and who was willing to pay an enhanced value to reflect the hope of development, that his case against the defenders can get off the ground. His failure to aver that any such person existed, and that a price at the enhanced value was in fact capable of being obtained in the market at the relevant time, is fatal to the relevancy of his case."

[6] Although counsel for the defenders relied on these observations, they appear to us to have no application to the circumstances of the present case. The problem in the case of Dick was that the pursuer had failed to identify an available market which, if approached by way of appropriate marketing, would have been likely to produce a better price than was in fact achieved. In the context of agricultural land said to have "hope value", the identification of an available market required, in effect, the identification of a potential buyer. In the present case, on the other hand, the judge's conclusions that the flats were not marketed in the residential market, and that they should have been, were not criticised. As a result of the defenders' failure, the residential market was never tested, no potential individual purchasers were identified or made offers for the flats, and accordingly the market price was not established by the residential market. In those circumstances, the judge had no alternative but to proceed on the basis of expert valuation evidence as to the sum which could have been expected to be achieved if the flats had been properly marketed. It is implicit in such evidence that a market existed in which there were persons who could be expected to buy the flats at the prices estimated by the valuer. It was unnecessary, and would be unrealistic to expect, that the pursuer should prove that there were specific individuals who would have bought the flats in the residential market at particular prices.

[7] Thirdly, a number of criticisms were made of the judge's treatment of Mr Watt's evidence. Counsel observed in the first place that the judge's Opinion was issued 18 months after the conclusion of the proof, and 21 months after the relevant evidence had been heard. Counsel submitted that such a delay in rendering judgment tended to undermine confidence that the judicial process had operated effectively, and created a situation where an appellate court should scrutinise with particular care any finding of fact which was disputed on appeal. The critical findings in the present case were inferences drawn by the judge from the evidence of Mr Watt. An appellate court could evaluate the soundness of those inferences. The judge's findings were in counsel's submission not entitled to any special consideration, or were at least entitled to very little.

[8] Counsel's submission as to the consequences of delay in the issuing of an Opinion was based on the judgment of the Court of Appeal in Goose v Wilson Sandford & Co, 13 February 1998. In that case, the judge had made mistakes in his treatment of some parts of the evidence, and had failed to make any findings in respect of other material parts. He had also mislaid his notes of counsel's submissions. A ground of appeal was that the court should infer that the judge had forgotten parts of the evidence and had no clear recollection of the witnesses by the time he came to deliver his judgment. In the present case, on the other hand, the judge prepared a detailed Opinion of some 66 pages. He did so with the assistance of a transcript of the evidence. It has not been suggested that he erred in any respect in his recollection of the evidence. His Opinion contains what appears to be a careful account of the witnesses and their evidence. In these circumstances, although the delay is unsatisfactory, the complaint about delay takes the appeal no further forward. As was said by Lord Scott of Foscote, giving the judgment of the Privy Council in Cobham v Frett [2001] 1 WLR 1775 at pages 1783-1784:

"In their Lordships' opinion, if excessive delay, and they agree that 12 months would normally justify that description, is to be relied on in attacking a judgment, a fair case must be shown for believing that the judgment contains errors that are probably, or even possibly, attributable to the delay. The appellate court must be satisfied that the judgment is not safe and that to allow it to stand would be unfair to the complainant."

The approach of this court to the judge's findings in fact is accordingly that described by Lord Thankerton in Thomas v Thomas 1947 SC (HL) 45 at page 54:

"(1) Where a question of fact has been tried by a Judge without a jury, and there is no question of misdirection of himself by the Judge, an appellate Court which is disposed to come to a different conclusion on the printed evidence should not do so unless it is satisfied that any advantage enjoyed by the trial Judge by reason of having seen and heard the witnesses could not be sufficient to explain or justify the trial Judge's conclusion. (2) The appellate Court may take the view that, without having seen or heard the witnesses, it is not in a position to come to any satisfactory conclusion on the printed evidence. (3) The appellate Court, either because the reasons given by the trial Judge are not satisfactory, or because it unmistakably so appears from the evidence, may be satisfied that he has not taken proper advantage of his having seen and heard the witnesses, and the matter will then become at large for the appellate Court. It is obvious that the value and importance of having seen and heard the witnesses will vary according to the class of case, and, it may be, the individual case in question."

We would add to that familiar passage a citation from Lord Hoffmann's speech, with which the other members of the House agreed, in Biogen Inc v Medeva plc [1997] RPC 1 at page 45:

"It is true that in Benmax v Austin Motor Company Limited [1955] A.C. 370 this House decided that, while the judge's findings of primary fact, particularly if founded upon an assessment of the credibility of witnesses, were virtually unassailable, an appellate court would be more ready to differ from the judge's evaluation of those facts by reference to some legal standard such as negligence or obviousness. In drawing this distinction, however, Viscount Simonds went on to observe, at page 374, that it was 'subject only to the weight which should, as a matter of course, be given to the opinion of the learned judge'. The need for appellate caution in reversing the judge's evaluation of the facts is based upon much more solid grounds than professional courtesy. It is because specific findings of fact, even by the most meticulous judge, are inherently an incomplete statement of the impression which was made upon him by the primary evidence. His expressed findings are always surrounded by a penumbra of imprecision as to emphasis, relative weight, minor qualification and nuance (as Renan said, la vérité est dans une nuance), of which time and language do not permit exact expression, but which may play an important part in the judge's overall evaluation. It would in my view be wrong to treat Benmax as authorising or requiring an appellate court to undertake a de novo evaluation of the facts in all cases in which no question of the credibility of witnesses is involved."

[9] Against that background, counsel's numerous criticisms of the judge's treatment of Mr Watt's evidence can be dealt with relatively shortly. It was said, first, that Mr Watt was not an expert witness instructed for the purposes of the present proceedings, and as such under a duty to the court, but a valuer who had been involved in advising on the valuation and marketing of the flats at the material time. The suggestion appeared to be that less weight should therefore have been attached to Mr Watt's evidence. This appears to us to be a point without substance. The assessment of the credibility and reliability of the evidence was a matter for the judge. The fact that Mr Watt had provided his valuation at the time, for purposes unconnected with the litigation, rather than being instructed on behalf of one of the parties ex post facto for the purposes of the action, did not necessarily detract from his evidence: other things being equal, those might on the contrary be reasons for attaching greater weight to it.

[10] The next criticism was that the judge had omitted to mention a number of matters and therefore, it was submitted, must have failed to take them into account. We would observe that it cannot necessarily be inferred, from a judge's failure to mention a piece of evidence, that he has therefore forgotten or ignored it. As Lord Simonds said in Thomas at page 61,

"The trial judge has come to certain conclusions of fact; your Lordships are entitled and bound, unless there is compelling reason to the contrary, to assume that he has taken the whole of the evidence into his consideration."

In the present case, the "omissions" in question appear to us to be unsurprising, and we draw no adverse inference from them.

[11] It was said, first, that the judge had omitted to mention the "fact" that Mr Watt had no expertise in the valuation of residential properties in the east of Scotland; that there was a lack of comparable properties on which to base a valuation; that the content of his 1996 report was essentially hearsay, in that it relied heavily on the views of another surveyor; that he had apparently not inspected the subjects himself; and that his report was produced without any knowledge of the previous marketing of the subjects.

[12] What Mr Watt said in evidence was that his area of practice in geographical terms covered the whole of Scotland, so far as development appraisals were concerned, and the west Central Scotland area, so far as individual houses were concerned. The property in question was unusual in that it was located in an area of publicly owned housing with few if any comparables. He had his own views of the property, but because it was a unique development he engaged a local surveyor so as to obtain what he described as "a second opinion". It was not suggested to Mr Watt in cross-examination that he lacked relevant expertise, or that his report reflected the views of the Edinburgh surveyor rather than his own opinion. The suggestion by counsel, in this appeal, that Mr Watt had apparently not inspected the subjects, rests upon his response, when asked for his view of another surveyor's description of the subjects as "reasonably attractive" and "generally furnished to reasonable standard in keeping with normal marketing expectations", that he could not comment. The matter was not pursued further. It was not suggested to him that he might not have inspected the subjects. His report, on the other hand, to which he spoke in evidence, stated: "We confirm having inspected the subjects". In relation to the previous marketing of the subjects, Mr Watt accepted in evidence that he did not know the details of how they had been previously been marketed: for example, the particular publications in which they had been advertised. He was however aware that they had been "vigorously marketed over a two year timescale"; that "various selling agents [had] been employed"; that "several people [had] shown an interest in purchasing these flats and indeed some going as far as instructing surveyors and valuers to inspect certain of the flats for loan purposes"; and that "no sales have been achieved", apparently because "when valuers were instructed to undertake valuations for loan security purposes their valuations were considerably lower than the prices sought by the selling agents". He was also aware of the prices at which the flats had been marketed. It was not suggested to him that the reliability of his opinion was undermined to any extent by his lack of knowledge of more precise details. On the contrary, he said in re-examination that those details confirmed that the information which he had been given at the time of his report was correct.

