Scottish Law Commission (Discussion Papers)

 


Part 12      Transition

Introduction

12.1      Transition to the proposed new regime requires the balancing of competing policies. On the one hand, legitimate expectations acquired under the existing regime should not readily be disturbed. On the other hand, it would be inconvenient to maintain two parallel regimes of entitlement to interest in existence during an extended period of time. It might also be argued that if, as we believe, the proposed new system would represent a significant improvement upon the existing law, that benefit should be generally available as soon as possible. One method of minimising retrospective application of the new law would be to delay its commencement for a period after the date of Royal Assent.

Contractual debts

12.2      The following options exist for the application of a new entitlement to statutory interest to contractual debts:

(i) all obligations to pay which are created on or after the commencement date;

(ii) all debts which become due on or after the commencement date;

(iii) all actions for payment^[1] raised on or after the commencement date;

(iv) all decrees for payment granted on or after the commencement date.

12.3      Of these options, the first is the only one which avoids entirely any element of retrospective application. In all the others, an entitlement to interest is created which did not exist at the time when the parties entered into their contract. The Late Payment of Commercial Debts (Interest) Act 1998^[2] "does not affect contracts of any description made before this Act comes into force for contracts of that description", thus effectively adopting option (i). The principal disadvantage of option (i) is that the period of transition for the new regime would be prolonged, perhaps for many years, during which contracts in existence prior to the commencement date continue to run.^[3]
12.4      It seems to us to be arguable that no real issue of retrospection arises under option (ii). Parties do not (or at least should not) enter into a contract with a view to the benefit, if any, which they may obtain by failing to implement it. Accordingly, the choice of option (ii) ought not to affect decisions taken or courses of conduct entered into in reliance upon the existing law. It may be regarded as sufficient to avoid retrospection if the consequences of a breach of contract are determined according to the law as it stands at the time when the breach occurs rather than when the parties entered into the contract. The advantage of adopting this option would be that it would bring within the scope of the new scheme existing contracts of long duration which might otherwise remain outside it for many years.
12.5      Option (iii) has a real element of retrospection: it would mean that a debtor who was in default would be worse off on the commencement day than he had been on the day before. The principal advantage of option (iii) (in addition to those of option (ii)) would be one of consistency: prior to the commencement date, interest would run in most actions (in absence of contrary stipulation) from the date of citation; after the commencement date, interest would run from the date when payment was due. It might be thought that this degree of retrospectivity is an acceptable price to pay for a clean and speedy transition. It must be borne in mind, however, that we are proposing to create a statutory entitlement to interest which does not depend upon the raising of proceedings.^[4] If, therefore, option (iii) were to be preferred, it would require to be expressed negatively: in other words, the new scheme would not apply to debts in respect of which an action had been raised prior to the commencement date.
12.6      Option (iv) has found favour in law reform elsewhere.^[5] It has the advantage of simplicity where the underlying legislative scheme is one of "deferred entitlement",^[6] but is less easily adapted to the system of "immediate entitlement" which we propose. The alternative of negative expression which could be used for option (iii) could not be used with option (iv). More importantly, it would affect the rights of parties to existing litigation and in particular could cause tenders which had been lodged on the basis of the existing law to become unprotective. Our provisional view is that this option should be rejected.

Non-contractual debts

12.7      The options for commencement in relation to non-contractual debts are the same as for contractual debts with the exception of option (i) which has no counterpart. The arguments set out above for and against the other options apply mutatis mutandis to non-contractual debts.

Damages

12.8      The options for commencement in relation to claims for damages are:

(i) all rights of action arising on or after the commencement day;

(ii) all actions raised on or after the commencement day;

(iii) all decrees granted on or after the commencement day.

12.9      As with interest on debt and damages, retrospective effect can be avoided entirely only by option (i). Its disadvantage would be that two regimes would exist side by side for many years until all actions arising out of events occurring before the commencement date had been completed. Option (ii) would also result in parallel regimes existing for a period. But the degree of retrospectivity arising out of the application of the new legislation to rights of action accruing prior to its commencement may be regarded as acceptable: the substantive reform which we are proposing in relation to damages is not radical and, unlike interest on debt, interest on damages already runs prior to the date of commencement of the action under the present law. This option was adopted in the Interest on Damages (Scotland) Act 1958.^[7] Option (iii) seems to us to be more attractive in relation to damages than in relation to debt because it could be expressed negatively (as in the 1958 Act). It would, however, affect the rights of parties to pending court proceedings. As with actions for payment, it could cause tenders to become unprotective although, given the current rate of judicial interest, this seems unlikely.

Conclusion

12.10     There would be advantages of consistency in having the same commencement date in relation to all types of pecuniary claim, whether for debt or for damages. The two options which could achieve such consistency are (i) to provide for the Act to apply to all debts falling due or, as the case may be, rights of action arising, on or after the commencement date; or (ii) to provide for the Act to apply immediately to all claims except those in respect of which an action has been raised prior to the commencement date. If consistency as between debt and damages were not regarded as crucial, one or other of these two options could be used for debts but the new Act could apply immediately to all claims for damages, regardless of whether proceedings had been raised. A further possibility would be to amend the law with regard to rates of interest with immediate effect for all pecuniary claims^[8] but to apply one of the other options to the substantive changes in the law which we have proposed. We would welcome responses to the following question:

49. Should the new provisions apply:

(a) to all debts falling due and all rights of action arising on or after the commencement date; or

(b) to all pecuniary claims except those in respect of which an action has been raised prior to the commencement date; or

(c) on some other basis?

Note 1   Including claims to tribunals and claims in arbitration.    [Back]

Note 2   S 17(4).    [Back]

Note 3   There is also an argument against option (i) based on a desire for consistency, since, as noted in para 12.7 below, option (i) could not apply to non-contractual debt.    [Back]

Note 4   Ie a system of "immediate entitlement": see paras 4.3-4.8.    [Back]

Note 5   Eg British Columbia: Court Order Interest Act 1996, s 6; New Brunswick: Judicature Act (RSNB 1973, cJ-2), s 46(3).    [Back]

Note 6   Ie where entitlement to interest is based upon an action for payment having been raised: see paras 4.3-4.8.    [Back]

Note 7   S 3(3): "This Act …shall not apply to any action commenced against any person before the passing of this Act".    [Back]

Note 8   As presently occurs when the judicial rate of interest is changed.    [Back]