Scottish Law Commission (Discussion Papers)

 


Part 5      Interest on Damages

Introduction

5.1      In relation to interest on damages, it is less obvious than in the case of interest on contractual debt that any fundamental change to the existing law is required with regard to the commencement date for the running of interest. Statutory intervention has taken place twice and, despite the criticisms which were made of them shortly after their enactment, the operation of these provisions seems to be broadly satisfactory. The effect of the 1971 amendments to the Interest on Damages (Scotland) Act 1958 was to bring forward the date from which interest may be awarded on damages and, in the case of solatium for personal injury, to bring it forward to the date of the injury. We are not aware of any glaring injustice to be remedied with regard to the running of interest on damages. There is a persuasive argument that if the present legislation works in practice, it ought to be left alone. (As a separate issue, questions have arisen regarding the rate of interest payable on damages; these are addressed in Parts 7 and 8 below.)
5.2      Nevertheless, we have considered whether the law relating to interest on damages should be subject to a statutory re-statement in somewhat amended form. In our view, such re-statement may be justified for the following reasons:

(i) The current statutory provisions depend heavily on the exercise of judicial discretion. They do no more than empower the court to award interest during any period since the date when the right of action arose. It is clearly not always appropriate for every head of claim to bear interest from the date when the right of action arose but the law gives no further guidance as to how the discretion ought to be exercised.

(ii) There are uncertainties which remain unresolved, such as the date when interest runs on out-of-pocket expenses which are capable of quantification at a date earlier than the date when they are actually incurred by the person claiming them as a head of loss (such as where a pursuer sues for reimbursement of an expense which has been quantified but not yet actually incurred). Nor is there any clear authority on the commencement date for interest on damages for the destruction of property which is not replaced.

(iii) The current statutory provisions have been judicially interpreted as requiring the court to continue to have regard to the criterion of "wrongful withholding". If, as we are proposing, this is to be abolished as the test for interest to run on sums other than damages, it seems appropriate also to remove it as a requirement for interest to run on damages. The most appropriate way to do so would be to re-cast the statutory provisions in such a way as to leave no room for the application of that test.

(iv) The drafting of the existing legislation, in particular the subsections which were substituted in 1971, has been subject to criticism. Interpretation has required a degree of judicial elucidation and we consider that even as regards aspects of the present law to which we propose no significant change of substance, the law could be more clearly stated than it was in 1958 and 1971.

For these reasons, it seems appropriate to us to consult on the question whether the law relating to interest on damages is in need of statutory re-statement. We seek views on the following question:

17.  Is it desirable for the law relating to interest on damages to be re-formulated by statute?

The remainder of this part of the Discussion Paper proceeds upon the assumption that such a re-formulation ought to be attempted.