[13] It was next said that the judge had omitted to mention that Mr Watt's report addressed itself to the question of separate sales of the flats, rather than to the sale of the subjects as a whole, only because that was what he had been instructed to consider, and that Mr Watt's own view was that the sale of the subjects as a whole had been a reasonable approach for the defenders to adopt. These points appear to us to be of no relevance. At the stage of assessing damages, the judge was concerned only with the price which could have been achieved if the subjects had been sold as individual flats rather than as a whole: he had already concluded that it had been a breach of duty on the part of the defenders to sell the development as a whole, and his conclusion in that regard is not challenged. Counsel's submission in any event does not accurately reflect what Mr Watt said in evidence. In the passage in question, what was put to him was that "from the [defenders'] point of view, the most sensible approach would be to attempt a disposal of the subjects as a whole". Mr Watt agreed that he could see that as a reasonable attitude, but he also agreed that someone had to make a decision about the differential in prices. In other words, it would be in the defenders' interest to sell the subjects quickly and to recover the borrowings - which could be achieved by selling the subjects as a whole - but they would achieve a higher price for the flats by selling them individually, although that might take longer; and someone other than a valuer had to decide which was the more appropriate course of action.

[14] It was next said that the judge had omitted to mention Mr Watt's evidence that valuation was a matter of opinion, the actual price being determined by the buyer and seller rather than the surveyor, and that he was merely disappointed, not surprised, by the offer ultimately made for the subjects. The first of these points goes without saying. In the absence of actual sales of the individual flats, the prices which could have been expected to be realised could only be established by means of opinion evidence. In relation to the second point, Mr Watt explained in evidence that, when he learned of the offer that had been made, he assumed (incorrectly) that proper marketing of the subjects by the defenders' agents, D.M. Hall, had taken place. On that assumption, he wrote to the defenders that he considered the offer disappointing. Asked in evidence about his use of the word "disappointed" rather than "surprised", he said that, because he knew of the previous unsuccessful marketing of the subjects (prior to the calling up of the security), he was not totally surprised. In that regard, it was put to Mr Watt that there might be two different sorts of expectation: "one is an expectation which is really more of a hope that one will get a certain figure, and the other sort of expectation might be one that that is actually what you will get." He was then asked:

"And the fact you have used the word 'disappointing', would that suggest that the valuations that had been given tended towards the hope end of the spectrum rather than the more solid expectation end?"

He answered:

"No, I think the reason I used the word 'disappointed' was that I was disappointed all round that that was the price, which in my own view was lower than expectation, expected, although not totally surprised because of the history."

This evidence appears to us to be of little significance, since Mr Watt's reaction, whether of disappointment or of surprise, was based on a false premise: namely, that proper marketing had taken place. It was not suggested to Mr Watt that his reaction undermined the reliability of his valuation, on the hypothesis that proper marketing had taken place; and we see no reason why the judge should have mentioned this particular part of the evidence in his Opinion.

[15] It was next said that the judge had failed to appreciate the significance of Mr Watt's evidence that it was only "possible" that more extensive marketing of the subjects might have attracted other offers, and that to say any more than that it might have "helped" to overcome the existing unease in the market about those subjects would be a hypothetical exercise on which he was not prepared to embark. These criticisms are based on a tendentious account of the evidence. In relation to the first point, the proposition which was put to Mr Watt was that "unless suitable marketing is done you might end up in a situation where there is an offer made at an early stage before it is plain whether there is any alternative offers going to come"; to which Mr Watt responded, "Possible". In relation to the second point, Mr Watt said that rigorous marketing "certainly would have helped", and that he was "sure it would have helped". When that answer was repeated back to him, he said: "Beyond that I cannot obviously answer because it is hypothetical". The language used by Mr Watt in those answers permits, semantically, an argument to be advanced that he was not saying that it was more likely than not that a higher price would have been obtained if the subjects had been properly marketed. That proposition was not however put to him. He spoke to his valuation; and nothing in his evidence indicated any qualification of it or any departure from it.

[16] It was next said that the judge had omitted to give due regard to the fact that Mr Watt had joined with D.M. Hall in advising the defenders to accept the offer for the subjects which they in fact accepted. It was however clear from Mr Watt's evidence that he had supported D.M. Hall's advice under the mistaken assumption that proper marketing of the subjects had taken place, and in reliance upon a letter from D.M. Hall which described the difficulties which they claimed to have experienced on site with potential purchasers: a letter which the judge found to be "grossly misleading". Mr Watt was cautious in expressing a view as to what his advice would have been if he had known that the subjects had not been properly marketed, referring more than once to D.M. Hall's reputation and to the high respect in which he held them. That evidence was given before the judge had found that D.M. Hall's response to the defenders' marketing instructions was "one of almost total inaction", that their advertising of the subjects was "a sham", and that their written report on their marketing efforts was "grossly misleading". In that situation, it was open to the judge, as we have explained, to treat Mr Watt's valuation of the subjects as evidence of what they could reasonably be expected to have fetched if proper marketing had taken place. We note, in that regard, that Mr Watt's valuation was more conservative than D.M. Hall's, and that evidence was given by Mr Nisbett of D.M. Hall describing Mr Watt's valuation as being "within reasonable parameters of professional opinion". Mr Watt's valuation was also slightly more conservative than that of Mr Maguire, who was the other chartered surveyor to give evidence, and who had valued one of the flats earlier in 1996. Mr Watt was not challenged in cross-examination on the basis that his valuation was excessive.

[17] Finally, in relation to damages, it was submitted that Mr Watt's valuation did not provide any basis for the figure of £255,000 which the judge adopted as the amount which the subjects could have been expected to realise. In his report, Mr Watt considered separately the open market value of the flats and their estimated restricted realisation price. The open market value of each of the three lower flats was £44,000, and the open market value of each of the three upper flats was £45,000, producing an open market value of all six flats on an aggregate basis of £267,000. The estimated restricted realisation price, assuming a six month marketing timescale, was £40,000 in respect of each of the lower flats and £41,000 in respect of each of the upper flats, producing an estimated restricted realisation price of all six flats on an aggregate basis of £243,000. In his evidence, Mr Watt described the estimated restricted realisation price as being the estimated price that the properties would sell for under the circumstances of a forced sale with a limited time scale. Returning to the report, Mr Watt recommended that the flats should be marketed at prices in the region of £44,000 per unit, and that it might be advisable to advertise the first two units at slightly lower prices of £41,000 or £42,000. He concluded:

"On the basis that this course of action is adopted and provided there is a vigorous marketing campaign including extensive advertising then we would expect that the majority if not all of these flats could be disposed of within three to four months."

The judge explained his adoption of the figure of £255,000 as follows:

"Mr Watt was satisfied when he gave his advice to the defenders in September 1996 that there was a residential market for the [subjects]. At that time he produced an aggregate valuation of £267,000 and an estimated restricted realisation price of £243,000. On the basis that there was a vigorous marketing campaign he expected that the majority if not all of the flats could be disposed of within three to four months. To take account of the possibility of the minority of the flats taking a longer period to sell, and in exercising a broad judgement, I propose to use a mid-point figure between £267,000 and £243,000 as the appropriate starting point, namely £255,000."

Counsel did not dispute that the judge was entitled to proceed on the basis that all of the flats should have been sold by 31 December 1996. He argued, however, that Mr Watt's valuation did not support a higher figure, as at that date, than £243,000.

[18] The relationship between Mr Watt's conclusion ("On the basis...") and his earlier open market valuation and estimated restricted realisation price was not explored in evidence. It is however apparent that it was Mr Watt's expectation that "the majority if not all" of the flats could be sold within three to four months if they were marketed at prices in the region of £44,000 (i.e. at prices at, or slightly below, their open market value), with the first two units being advertised at slightly lower prices. It is reasonable to infer that the prices at which Mr Watt expected "the majority if not all" of the flats to be sold if marketed in that manner must have been his open market valuations of £44,000 - £45,000, rather than his restricted realisation prices of £40,000 - £41,000: it would not be customary in Scotland under any circumstances (least of all in a forced sale) to market property at an asking price well above the price which one was expecting to achieve. One can therefore infer from Mr Watt's evidence that most if not all of the flats could be sold by the end of 1996 for prices corresponding to their open market valuation. Any remaining flats would have to be sold at the estimated restricted realisation price in order to achieve a quick sale. The resultant figure would therefore be somewhere between £243,000 and £267,000. Mr Watt's evidence would suggest a figure closer to £267,000 than to £243,000 ("the majority, if not all..."). In adopting the mid-point figure of £255,000, the judge has exercised a broad judgment, as he was entitled to do in a case where the amount of damages did not admit of precise calculation.

Interest

Introduction

[19] The pursuer's claim was quantified in his pleadings on the basis that he should have received from the defenders a sum of £92,000 (being the net free proceeds of the sales which would have been achieved, if proper marketing had taken place, less the costs owed to the defenders) on about 8 November 1996. He therefore concluded for payment of £92,000 "with interest thereon at the rate of eight per cent per annum from 8 November 1996 (or from such date as to the Court shall seem appropriate) until payment".

[20] The judge's conclusion was that the pursuer should have received a sum of £66,400 on about 31 December 1996. He decided that the pursuer was entitled to interest at the judicial rate on that sum from 31 December 1996 to the date of decree. In that regard, the judge said:

"As at 31 December 1996...the pursuer would have received an ascertainable sum of money after deduction of his indebtedness to the defenders. Because of the defenders' breach of duty, as at that date the pursuer was standing out of his money, and, in my opinion, the defenders as the wrongdoers were wrongfully withholding money from him. He could have used that sum to his advantage either to obtain interest or to reduce other borrowings."

The judge decided that interest should run from the date of decree until payment on the aggregate of £66,400 and £50,600, the latter sum being the amount of the interest up to the date of decree. In that regard, the judge said:

"In my opinion, when a decree is granted and that decree includes within it a proportion of interest assessed under reference to section 1(1) of the Act [viz the Interest on Damages (Scotland) Act 1958, as amended by the Interest on Damages (Scotland) Act 1971], that decree, inclusive of all its constituents, becomes a decree upon which simple interest begins to run at the relevant rate. If the contrary were the case it would allow a defender, in relation to the accrual of interest to date of decree, to delay without penalty the payment of that interest."

Notwithstanding the form of the pursuer's conclusion, the judge granted decree:

(1) for payment of £66,400;

(2) for payment of interest at the judicial rate on £66,400 from 31 December 1996

until the date of decree; and

(3) for payment of interest at the judicial rate on £117,000 from the date of decree

until payment.

This was challenged on the basis that the judge had awarded interest upon interest. It was submitted that interest should have been awarded only upon the principal sum of £66,400, from 31 December 1996 until payment.

[21] This question turns upon the interpretation of section 1(1) of the Interest on Damages (Scotland) Act 1958, as amended by section 1 of the Interest on Damages (Scotland) Act 1971. In order to understand the purpose and effect of the 1958 and 1971 Acts, and the parties' arguments in relation to this matter, it is necessary first to consider the common law, and the successive stages of its amendment by statute.

Interest at common law

[22] In Wisely v John Fulton (Plumbers) Ltd 2000 SC (HL) 95 Lord Hope of Craighead summarised (at page 98) the common law's approach to interest:

"The general principle of the common law is that, apart from contract, a party will only be entitled to interest on money if the principal sum has been wrongfully withheld and not paid on the day when it ought to have been paid: Carmichael v Caledonian Railway Co (1870) 8 M (HL) 119 at p 131, per Lord Westbury; Kolbin & Sons v Kinnear & Co 1931 SC (HL) 128 at p 137, per Lord Atkin".

[23] In holding that a person from whom a payment has been wrongfully withheld is entitled to interest ex mora debitoris, Scots law follows Roman law and the ius commune, and differs from English law: see Zimmerman, The Law of Obligations: Roman Foundations of the Civilian Tradition (1990), pp. 791, 799; Johnston, "Breach of Contract", in Reid and Zimmerman, A History of Private Law in Scotland, Vol. 2 (2000), pp. 176-178. As in Roman law (cf. D.18.6.20; Kaser, Das Römische Privatrecht, 2^nd ed (1971), Vol 1, p. 516), interest ex mora has been understood in Scots law as being compensatory in nature. Erskine, for example, describes interest as being due on the late payment of a debt on account of damage (nomine damni): Institute, III.3.80. Bell provides a fuller explanation in his Commentaries (5th ed., page 646):

"I. OF INTEREST, NOMINE DAMNI. - In observing the difference between a claim for damage on breach of a pecuniary obligation, and a claim for damage on breach of an ordinary contract, it is obvious that the general principle upon which both depend is the same. Wherever one suffers loss by breach of contract, he, by whose failure in his engagement the loss comes, is bound to indemnify the suffering party; and the difference between DAMAGE in ordinary contracts, and INTEREST in pecuniary obligations, arises from the nature of the injury which the party in those several contracts may be supposed to have in contemplation at entering into the contract, as the inevitable consequence of failure .... In pecuniary obligations there is not necessarily any particular injury or damage presented to the debtor, which he is to lay his account with as the inevitable consequence of breach of contract; but the evil suffered is the extent of the loss sustained, by not gaining the ordinary legal profits of money, or what is necessary to be paid in order to replace it from another source. This claim for interest on account of damage suffered, is not repugnant even to the Canon law; and where damage could be shewn actually to have arisen from breach of engagement, a claim for it seems to have been allowed under that system. But according to the juster principles of Roman jurisprudence, not only an express breach of contract, but also an inconvenient delay in payment, gave a claim for interest.- Minus solvit qui tardius solvit nam et tempore minus solvitur. Since the prejudice against the taking of interest expired on the Reformation, the law of Scotland has been settled, that breach of contact, or mora in payment, raises this claim without any injury into actual damage, and estimating all losses arising from this cause by the same rule, viz. according to the legal rate of interest."

The same understanding of interest ex mora debitoris as being compensatory in nature can be seen in the judicial decisions discussed below, and is epitomised in Lord Kincairney's dictum in Roissard de Bellet v Scott's Trustees (1897) 24 R 861 at page 865:

"In the ordinary case the damage due for delay in payment of money is nothing but interest."

[24] The date from which a payment can be regarded as wrongfully withheld depends on the context, as was observed by Lord Hamilton, delivering the Opinion of the court, in Elliott v Combustion Engineering Ltd 1997 SC 126 at page 131:

"Lord Westbury's dictum requires to be applied in any particular case in the context of the transaction in question. The expression 'by virtue of the principal sum of money having been wrongfully withheld, and not paid on the day when it ought to have been paid' does not confer a wide discretion on the court or on an arbiter to determine, untrammelled by legal rules, the date from which interest is to run.

In relation to contractual debt parties may expressly agree the date or event from which interest will run on any outstanding principal sum. In some cases (for example, contracts of loan) the law will imply an obligation to pay interest from the date when the principal sum is due. Otherwise, subject to the exception (admitted at least in the case of open accounts) of interest running from a specified date following the making in advance of a demand to that effect, modern authority indicates that in general interest runs on contractual debts from judicial demand."

[25] Since interest is ordinarily due on a contractual debt only once a judicial demand for payment is made, the proper form of conclusion in an action for payment of such a debt is generally for interest "from the date of citation until payment" (Maclaren, Court of Session Practice (1916), pp. 298-299). In accordance with that form of conclusion, the court grants decree to a successful pursuer for payment of the debt, with interest at the judicial rate from the date of citation. The court does not grant decree for both the debt and the interest on the debt for the period between the date of citation and the date of decree, with interest accruing thereafter at the judicial rate on both amounts. That is because the sum which has been wrongfully withheld, and which is the subject matter of the action, is the principal debt. Interest is due on the debt from the date of citation, because payment of the debt was wrongfully withheld once it was judicially demanded; but the interest is not itself a principal debt forming part of the subject matter of the action.

[26] The position is different where interest is due on a debt prior to citation, usually by virtue of a contractual provision. In such a case, it is usual in modern practice to seek interest at the agreed rate from the date when the debt became due until payment, in accordance with the contract (cf. Bank of Scotland v Davis 1982 SLT 20). It is however also possible to sue, first, for payment of the principal debt, and secondly, for payment of the arrears of interest which have accrued to the date of citation, with interest on the total of those sums at the judicial rate from the date of citation: see, for example, Jolly v McNeill (1829) 7 S 666, Napier v Gordon (1831) 5 W & S 745 and Maclean v Campbell (1856) 18 D 609.