Date for commencement of running of interest

5.3      As with interest on contractual debt, our guiding principle is that a claimant should be compensated for loss in the whole of the period during which that loss has subsisted. The corollary of this is that interest should not be awarded on any sum for any period prior to the time when the head of loss in question was sustained. By way of example, consider earnings lost as a consequence of an accident at work. The loss accrues over a period which may continue after the date of the award. In principle, the instalments of past earnings lost should carry interest from the respective dates when they would have been received were it not for the accident. On the other hand, instalments of future earnings should not carry interest. They are not being received late: in fact, they are being received early and should be subject to a discount.^[1]
5.4      Damages are also awarded as a surrogatum for loss which is not patrimonial: the most common example is solatium for pain and suffering due to personal injury. In other cases, money damages are awarded for patrimonial losses other than loss of the use of money, for example, destruction or loss of property. In these cases too, the loss which is being compensated may have arisen at any time, or at various times, since the date when the event giving rise to the claim occurred and may also continue into the future. Again, therefore, it is in principle appropriate to divide up the award into its component parts, awarding interest on past losses but not on compensation for losses which will arise or continue to arise in future. A method also has to be found for ensuring that past losses bear interest from an appropriate date or dates.
5.5      The Interest on Damages (Scotland) Act 1958, as amended in 1971, addresses these requirements by permitting the award of interest for any period beginning on or after "the date when the right of action arose". The use of the benchmark "when the right of action arose" appears to have been borrowed from English law. Many of the Commonwealth legal systems have also adopted this benchmark.^[2] It had not previously been used in Scots law in the context of commencement of an entitlement to interest. Whilst it has the merit of affording the court the possibility of awarding interest from the earliest possible date, it requires some kind of modification to take account of the fact that not all loss accrues on the date when the harmful event occurs. Most systems, including Scots law, have resolved this by giving the court a wide discretion to award interest from any date or dates after the date when the cause or right of action arose, enabling the court to achieve a just result in individual cases. We have considered alternative formulations which would give greater certainty as to the date of commencement without depending to a large extent on the exercise of judicial discretion.
5.6      An example of a system which operates without judicial discretion is afforded by British Columbia. The Court Order Interest Act 1996^[3] utilises the benchmark of the date on which the cause of action arose, but requires the court to add interest from that date at a rate which the court considers appropriate. There are, however, two notable exceptions. Firstly, if the sum awarded consists in whole or in part of "special damages",^[4] interest runs from the end of each six-month period in which the special damages were incurred. Secondly, the court must not award interest on non-pecuniary damages arising from personal injury or death. The first of these exceptions acknowledges that not all items of actual pecuniary loss are incurred on the date of the event giving rise to the claim. We agree that whatever statutory formulation is adopted must be such as to secure that interest is awarded on items of actual pecuniary loss only from the time when it was in fact incurred. The second appears to have been the consequence of a reluctance on the part of the Canadian courts to apportion non-pecuniary loss into past and future components.^[5] This reluctance has not been shared by the courts in Scotland where solatium is routinely (albeit on a broad-brush basis) divided into pre-judgment and post-judgment loss. We would not wish to except non-pecuniary loss from the scope of our proposed scheme.
5.7      The solution which we propose is to provide, with as little further elaboration as possible, for interest to run on a particular head of loss from the date upon which that loss was sustained. This would be a principled approach and would moreover have the attraction of simplicity. It makes clear that the court must continue to take the "selective and discriminating" approach to assessment of damages which the case law presently requires and provides a test for the starting date for interest on each head of claim which does not depend upon applying the criterion of "wrongful withholding". It seems to us that such a benchmark would provide significantly greater guidance to the court than does the present law. We invite comment on the following proposal:

18.  In an action for damages, interest should run on each head of loss from the date on which the loss in question was sustained.

5.8      We are attracted to the idea of a principle which can be shortly stated and which can be applied by the court in such a way as to achieve a just result on the facts of each particular case. Our provisional view is that a statutory provision which confers an entitlement to interest on each head of damage awarded from the date when the loss was sustained is sufficiently clear without need of further elaboration for specific types of loss although, as noted below, the meaning of the test in relation to solatium may require express statutory explanation. We see the principle applying to different types of loss in the following way.

Application of the general rule to particular types of loss

Pecuniary losses (including out-of-pocket expenses)

5.9      In the case of out-of-pocket expenses, the application of the principle would be straightforward. The loss is sustained on the date when the expense is incurred. It does not matter that the amount of the expense was quantifiable, or, indeed, quantified, at an earlier date: to award interest prior to the incurring of the expense would be to over-compensate the claimant. For example, assume that A causes a road accident in which B's car is damaged beyond economic repair. B sues for (i) the value of the car, and (ii) the cost of hiring a car during the period prior to purchase of a replacement car. The dates on which B's losses are sustained are (i) in the case of the car itself, the date on which B incurs the expense of purchase of the replacement car, and (ii) in the case of the hire charges, the date or dates upon which these are incurred. Although B has been deprived of the use of his damaged car from the date of the accident, he would be over-compensated by allowing interest to run from that date: his deprivation of the use of the car prior to the purchase of the replacement is in this case compensated by reimbursement of the expense of a temporary replacement; in other cases a different loss (such as increased public transport expenses) might be incurred instead.
5.10      The principle would apply in the same way where the loss consists not of an out-of-pocket expense but rather of the loss of money which would have been received but for the event giving rise to the claim, such as wage loss. The main obstacle to the straightforward application of this principle in such cases seems to us to be practicality: actual pecuniary losses may consist of a large number of individual items the loss of which was sustained at different times. For example, each instalment of past wage loss will have been sustained on the date when that instalment would have been received. This is a difficulty which must be addressed by any system in which interest is awarded on past losses. Precise calculation of interest due on each instalment is tedious but entirely feasible. To what extent is the system prepared to sacrifice accuracy for ease of calculation? Existing legislation in Scotland gives no guidance on this. The practice, encouraged by court decisions during the period following the legislative amendments in 1971, is for a broad measure of accuracy to be achieved by calculating the total wage loss over the whole period of past loss and then awarding interest on that total at half the judicial rate. In some Canadian jurisdictions^[6] interest runs only from the end of the six-month period in which the loss was sustained thereby reducing the number of interest calculations required.
5.11      Our provisional view is that the fact that strict accuracy could only be achieved by a detailed process of calculation is not a sufficient reason to depart from the principle that interest should run on a particular item of loss from the time when that item of loss was sustained. It would be to the disadvantage of pursuers if the commencement of running of interest on pecuniary losses were to be delayed until the end of the six-month period in which the loss accrued. We do not regard this disadvantage as a fair price to pay for a speedy calculation. In any event the availability of the on-line and other computational aids which we suggest elsewhere in this Discussion Paper^[7] should mean that speedy calculation remains entirely feasible. There is, of course, no reason why parties should not continue to settle claims on the basis of a more approximate calculation; nor, indeed, why they should not invite the court to employ a degree of approximation where this will not cause material prejudice to either party. The claimant's statutory entitlement should, in our view, be clear.