[27] Since these authorities were relied on by counsel for the pursuer in the present case in order to support the judge's approach, it is important to understand the basis on which these decisions proceeded. The rationale of the decisions was that the arrears of interest were themselves a debt, and were therefore (like the principal debt) wrongfully withheld after a judicial demand for payment had been made. That was explained in each of the cases which we have cited. In Jolly v McNeill, the issue was discussed only in the course of the argument (the opinions being concerned with a different point), when, in response to a submission that this was the first occasion on which interest had been allowed on interest on a contractual debt, the members of the court interjected (at page 668) that that had only been done from the date of citation, that the defender should then have paid the debt, and that "the interest then became principal, and interest is due upon that". In Napier v Gordon, Lord Brougham LC said of the arrears of interest (at page 758):

"It is just as much liable to interest from that day [viz. the date of citation], up to the time of payment, as the principal. The party refusing payment on the citation has put himself in mora, and is just as much liable to pay interest upon that as upon the principal, or any other debt which one man owes another... it is not because it is interest, but because it is the subject matter of the action, that the Scotch law gives interest, contrary to the principle of the English law, from the instant that the party being called upon to pay, and who ought to pay on the citation, refuses to pay, and thereby becomes, under the Scotch law, in mora."

In Maclean v Campbell the same point was made, for example by Lord Murray (at page 611):

"The pursuer has been found entitled both to principal and interest down to the date of citation. The principal and interest together form the sum that was due, and therefore on both the defenders ought to pay interest from that date."

Lord Cowan, in the same case, cited the speech of Lord Brougham LC in Napier v Gordon, and observed (ibid):

"Here it is clear that the claim for the principal and interest forms the subject-matter of the action."

The difference between the approach adopted in these decisions, and the general approach to interest on debt (i.e. that interest runs from the date of citation), thus reflected the fact that the arrears of interest were themselves a principal debt forming part of the subject-matter of the action.

[28] Following that approach, Maclaren stated in his Court of Session Practice (at page 301) that, where interest was due from a date prior to citation, the usual form of conclusion was for interest from the date in question until payment, but that in such a case there was no reason why the pursuer should not conclude for payment of, first, the sum of the principal debt, and secondly, the sum of the arrears of interest to the date of citation, with interest on the total of those two sums from the date of citation until payment. In that regard, Maclaren stated (at pages 301-302):

"What is really due at the date of citation is two sums - first, principal, second, interest upon the principal from the date when interest became due either ex pacto or ex lege until the date of citation, and these two sums might have been sued for as one sum upon which interest would run from the date of the legal demand, i.e. the date of citation."

That approach to the appropriate forms of conclusion was followed in the Encyclopaedia of Scottish Legal Styles (1935), Vol. 1, pages 55-59, and is currently followed in Green's Litigation Styles, pages A2051 and A2058. It is to be noted that, if that approach is followed, the court does not pronounce a decree under which interest runs on the interest accruing between the date of citation and the date of decree: that is because the interest accruing after citation on the debts of which payment has been wrongfully withheld is not itself a principal debt forming part of the subject-matter of the action.

[29] The same approach was followed more recently in the case of Nash Dredging Ltd v Kestrel Marine Ltd 1986 SC 198, as a matter of construction of an agreement in settlement of an action. The court awarded interest at the judicial rate, from the date when the principal sum was paid under the agreement, on the arrears of interest which had accrued to that date, on the basis that the agreement was

"one in which the defenders had conceded their liability to pay accrued interest as at [the relevant date], and in which that date was to be deemed to be the date when the arrears became due and payable"

(per Lord President Emslie at page 207). Payment of the arrears having been judicially demanded, interest accordingly ran on the arrears. The Lord Ordinary, Lord Ross, explained (at page 201):

"As Lord Cowan pointed out in Maclean v Campbell, at p. 611, under reference to Napier v Gordon, where the subject-matter of the action is interest, the law of Scotland may award interest on that interest, In ... the instant case the outstanding interest is in the same position as a principal sum which has been wrongfully withheld."

[30] Interest on damages was subject under the common law to the same general principle as interest on debt. Since damages do not become a liquid debt until awarded by the court, it followed that damages could not ordinarily be said to be wrongfully withheld until they had been awarded, and therefore that damages could not ordinarily attract interest until the date of decree. Lord Hope explained in Wisely (at page 98):

"This common law principle [viz. the principle stated by Lord Westbury in Carmichael v Caledonian Railway Co and by Lord Atkin in Kolbin & Sons v Kinnear & Co] was applied to awards of damages. The practice both in England and in Scotland was that interest was not due on sums awarded as damages until the making of the award. As Lord Justice-Clerk Thomson said in Macrae v Reed & Mallik Ltd 1961 SC 68 at p. 72: 'It has long been our practice that where, in actions of damages, damages are awarded interest runs only from the date of the final decree. The reason is that it is then, and only then, that the illiquid claim for damages is quantified and made liquid. Once there is a final decree for a specified sum that sum is payable at the date of the final decree, and if it is not then paid, it carries interest as payment is wrongly withheld. That is in consonance with the accepted principle as laid down in Carmichael by Lord Westbury where he said (at p 131): 'Interest can be demanded only in virtue of a contract, express or implied, or by virtue of the principal sum of money having been wrongfully withheld, and not paid on the day when it ought to have been paid'."

[31] The general principle in relation to interest on damages was therefore that, since it was only once damages were quantified and made liquid that payment of that sum could be said to be "wrongfully withheld", it was only from the date of decree that interest was ordinarily payable on that sum. That approach was approved by the House of Lords in F.W. Green & Co v Brown and Gracie Ltd 1960 SLT (Notes) 43, a case concerned with damages for breach of contract, where Lord Keith of Avonholm (with whose speech Viscount Simonds and Lord Reid agreed) said at page 44:

"Quantification will generally fix the earliest date from which interest can reasonably be taken to run and that will generally coincide with the date of decree, where the pursuer is successful."

Lord Keith added that, where there was a frivolous defence or an unjustified appeal or other obstructive procedure designed to hold up payment, that might constitute wrongful withholding. In such circumstances, the court had on occasion awarded interest on damages from a date prior to the final decree (e.g. Clancy v Dixon's Ironworks Ltd 1955 SC 17), although there appears to have been no case in which interest was awarded from an earlier date than the date on which the amount of the damages was fixed (cf. British Railways Board v Ross and Cromarty Council 1974 SC 27 per Lord President Emslie at page 39).

[32] Finally, in relation to the general approach of the common law, it is necessary to bear in mind that, in addition to the principle that interest is payable ex mora as a form of compensation for delay in the performance of an obligation to pay money, whether the obligation arises ex contractu or ex delicto, our law has also developed general principles that damages are payable for breach of contract and for the breach of delictual obligations. Interest may in some circumstances enter into the assessment of damages, in accordance with the principles governing such assessment (as explained, for example, in Hadley v Baxendale (1854) 9 Ex 341). An example is the case of Dunn & Co v Anderson Foundry Co Ltd (1894) 21 R 880 (as explained by Lord Keith of Avonholm in F.W. Green & Co Ltd v Brown & Gracie Ltd at page 44). The principles applicable in considering such awards of damages were stated by Lord Atkin in Kolbin & Sons v Kinnear & Co at page 137:

"It seems to be established that, by Scots law, a pursuer may recover interest by way of damages where he is deprived of an interest-bearing security or a profit-producing chattel, but otherwise, speaking generally, he will only recover interest, apart from contract, by virtue of a principal sum having been wrongfully withheld and not paid on the day when it ought to be paid".

More recent authorities from other jurisdictions (including Sempra Metals Ltd v Inland Revenue Commissioners [2007] 3 WLR 354) demonstrate the continuing importance of the court's ability to take interest losses into account when awarding damages. Although a connection can be made between the inclusion of interest losses in an award of damages and the award of interest ex mora (as Bell explained in the passage from the Commentaries quoted earlier, and as Lord Atkin's dictum implied in bringing those two concepts together), in that both are compensatory in purpose, they are conceptually distinct and proceed on different principles. In the present case, no claim was made for interest to be included in the assessment of damages, and interest was not awarded on that basis. It is therefore unnecessary to consider further the principles to be applied by the court, as regards interest, when assessing the amount of damages which it awards.

The Law Reform (Miscellaneous Provisions) Act 1934
[33] In order to understand the statutory innovations upon the common law's approach to interest on damages, it is necessary to make two detours south of the Border, as each of the 1958 and 1971 Acts was to some extent modelled upon earlier English legislation.

[34] The common law of England in relation to interest differed fundamentally from that of Scotland. As Lord Denning MR stated in Jefford v Gee [1970] 2 QB 130 at page 143:

"The rule of the common law of England was that, in the absence of express agreement, interest could not be recovered on a debt or damages: and Equity in this respect followed the law."

Certain inroads on that general principle were however made by statute. In particular, section 17 of the Judgments Act 1838 provided that every judgment debt should carry interest from the time of entering the judgment. The consequence was that in England, as in Scotland, interest was not due on sums awarded as damages until the making of the award; but interest then ran on the award in England on the basis of a statutory provision, whereas interest was due in Scots law on the basis of the common law principle that interest ran on a liquid debt the payment of which was wrongfully withheld.

[35] The common law of England was further amended by the Law Reform (Miscellaneous Provisions) Act 1934, so as to give effect to a recommendation contained in the Second Interim Report of the English Law Revision Committee (Cmd. 4546, 1934). Section 3 of the 1934 Act provided:

"(1) In any proceedings tried in any court of record for the recovery of any debt or damages, the court may, if it thinks fit, order that there shall be included in the sum for which judgment is given, interest at such rate as it thinks fit, on the whole or any part of the debt or damages for the whole or any part of the period between the date when the cause of action arose and the date of the judgment: Provided that nothing in this section -(a) shall authorise the giving of interest upon interest; or (b) shall apply in relation to any debt upon which interest is payable as of right whether by virtue of any agreement or otherwise; ... ".

[36] The thinking behind section 3 was set out in the Law Revision Committee's report (the relevant section of which was quoted in the analogous Scottish report which preceded the 1958 Act, as explained below). In short, the Committee considered that

"In practically every case a judgment against the defendant means that he should have admitted the claim when it was made and have paid the appropriate sum for damages"

(para. 8). The Committee saw no reason to distinguish in that regard between debts, damages for breach of contract, special damages for tort, and cases where general damages were given, as for instance for libel, or for pain and suffering in personal injury cases.

[37] Consistently with that approach, section 3 conferred on the court a discretionary power to award interest, in all proceedings for the recovery of debt or damages, for the period between the date when the cause of action arose and the date of the judgment (interest for any period after the date of judgment already being provided by the 1838 Act). Under section 3, any interest awarded on damages in respect of the period prior to judgment would be included in the sum for which judgment was given. That sum would then bear interest from the date of the judgment under the 1838 Act. The proviso in section 3(1)(a) was therefore not concerned with interest accruing after the date of the judgment.

[38] Section 3 was considered by the House of Lords in Riches v Westminster Bank Ltd [1947] AC 390. The question was whether income tax was payable on interest awarded under section 3: it was argued that such interest was in reality a form of damages. The tenor of the speeches was that the interest was undoubtedly compensatory, but was nonetheless income rather than capital. Lord Wright, for example, said (at page 400):

"the essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date. It may be regarded either as representing the profit he might have made if he had had the use of the money, or conversely the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation. From that point of view it would seem immaterial whether the money was due to him under a contract express or implied or a statute or whether the money was due for any other reason in law. In either case the money was due to him and was not paid, or in other words was withheld from him by the debtor after the time when payment should have been made, in breach of his legal rights, and interest was a compensation, whether the compensation was liquidated under an agreement or statute ... or was unliquidated and claimable under the Act as in the present case. The essential quality of the claim for compensation is the same and the compensation is properly described as interest."

Lord Normand considered that, under Scots law also, interest awarded on the ground of wrongful withholding had a compensatory nature:

"Claims for interest may arise in Scots law ex pacto, ex lege or ex mora ... Interest ex mora corresponds to the interest awarded to the present appellant under the Law Reform (Miscellaneous Provisions) Act, 1934, s. 3. That interest ran from the date at which the principal sum was first wrongfully withheld from the appellant and it is wrongful retention of the debt from the creditor that is the legal ground for an award of interest ex mora in Scotland: per Lord Westbury in Carmichael v Caledonian Ry. Co The correspondence is not complete; for example, interest is awarded by the Scottish courts as of right, whereas in England the award depends on the exercise of a discretion which the statute has committed to the jury or the court. Nevertheless the principle of the decision in this appeal will apply to interest awarded ex mora in Scotland. The retention of the principal sum in the present instance was fraudulent, but the award of interest either under the statute in England or ex mora in Scotland does not depend on proof of fraudulent retention or of negligent retention of the principal. The commonest example indeed of an award of interest ex mora is a decree for interest from the date of citation in an action in which the pursuer has successfully sued for the disputed amount due to him on an open account, where there is neither averment nor proof of fraud or negligence (Blair's Trustees v Payne (1884) 12 R 104). The wrongful withholding is then merely the refusal of the creditor's demand contained in the summons and the implied denial of his right. Even when there is no proof of fraud or negligence the interest awarded is sometimes spoken of as damages both in England and in Scotland. But in Scotland at least it would, I think, be more appropriately described as compensation"

(pages 411-412). It was also observed by Lord Wright (at page 401) that the effect of section 3(1)(a) was to exclude the power to give compound interest.

The Interest on Damages (Scotland) Act 1958

[39] In Scotland, the common law governing interest on damages was amended by the Interest on Damages (Scotland) Act 1958, which followed a recommendation of the Law Reform Committee for Scotland. In their Third Report, "The rules governing the date from which interest on an award of damages is, or may be, ordered by the court to run" (Cmnd 141, 1957), the Committee responded to an invitation by the Lord Advocate "to consider the rules governing the date from which interest on an award of damages is, or may be ordered by the court to run". They noted that it had long been the practice in actions of damages to conclude for interest "from the date of the decree to follow hereon until payment", and that the rule that interest was not payable on damages until the date of decree was based upon the principle that the damages did not become liquid until then. The decree from the date of which interest normally ran was the final decree: that is to say, in a case where an appeal was taken to the Inner House or the House of Lords, the date on which the judgment of the appellate court was applied. The Committee observed (at para. 2):

"Both the Inner House and the House of Lords have discretion to award interest from a date earlier than that of their judgment in an appeal. It is not clear, however, what is the earliest date from which they may award interest. It is not the normal practice for this discretion to be exercised, because the party who is unsuccessful in the Court of first instance has a right to appeal, and the delay caused by the appeal is lawful and is not generally regarded by the Court as unreasonable ... But there are some reported cases in which interest on damages has been awarded either from the date of the jury's verdict, or from the date on which the verdict might have been applied but for unjustifiable delay by the defender."

[40] Against that background, the proposal which the Committee had considered was that power should be given to the court to award interest from a date earlier than the date of the jury's verdict or the judge's decree. Two such earlier dates had been suggested as the beginning of the period from which interest might run: the date when the cause of action arose, and the date of citation:

"The former is the date applicable in England [under section 3(1) of the 1934 Act], but we consider that, if any change is to be made in the law of Scotland on this matter, the earliest date from which the court should be empowered to award interest is the date of citation. We reach that view because we think that cases must be rare in which it could be equitable that a defender should be found liable to pay interest on an award of damages from a date earlier than that on which he had received a formal claim for payment by being cited. Even this proposal involves a departure from strict adherence to the principle at present accepted in Scotland that interest is not payable on damages until the amount of damages is liquidated. Such a departure might be justified on the theoretical ground which was apparently accepted by the English Law Revision Committee (Cmd 4546, paragraphs 8 and 9) - viz, that when the court makes an award of damages it in effect decides that the defender should have admitted the claim when it was made and that he should then have paid the appropriate sum in damages. In our view a more important reason for making such a departure is the practical consideration that it would remove the interest which a defender at present generally has in delaying proceedings"

(para. 3). The Committee added (at para. 5):

"In the event of a discretionary power such as is suggested being given to the Courts, we assume that the normal practice of awarding interest only from the date of final decree would continue except where the defender had caused unreasonable delay."

The Committee's recommendation was:

"That all Courts having jurisdiction in questions of damages should be empowered to award interest from the date of citation."

[41] What the Committee envisaged was therefore a relatively minor reform, extending (or at least clarifying) the court's power to award interest on damages from a date prior to the date of the final decree, where the defender had caused unreasonable delay. The court's power to fix a date, in advance of the damages becoming a liquid debt, as at which they would attract interest on the ground of wrongful withholding as if the debt had been liquidated then, would extend as far back as the date of citation.