We invite comment on the following proposal:

19.  (a) Interest on pecuniary losses consisting of out-of-pocket expenses should run from the date when the expense in question was incurred.

(b) No special provision is required in relation to losses accruing periodically during the time since the date of the event giving rise to the claim.

Solatium

5.12      There has been no consensus among judges in different jurisdictions as to the proper interpretation of an award for non-pecuniary loss. Some courts have taken the view that the valuation of financial compensation for non-pecuniary damage such as personal injury or death is such an approximate process that it would introduce a spurious accuracy to divide the sum into past and future elements or to award interest on a past element. Legislation sometimes prohibits the award of interest on solatium. This is not presently the case in Scotland. Section 1(1A) of the 1958 Act requires interest to be "included" in the damages awarded in respect of solatium for personal injury.^[8] Clarification might be required with regard to the application to awards of solatium of the simply-expressed test which we have tentatively proposed. On the one hand, it could be argued that the loss which is compensated by an award of solatium is sustained on the day of the accident. On the other hand, it might be said that the loss is sustained on every day following the accident unless and until the claimant makes a full recovery. The latter interpretation is the one which seems to us to represent the reality. We would intend that the legislation be drafted in such a way, if necessary by a specific provision, as to achieve this result. It would thus remain possible for interest on solatium allocated to the past to be calculated at a rate which is one-half of that specified by law in order to compensate the effects of the injury over a period of time. We would welcome views on the following question:

20.  If the principle which we have proposed were to be adopted, is there a need to specify by statute that the loss which is compensated by an award of solatium is sustained throughout the period during which the effect of the event giving rise to the claim endures, and is not sustained wholly on the date when the event occurs?

If so, how might this best be done?