[42] Section 1 of the 1958 Act, as originally enacted, provided:

"1.-(1) Where the court having jurisdiction in any action for damages pronounces an interlocutor decerning for payment by any person of a sum of money as damages, the interlocutor may, if the circumstances warrant such a course, include decree for payment by that person of interest on the sum or any part thereof at such rate as may be specified in the interlocutor, from such date as may be so specified (being a date not earlier than the date on which the action was commenced against that person) until the date of the interlocutor.

(2) Nothing in this section shall-

(a) authorise the granting of interest upon interest, or

(b) prejudice any other power of the court as to the granting of

interest, or

(c) affect the running of any interest which apart from this section would run by virtue of any enactment or rule of law."

[43] Although there are similarities between section 1 of the 1958 Act and section 3 of the 1934 Act, there are also significant differences. One such difference concerns the earliest date from which interest might run. Another concerns the form in which judgment would be given. As already explained, interest awarded under section 3 of the 1934 Act was included in the sum for which judgment was given, with the consequence that that aggregate sum would then bear interest from the date of the judgment as a judgment debt. Section 1 of the 1958 Act, on the other hand, envisaged that the court would pronounce "an interlocutor decerning for payment ... of a sum of money as damages". In such a case, the interlocutor could in addition "include decree for payment ... of interest on the sum" (or part of it) at a rate specified in the interlocutor from a date also so specified. The interest so awarded was to run "until the date of the interlocutor"; but, in accordance with section 1(2)(c), judicial interest would then run at common law on the damages for which the court had decerned. The court would not calculate the amount of the interest to the date of decree and then decern for payment of that sum, with interest running on that sum from the date of decree, for two reasons. First, such an interlocutor would not conform to the terms of section 1(1). Secondly, if the court were to exercise its discretion to award interest on the damages under section 1(1), that would be on the basis that the damages could be regarded as having been wrongfully withheld. The interest so awarded would not itself be a principal debt forming part of the subject-matter of the action, and therefore would not itself be a sum which would bear interest (unlike the arrears of interest judicially demanded in such cases as Napier v Gordon). The appropriate form of conclusion would therefore be the same, mutatis mutandis, as where a debt was sued for, on which interest ran from judicial citation: a conclusion, in other words, for payment of damages, with interest from the date of citation until payment.

[44] The 1958 Act was considered in Macrae v Reed & Mallik Ltd. In accordance with the approach to statutory interpretation adopted at that time, no reference was made to the Committee's report. Although differing views were expressed by the members of the court as to the circumstances in which the discretion conferred by section 1 should be exercised, and as to the application of section 1 to awards of solatium (a majority of the court being of the opinion that section 1 could not apply to such awards), all the members of the court were agreed that the effect of section 1 was to enable the court to treat a sum awarded as damages (or part of it) as having been wrongfully withheld from the date of citation (or some later date, prior to the date of decree), and on that basis to include in its interlocutor an award of interest on that sum. Lord Justice-Clerk Thomson noted (at page 74) that interest awarded under section 1 was analogous to interest on a debt:

"The ruling principle must be that, as interest assumes the existence of a principal sum, interest falls to be awarded only where there is a principal sum, which, but for the law's normal delays, the pursuer would have enjoyed. This is consonant with the accepted principle that ordinarily interest is payable only where there is a principal debt payment of which has been improperly or unjustifiably withheld."

Like Lord Justice-Clerk Thomson, Lord Patrick regarded the Act as enabling the court to compensate the successful pursuer for delay in the receipt of damages in respect of losses which he had sustained, stating (at pages 76-77):

"The cardinal rule in awards of damages has hitherto been that the tribunal which tries the case should seek to put the injured party, so far as money can do so, into the same position as he would have been if he had not been injured, and I can see nothing in the statute to lead me to believe that that cardinal rule has been departed from. On the contrary, I think the purpose of the statute was to give the Court power to give fuller effect to that cardinal rule, a power which it did not previously have. Thus, a case, such as this, might not come to trial, there being no undue delay on the part of the pursuer in bringing his action, for a year or more after the accident. In such a case, the injured pursuer would commonly be losing wages week by week until the date of the trial. The Court had no power to compensate him except by awarding him his out-of-pocket loss established at the date of the trial. It could not compensate him for the fact that he should have had these wages in his pocket week by week as time elapsed until the date of the trial. Now, the Court has been given power to compensate him for that fact by awarding him interest on his pecuniary loss before the trial at such rate and from such date or dates as will in the Court's judgment adequately compensate him in this matter."

Lord Mackintosh noted (at page 79) that the Act dealt only with the interest, if any, which was to run on a sum of damages prior to the date of the interlocutor decerning for payment of them, and had nothing to do with interest payable on them from the date of the decree until payment:

"That latter matter was already fully provided for under existing procedure whereby interest, usually at five per centum, is invariably payable on the whole sum of the damages from the date of decree, the damages being then regarded as a debt already due and payable, and, as such, interest runs on it ex lege. The purpose of the Act was, as its long title shows, to amend our law and to make provision, where the circumstances of the case warrant it, for interest being given on an award of damages from some date earlier than the date of decree."

After referring to the general rule that interest was not given on damages until they were liquidated, Lord Mackintosh suggested (at page 80) that the intention of the Act was

"to allow interest to run on a successful pursuer's damages, or on such part of them as might be reasonably ascertainable before the date of the decree, so as to compensate him for being kept out of his money and so deprived of its use throughout the progress of a litigation through no fault of his own."

Finally, Lord Strachan observed (at page 85):

"In my opinion, the distinction between principal and interest must be kept in mind, and, primarily at all events, interest should be granted under section 1(1) only in circumstances which are generally recognised by law as giving rise to a claim for interest."

In that regard, Lord Strachan cited the principle that, apart from contract, interest was payable only by virtue of a principal sum having been wrongfully withheld and not paid on the day when it ought to have been paid, as stated by Lord Westbury in Carmichael v Caledonian Railway Co and by Lord Atkin in Kolbin & Sons v Kinnear & Co, and continued (at pages 85-86):

"It seems to me that it is some such principle which should govern the exercise of the power conferred by section 1(1) of the Act of 1958."

[45] Following that approach, it was not to be expected that the court would calculate the amount of interest to the date of decree and decern for the payment of that amount, since the interest was not itself a principal debt forming part of the subject-matter of the action. Interest would therefore run from the date of decree on the damages awarded, but not on the interest awarded in respect of the earlier period.

[46] Reported examples of practice under the 1958 Act appear to be consistent with that approach. In Killah v Aberdeen and District Milk Marketing Board 1961 SLT 232, for example, the court awarded interest on elements of the damages from the date of citation until the date when the jury's verdict would have been applied had not a motion for a new trial been enrolled, and interest at the judicial rate on the total amount of damages from the latter date until payment. In some other cases (e.g. Fraser v J. Morton Wilson Ltd 1966 SLT 22, Webster v Simpson's Motors 1967 SLT (Notes) 36 and Bell's Sports Centre (Perth) Ltd v William Briggs & Sons Ltd 1971 SLT (Notes) 48) the court awarded interest on elements of the damages from the date of citation until the date of decree, saying nothing about interest thereafter. In such a case, interest would run on the damages from the date of decree until payment, in accordance with the common law principle that "interest upon the principal sum and expenses runs ex lege from the date of decree": Maclaren, page 298.

The Administration of Justice Act 1969

[47] In order to understand the next stage in the development of the Scots law, it is necessary first to return to England. The English Act of 1934 was amended with effect from 1 January 1970 by section 22 of the Administration of Justice Act 1969, so as to implement a recommendation of the Report of the Winn Committee on Personal Injuries Litigation (Cmnd 3691, 1968). It inserted into section 3 of the 1934 Act a new subsection (1A):

"(1A) Where in any such proceedings as are mentioned in subsection (1) of this section [section 3 of the Act of 1934], judgment is given for a sum which (apart from interest on damages) exceeds £200 and represents or includes damages in respect of personal injuries to the plaintiff or any other person, or in respect of a person's death, then (without prejudice to the exercise of the power conferred by that subsection in relation to any part of that sum which does not represent such damages) the court shall exercise that power so as to include in that sum interest on those damages or on such part of them as the court considers appropriate, unless the court is satisfied that there are special reasons why no interest should be given in respect of those damages."