Property lost or destroyed

5.13      Another situation which requires to be separately addressed is that of property which is destroyed or lost and not replaced. An example is provided by James Buchanan & Co v Stewart Cameron (Drymen) Ltd.^[9] The pursuers engaged the defenders to carry a load of whisky and advertising material by road. The lorry was stolen and the goods lost. It was held by Lord Maxwell that where, as here, there was no suggestion that the defenders were enjoying an advantage from the pursuers' loss, the principal sum could not be said to be wrongfully withheld from any date prior to the date of citation. He noted also that he had no grounds for assuming that the whisky and advertising material, if not lost, would have earned profit for the pursuers from any particular date. Applying the principle which we have proposed to the facts of this case, it becomes necessary to determine when the owner's loss was sustained: was it the date of the theft or was the loss sustained only at the date when the stolen goods would have been used for profit? We consider the latter alternative to be a more accurate reflection of reality: if interest were to be awarded from the date of the theft, the claimant could be better off than if the goods had not been stolen. It may be more accurate still to regard the loss of the cost of the goods (which will usually constitute the greater part of the loss) as occurring on the date of the theft but to regard the loss of profit on their re-sale as occurring on the date when they would have been used for profit.
5.14      Different dates might be appropriate for the different types of goods lost: it would in each case be for the pursuer to prove when a financial loss actually occurred. In the circumstances of the James Buchanan case, interest might not run from the same date in respect of the whisky as in respect of the advertising material. So far as the whisky is concerned, the appropriate date for commencement of the running of interest seems to be the date when it would have been sold in the course of the pursuers' business. The advertising material is perhaps more difficult. If, for example, the pursuers proved that they required to incur expense on ordering replacement material then interest would run from the date when that expense was incurred on the normal principle for out-of pocket expenses.^[10] If, on the other hand, the material was not replaced then, as discussed in paragraph 5.16 below, the only possible date for the calculation of interest on whatever loss was claimed would appear to be the date of the theft.
5.15      The principle may be further tested by applying it to the facts of Boots the Chemist Ltd v GA Estates Ltd.^[11] The pursuers were tenants of shop premises who suffered loss when their premises were flooded as a consequence of a blocked culvert. Seven of the eight heads of loss claimed from the landlord consisted of out-of-pocket expenses, such as shopfitting costs, which had been incurred during the two months following the flooding incident. The eighth was a claim for loss of stock. The court held that interest on the seven heads of out-of-pocket expenses ran from the dates when these expenses were respectively incurred. As regards the loss of stock, there was no evidence before the court as to when that stock could have been turned to profit, and accordingly, following James Buchanan & Co v Stewart Cameron (Drymen) Ltd, interest was allowed only from the date of citation. Applying the new principle which we have proposed, the situation as regards the out-of-pocket expenses would be no different. The position as regards the lost stock would depend (a) upon whether or not the stock was replaced, and, if not, (b) upon proof of the date when the stock would have been likely to have been turned to profit. A difference from the existing law would be that there would be no "safety net" of date of citation for a pursuer who failed to prove when the loss was sustained.
5.16      The examples in the two previous paragraphs concern property whose loss can be compensated by reference to its commercial value. This will not always be possible. Assume that in the example in paragraph 5.9 above, B does not purchase a replacement car and simply sues for the value of the car which was damaged beyond repair, with no intention of expending the sum recovered on a car. There would seem to be only one possible date upon which B's loss could be said to be sustained, namely the date of the accident. It might be thought anomalous that interest runs from different dates depending upon B's decision whether or not to replace his car. However this is because a different type of loss is being compensated. In the first case, it is a permanent financial loss which does not occur immediately, accompanied by the temporary loss of use of an asset; in the second, it is a permanent loss of an asset which occurs immediately. On reflection, we do not regard it as anomalous that the commencement dates for the running of interest should be different,^[12] and it seems to us that our proposed test is capable of applying in all of the foregoing circumstances in a fair and reasonable way.
5.17      Another example is afforded by the English case of Metal Box Co Ltd v Currys Ltd.^[13] Goods belonging to the plaintiffs which were stored in the defendants' warehouse were destroyed by a fire caused by the negligence of the defendants' employees. It appears that the goods were stock intended for sale. The plaintiffs were compensated for the value of the goods destroyed and the question was whether interest was due on the compensation and, if so, in respect of what period. The defendants contended that no interest at all was due because payment had not been wrongfully withheld. Alternatively, since the plaintiffs were insured, it was due only from the date when the insurers made payment to the plaintiffs. It was argued that unless the plaintiffs had intended to sell the goods on the day of the fire, they were not entitled to interest. The plaintiffs contended that interest should run from the date when their loss adjusters wrote to the defendants' insurers to intimate a claim. There were further arguments as to whether the plaintiffs had delayed unduly in prosecuting their claim and McNeill J, in exercise of the statutory discretion,^[14] awarded interest from a date midway between the date of the fire and the date when the action was raised. It seems clear that the judge was correct to reject the submission that no interest was due. On the test which we propose, however, interest would be awarded on the compensation for the destruction of the stock from the date when the stock would have been used for profit. The question whether delay on the part of a pursuer in raising proceedings should affect the running of interest is discussed below.^[15] Leaving that matter aside, however, it seems to us that our proposal would have been reasonable in the circumstances of the Metal Box case. In the course of argument in that case, counsel for the defendants invited the court to consider the situation where a work of art or a Ming vase was destroyed. He argued that profit-earning capacity was irrelevant to the question whether or not interest should be paid on the damages awarded for its destruction. Whilst we agree that interest should be awarded whether the item destroyed has a profit-earning capacity or not, it does not seem to us to follow that the commencement date should be the same in all cases.
5.18      We invite comment on the following proposals and question:

21.  (a) Where loss is sustained as a consequence of the loss or destruction of an item of property which is replaced, the loss should be taken to occur on the date when expense is incurred on replacement.