The effect of the new provision was to make it compulsory for the court to exercise its power under section 3(1) of the 1934 Act in personal injury cases, unless there were special reasons not to do so. In requiring that the interest so awarded be included in the sum for which judgment was given (and, therefore, in the sum which then attracted interest as a judgment debt), section 3(1A) was consistent with section 3(1). The only innovation was to oblige the court, in personal injury cases, to apply the same principles as under the 1934 Act (Jefford v Gee at page 143 per Lord Denning MR).

The Interest on Damages (Scotland) Act 1971

[48] The 1958 Act was amended by the Interest on Damages (Scotland) Act 1971, which originated (like the 1958 Act) in a Private Member's Bill. The Member sponsoring the Bill explained that it was intended to address two disadvantages from which the pursuer in Scotland suffered when compared with the plaintiff in England:

"First, because of these differences between Scotland and England [i.e. between section 1 of the 1958 Act and section 3 of the 1934 Act, as amended], a Scottish pursuer today can claim interest for a shorter period, that is, from the date of the commencement of the court action, and not from the date of the accident. Secondly, there is no presumption that interest should be payable in the personal injuries case"

(HC Deb. Vol. 810, cols. 1185-1186, 29 January 1971).

[49] According to its long title, the 1971 Act was intended to amend the 1958 Act "by extending the power of the courts to order payment of interest on damages". Section 1 of the 1971 Act substituted new subsections for section 1(1) of the 1958 Act, the material provisions for present purposes being subsections 1(1) and 1(1A):

"(1) Where a court pronounces an interlocutor decerning for payment by any person of a sum of money as damages, the interlocutor may include decree for payment by that person of interest, at such rate or rates as may be specified in the interlocutor, on the whole or any part of that sum for the whole or any part of the period between the date when the right of action arose and the date of the interlocutor.

(1A) Where a court pronounces an interlocutor decerning for payment of a sum which consists of or includes damages or solatium in respect of personal injuries sustained by the pursuer or any other person, then (without prejudice to the exercise of the power conferred by subsection (1) of this section in relation to any part of that sum which does not represent such damages or solatium) the court shall exercise that power so as to include in that sum interest on those damages and on that solatium or on such part of each as the court considers appropriate, unless the court is satisfied that there are reasons special to the case why no interest should be given in respect thereof."

[50] One difference of substance between section 1(1) as originally enacted and as substituted by the 1971 Act was that, whereas the former empowered the court to award interest from "a date not earlier than the date on which the action was commenced", the latter empowered the court to award interest from "the date when the right of action arose.". A second difference was that section 1(1) in its new form omitted the words "if the circumstances warrant such a course", on which some stress had been laid in Macrae v Reed & Mallik Ltd. The substituted section 1(1) was otherwise similar to its predecessor. In particular, it envisaged that the court would pronounce an interlocutor "decerning for payment ... of a sum of money as damages", and it enabled the court to include in that interlocutor

"decree for payment ... of interest, at such rate or rates as may be specified in the interlocutor, on the whole or any part of that sum".

The distinction between the sum awarded as damages, on the one hand, and interest on that sum on the other hand, was maintained.

[51] Section 1(1A), on the other hand, which related solely to awards of damages or solatium in respect of personal injuries, was partly modelled on section 3(1A) of the 1934 Act (as inserted by the 1969 Act). The first part of section 1(1A) was in similar terms to section 1(1): the provision was to apply where the court decerned for "payment of a sum which consists of or includes damages or solatium in respect of personal injuries". The second part of section 1(1A), on the other hand (from "then" to the end), closely followed the terms of section 3(1A) of the 1934 Act. It required, in particular, that the court

"exercise that power [viz. 'the power conferred by subsection (1)'] so as to include in that sum [viz. 'a sum which consists of or includes damages or solatium in respect of personal injuries'] interest on those damages and on that solatium".

[52] These new provisions were considered by Lord Emslie in Smith v Middleton 1972 SC 30. His Lordship began by considering the common law approach to interest on damages, and its basis in the principle laid down by Lord Westbury in Carmichael v Caledonian Railway Co His Lordship then considered (at pages 32-33) section 1(1) of the 1958 Act, as interpreted in Macrae v Reed & Mallik Ltd:

"In short, I understand the view of the court in Macrae to have been that the exercise of the power conferred by the subsection had to be approached upon a discriminating and selective basis, and that the ruling principle in the exercise of the power must be that, as interest assumes the existence of a principal sum, interest falls to be awarded only where there is a principal sum which, but for the law's normal delays, the pursuer would, before the date of decree, have enjoyed. This ruling principle was seen to be consistent with the accepted general principle of law that, ordinarily, interest is payable only where there is a principal debt, payment of which has been wrongly withheld."

His Lordship construed the new section 1(1), as substituted by the 1971 Act, as proceeding on the same basis as section 1(1) of the 1958 Act in its original form, subject to the change in the base date from which interest might run:

"I am of opinion that the principle which should be followed should be that laid down in Macrae, namely, that interest should be awarded, in the exercise of the power, upon those parts of the whole sum of damages payment of which to a pursuer has been withheld through the particular litigation's normal delays. As was explained in Macrae, this is in consonance with the accepted general principle laid down in Carmichael, which I have set out earlier in this opinion. It is also the principle which appears to have commended itself to the Court of Appeal in its consideration of the somewhat similar English legislation [in Jefford v Gee]. Like Lord Patrick in his consideration of the old form of subsection (1), I can see nothing in the language of the new subsection (1) to lead me to believe that the cardinal rule in awards of damages is to be departed from, and by giving effect to to the principle which I have just discussed the court will, it appears to me, be able to give even fuller effect to the cardinal rule than was possible under the old subsection (1)."

On that approach, the new section 1(1), like its predecessor, enabled the court to treat the damages, or elements in the damages, as being equivalent to a debt owed by the defender to the pursuer prior to the date of decree. The principal difference between the new provision and its predecessor was that, whereas the 1958 provision enabled the court to treat damages as being wrongfully withheld (and, therefore, as bearing interest) only as far back as the date of citation, the new section 1(1) enabled interest to be awarded from an earlier date.

[53] In relation to section 1(1A), Lord Emslie said (at page 39):

"Turning to the new subsection (1A), I am satisfied as matter of construction that, in the absence of special reasons why no interest should be given, the court is being directed therein to exercise the power described in subsection (1) in the case of all awards of damages in respect of personal injuries. It is 'that power' which is to be exercised, and the words can only refer to the power mentioned in the bracketed passage in subsection (1A), i.e., the power conferred by subsection (1). Further, not only is there no indication in subsection (1A) that the power is to be exercised in a way different from the power which may be exercised in the court's discretion, but there are, in my opinion, clear indications in the subsection itself which indicate that it is to be exercised in the same way. It is to subsection (1) that one must look to find out about rates of interest, the base date and the period of interest; and I refer, further, in particular, to the words which I have already quoted, viz, ' ... interest on those damages and on that solatium or on such part of each as the court considers appropriate ... ' A new and different problem, however, is raised by what the subsection says as to the result to be achieved by the exercise of the power. It is to be exercised 'so as to include in that sum interest.' In my opinion effect must be given to these words, but I do not consider that it is practicable to follow the direction literally. What, in my opinion, should be done, bearing in mind that any interest elements in an award may be subject to tax, is to decern for payment of a sum of damages, assessed in accordance with accepted principles, together with an additional sum derived from interest at specified rates, for specified periods ending with the date of the interlocutor, on those parts of the total sum of damages which should bear interest. Damages would therefore consist of the addition of two sums, and on the resulting sum interest would no doubt run from the date of decree until payment."

His Lordship therefore awarded interest on the past pecuniary losses, and on the past element of solatium, and granted decree for a global sum which comprised both the damages and the awards of interest.

[54] That approach to section 1(1A) has been followed in subsequent practice. In particular, it was held in Orr v Metcalfe 1973 SC 57 that the intention of section 1(1A) was

"to require the Court to include relevant interest elements in every sum decerned for in actions of damages for personal injuries unless there are special reasons for not doing so"

(per Lord President Emslie at page 60). Accordingly, the appropriate form of conclusion in an action of damages for personal injuries was for payment of a specified sum with interest thereon at the judicial rate from the date of decree until payment, since

"in every conclusion or crave in the type of action with which section 1(1A) is concerned the sum sued for must be deemed to cover all competent heads of damages, including any interest components which may fall to be included in any award in implement of the requirement of the subsection"

(per Lord President Emslie, ibid). In the same case, Lord Cameron explained (at page 62) that a different form of conclusion was appropriate in cases falling within the scope of section 1(1), since, under that provision,

"the interest which may be decerned for is additional to the sum awarded in name of damages itself and therefore, does not form part of it."