(b) Where loss is sustained as a consequence of the loss or destruction of an item of property which is not replaced and which consists of a loss of proceeds of realisation of the item, the loss should be taken to occur at the time of loss or destruction but any lost profit on realisation should not be taken to have occurred until the date when the proceeds would have been received.

(c) Where loss is sustained as a consequence of the loss or destruction of an item of property which is not replaced and which was not intended for realisation, the loss should be taken to occur at the time of loss or destruction.

(d) If these proposals are adopted, is there a need for express statutory provision setting them out, or could they be regarded as following naturally from the principle that interest runs from the time when loss is sustained?

Date for termination of running of interest

5.19      Under the current legislation,^[16] interest runs for the whole or any part of the period until the date of the interlocutor granting decree for payment of damages "including" interest. After decree, interest continues to run at the judicial rate in terms of Rule of Court 7.7 or the sheriff court equivalent.^[17] We discuss below:

•    whether interest before and after decree should be calculated by reference to the same rate;^[18] and

•    whether interest accrued to the date of decree should be compounded with the principal for the purpose of calculating interest post-decree.^[19]

5.20      Where the defender makes an interim payment of damages, interest ceases to run on the sum paid.^[20] At present, this obviously sensible result is achieved by operation of the judicial discretion in s1(1) of the 1958 Act. It could also be achieved by express provision in legislation. In any event, we suggest that:

22.  Where a defender makes a payment to the pursuer in part satisfaction of his liability, the amount on which interest is calculated after the date of such payment should be reduced by the amount of the payment.

Judicial discretion to remit interest

5.21      The current statutory provisions afford a wide discretion to the court to restrict the period during which interest runs. This is necessary because the 1958 Act simply permits the awarding of interest from any date after the right of action arose. There are in fact four separate discretions in section 1(1) as amended:

•    whether to award interest at all;

•    the rate or rates of interest;

•    the amount of the sum carrying interest; and

•    the period during which interest runs.

As regards damages or solatium for personal injury, the first of these discretions is restricted by section 1(1B): the court must award interest unless there are reasons special to the case why no interest should be given. The other three discretions remain.

5.22      Despite the width of the statutory wording, the courts have been reluctant to treat this as an unfettered discretion, preferring to apply the provisions of the 1958 Act against the common law background of "wrongful withholding". As with contractual debt, we propose that the criterion of wrongful withholding should cease to apply to interest on damages and be replaced by the new principle that interest should run on each head of loss from the date when it was sustained. It is for consideration, therefore, whether there is a need to retain any accompanying judicial discretion.
5.23      At one time the courts were inclined to exercise the discretion in the current law to restrict entitlement to interest where there was unreasonable delay on the part of the pursuer in prosecuting a claim.^[21] However, this approach was disapproved by the Second Division in Boots the Chemist Ltd v GA Estates Ltd^[22] and, since then, the discretion has not been exercised to penalise delay by the pursuer. So far as the rate of interest is concerned, the discretion has been exercised largely to achieve a broadly fair application to periods prior to decree of the judicial rate prescribed by Rule of Court 7.7 in respect of interest payable under a decree. As noted above, the discretion has also been used to restrict entitlement to interest where an interim payment has been made by the defender.
5.24      Arguments in favour of retaining a discretion in any new scheme applicable to interest on damages include the following:

The court may wish in certain circumstances to penalise the pursuer for his conduct of the litigation;

There may be circumstances in which the court would wish to award interest at a higher or lower rate than that prescribed by legislation, as discussed in Part 7 below, for example, where the defender has used the money to earn interest at a higher rate than that prescribed;

The discretion can be used to ensure that interest entitlement is restricted when an interim payment has been made;

There may be other circumstances in which it would be unfair to require the defender to pay interest for the whole period since a particular loss was sustained.

5.25      Against these arguments it may be said:

If conduct of litigation is to be penalised then this should be done by some means other than interest, such as awards of expenses;

The rate of interest actually earned by the defender may be regarded as irrelevant to the loss to the pursuer as a consequence of delayed payment;

The effect of interim payments can be dealt with expressly by statute.

We think that it would also be desirable that the same degree of discretion, if any, should apply to interest on damages as applies to interest on contractual and other pecuniary claims.

5.26      A separate issue arises as to whether there should be judicial discretion to vary the rate of interest or to apply simple or compound interest. These issues are discussed at paragraphs 7.29 to 7.32 and 8.32 to 8.35.
5.27 We have not reached a conclusion as to whether to retain a discretion with regard to the award of interest on damages. We invite comment on the following alternatives:

23.  (a) There should be no judicial discretion to remit interest on damages;

(b) There should be a judicial discretion to remit interest on damages where the interests of justice so require, but only by reason of any conduct of the pursuer;

(c) There should be a judicial discretion to remit interest in any other particular circumstances (which would be specified in the legislation); or

(d) There should be a wide judicial discretion to award or disallow interest as the interests of justice require.

Ý
Ü   Þ

Note 1   In current practice tables of multipliers (notably the "Ogden tables") are used to achieve an appropriate discount for early receipt of damages attributable to future loss.    [Back]

Note 2   The phrase usually used is "cause of action" rather than "right of action".    [Back]

Note 3   RSBC 1996 c 79, implementing in part the recommendations of the Law Reform Commission of British Columbia in their Report on The Court Order Interest Act (LRC 90, 1987).    [Back]

Note 4   The term is not defined in the British Columbian Act. It has been used in England as synonymous with "actual pecuniary loss suffered by a plaintiff": Jefford v Gee [1970] 2 QB 130, Lord Denning MR at 146.    [Back]

Note 5   There has been a similar reluctance on the part of the English courts: see eg Jefford v Gee above; Wright v British Railways Board [1983] 2 AC 773; McGregor, Damages (16th edn) paras 645-652.    [Back]

Note 6   Eg British Columbia (see above), Ontario and Manitoba.    [Back]

Note 7   See para 8.43.    [Back]

Note 8   For criticism of this formulation see Smith v Middleton 1972 SC 30, Lord Ordinary (Emslie) at 39. See para 2.29.    [Back]

Note 9   1973 SC 285; see para 2.30.    [Back]

Note 10   If in addition the pursuers had sustained consequential loss as a consequence of being deprived for a period of the use of the advertising material (for example, because they were unable to run an intended sales promotion event), then that would constitute a separate head of claim whose admissibility would depend upon application of normal Hadley v Baxendale rules. Interest would also run on this head of claim.    [Back]

Note 11   1992 SC 485; see paras 2.31-2.32.    [Back]

Note 12   A parallel may be found in English admiralty cases. Where a ship is destroyed, in a collision or otherwise, interest is awarded from the date of destruction: Straker v Hartland (1864) 34 LJ Ch 122. Where on the other hand a ship is damaged, interest is awarded from the date when the plaintiff incurred the cost of the repairs: The Hebe (1847) 2 W Rob 530; The Norseman [1957] P 224.    [Back]

Note 13   [1988] 1 WLR 175.    [Back]

Note 14   Supreme Court Act 1981, s 35A.    [Back]

Note 15   Para 5.23.    [Back]

Note 16   Interest on Damages (Scotland) Act 1958, s 1(1) (as substituted by the Interest on Damages (Scotland) Act 1971).    [Back]

Note 17   Sheriff Courts (Scotland) Extracts Act 1982, as most recently amended by the Act of Sederunt (Interest in Sheriff Court Decrees and Extracts) 1993 (SI 1993/769).    [Back]

Note 18   See paras 7.43-7.52.    [Back]

Note 19   See paras 7.46-7.51. (For a recent example seeRyan v Fairfield Rowan Ltd, 29 July 2004 (unreported).)    [Back]

Note 20   Redman v McRae 1991 SLT 785; Jarvie v Sharp 1992 SLT 350.     [Back]

Note 21   Nacap Ltd v Moffat Plant Ltd 1986 SLT 326; Buchan v J Marr (Aberdeen) Ltd 1987 SLT 521; M & I Instrument Engineers Ltd v Varsada 1991 SLT 106.     [Back]

Note 22   1992 SC 485, Lord Justice Clerk Ross at 497.    [Back]