His Lordship observed (ibid) that section 1(1A) introduced "a new and different concept", namely that "the interest found due forms part of the sum decerned for". As we have explained, the origin of that concept lay in the English Act of 1934.

[55] It is necessary to mention only two subsequent decisions. First, in Mouland v Ferguson 1979 SLT (Notes) 85 Lord Stewart rejected a contention that for interest to run after the date of decree on a sum awarded under section 1(1A) of the 1958 Act, which itself included interest, would be contrary to section 1(2)(a). Lord Stewart interpreted section 1(2)(a) as making it clear that section 1 did not authorise the awarding of compound interest. That interpretation was consistent with Lord Wright's interpretation of the corresponding English provision, noted earlier, in Riches v Westminster Bank Ltd. Secondly, in Boots the Chemist Ltd v G.A. Estates Ltd 1992 SC 485 the principles on which the court might award interest under section 1(1) of the 1958 Act (as amended by the 1971 Act) were considered by the Inner House. Lord Justice-Clerk Ross, with whose Opinion the other members of the court agreed, said (at pages 495-496):

"I agree with counsel for both parties that the Act of 1958 did not sweep away the previous law relating to damages. As Lord Mackintosh observed in Macrae v Reed & Mallik Ltd. at p. 80, the Act did not profess to abrogate the general rule relating to damages nor to do away with the former practice. Accordingly the general principle laid down in Carmichael v Caledonian Railway Co (1870) 8 Macph. (H.L.) 119 and Kolbin & Sons v Kinnear & Co still applies, that is to say, that a pursuer may recover interest by way of damages where he is deprived of an interest bearing security or a profit producing chattel or where money has been wrongfully withheld. Where a delict has been committed, the delinquent is liable to pay damages. In the normal case, however, the amount of damages cannot be quantified there and then, and damages cannot be regarded as being wrongfully withheld at a date when they are incapable of quantification. On the other hand, even though damages have not been quantified, if they become capable of ascertainment then the injured party can properly be regarded as standing out of his money, and the damages can be regarded as being wrongfully withheld (Fraser v Morton Wilson and Bell's Sports Centre v Briggs & Sons).

The Act of 1958 empowered the court to award interest from a date not earlier than the date on which the action was commenced against the defender, i.e. the date of citation. The Act of 1971 extended that power to an earlier date by enabling the court to award interest for the whole or part of the period between the date when the right of action arose and the interlocutor awarding damages. The right of action may well have arisen long before the pursuer has cited the defender in the action of damages. I agree with Lord Maxwell in Buchanan v Cameron 1973 S.C. 285 that the mere fact that a right of action arose on a particular date does not per se justify an award of interest from that date, but in my opinion interest may properly be awarded from a date when the damage suffered was capable of ascertainment (Bell's Sports Centre v Briggs & Sons). This appears to me to be consistent with the principle adverted to by Lord Keith of Avonholm in F.W. Green & Co Ltd v Brown & Gracie Ltd 1960 S.L.T. (Notes) 43 where he observed of damages for breach of contract that quantification would generally fix the earliest date from which interest could reasonably be taken to run. In my opinion, however, even if damages have not been quantified, interest may reasonably be held to run from a date when the damages may reasonably be regarded as quantifiable or capable of ascertainment. From that date the wrongdoer can reasonably be regarded as wrongfully withholding the damages."

Following that approach, the court upheld the decision of the Lord Ordinary to award interest under section 1 on certain elements of the damages from a variety of dates until the date of decree. The interlocutor was silent as to interest after the date of decree, which would therefore run at common law on the damages for which the court had decerned.

The present case

[56] In the present case, counsel's submissions focused on two matters in particular. First, it was argued on behalf of the defenders that the judge's award of interest from the date of decree on interest which he had awarded in respect of an earlier period had the effect of awarding compound interest, without any basis for such an award either in the common law (cf. Roxburgh Dinardo's Judicial Factor v Dinardo 1992 SC 188) or in statute (having regard, in particular, to section 1(2)(a) of the 1958 Act). On behalf of the pursuer, on the other hand, it was argued that the competency of such an award at common law was demonstrated by the line of authority from Jolly v McNeill to Nash Dredging Ltd v Kestrel Marine Ltd, and that its competency under section 1 of the 1958 Act was demonstrated by the requirement, under section 1(1A), that the power under section 1(1) must be exercised so as to include interest in the sum awarded. Secondly, it was argued on behalf of the defenders that the judge had mistakenly treated interest as if it formed part of the damages awarded. On behalf of the pursuer, on the other hand, it was argued that, since the interest awarded in respect of the period prior to the date of decree was compensatory in nature and formed part of the amount awarded to the pursuer in order to compensate him for the loss which he had suffered, it should attract interest from the date of decree in the same way as the principal sum of damages.

[57] As we have explained, the basis of an award of interest on damages under section 1(1) of the 1958 Act, as under the common law, is the wrongful withholding of payment. In the present case, the judge considered that

"As at 31 December 1996 ... the pursuer was standing out of his money, and, in my opinion, the defenders as the wrongdoers were wrongfully withholding money from him."

That conclusion is not challenged. The money which, as the judge found, was wrongfully withheld was the sum of £66,400 at which he assessed the pursuer's damages. Since that sum had been wrongfully withheld since 31 December 1996, it was open to the judge, under section 1(1) of the 1958 Act, not only to decern for payment of that sum of money as damages, but also to include in the interlocutor decree for payment of interest on that sum from 31 December 1996.

[58] The interest itself, on the other hand, was not a principal debt forming part of the subject-matter of the action, and could not therefore attract additional interest. The present case is thus distinguishable from Jolly v McNeill, Napier v Gordon, Maclean v Campbell and Nash Dredging Ltd v Kestrel Marine Ltd, in each of which the arrears of interest constituted a principal debt forming part of the subject-matter of the action.

[59] It might be argued (although this was not the argument in the present case) that the interest awarded on damages in respect of the period prior to the date of decree changes its character upon the granting of decree and becomes a debt, on which interest should thereafter run, since any withholding of payment of the past interest will be wrongful. Some such idea may have been in the judge's mind when he remarked that, unless further interest ran on the past interest, a defender could delay without penalty the payment of that interest. We can however find no support for that approach in any principle which we can derive from the authorities cited. Interest runs ex lege from the date of a decree ordering payment of a sum of money because from that date, if not earlier, it can be taken that any delay in payment amounts to wrongful withholding, as Lord Justice-Clerk Thomson explained in Macrae v Reed & Mallik Ltd at page 72. If wrongful withholding occurred from an earlier point in time, however, then section 1(1) of the 1958 Act enables the court to award interest from that earlier date. In such a case, interest simply continues after the date of decree, on the same principal sum, either at the same rate or at a different rate.

[60] As we have explained, interest awarded ex mora has a compensatory character, and to that extent is analogous to damages: Riches v Westminster Bank Ltd. Interest nevertheless remains interest: it is conceptually different from damages, and it is governed by different principles. The fact that an award of damages attracts interest from the date of decree does not imply that an award of past interest on damages attracts further interest in the same way. The legal treatment of interest depends on the principles applicable to interest, not on the principles applicable to damages.

[61] Nothing in section 1(1A) of the 1958 Act alters this conclusion. As we have explained, the inclusion of interest awarded under section 1(1A) in the sum for the payment of which the court then decerns is the consequence of modelling the drafting of section 1(1A) on section 22 of the Administration of Justice Act 1969. The consequence of this importation from English law is to create an exception, not to say an anomaly, in the context of Scots law. It does not bear on section 1(1) of the 1958 Act, the terms of which are materially different, and do not either authorise or require the court to include interest in the sum decerned for. As we have explained, section 1(1) enables the court to back-date the point in time from which interest would otherwise run, but is otherwise consistent with the pre-existing principles of Scots law, including the principle that interest is not included in the sum for which the court decerns unless it is itself part of the principal sum due (for example, as arrears due under contract, or as an element of the assessment of damages).

Conclusion

[62] In these circumstances, the appeal succeeds only insofar as it is directed against the award of interest. We shall accordingly adhere to the temporary judge's interlocutor of 11 July 2006 awarding damages of £66,400, but recall his interlocutor of 11 December 2006 in so far as it deals with the question of interest, and instead find the pursuer entitled to interest on the sum of £66,400 at the rate of 8 per cent per annum from 31 December 1996 until payment.