Scottish Law Commission (Discussion Papers)

 


Part 6       Interest in Other Circumstances

Introduction

6.1      Not all claims for payment of money fall conveniently into the categories of contractual debt and damages. There are a variety of other circumstances in which a pecuniary claim may be made which, if refused, could result in a court action. Inevitably in such cases the question of entitlement to interest on the sum sued for arises. Examples are: certain forms of claim based on unjustified enrichment, notably claims for repetition of money paid in error or for recompense; claims for salvage; and claims on a fund paid into court following a ship collision. In addition, there are circumstances in which a person may hold funds on behalf of another, otherwise than as a consequence of a contractual relationship or following the expiry of a contractual relationship, in circumstances in which the holder may be regarded as being in default by having failed to hand over the funds. For example, an executor or a trustee may have delayed unduly in winding up an estate or trust and making over the capital to the beneficiaries; or one of the partners of a dissolved partnership may be holding funds properly due to one of his ex-partners. A further example is delay in satisfying a claim for legal rights in a deceased's person's estate. A sum claimed by way of aliment or financial provision on divorce is neither of the nature of debt nor damages.^[1]
6.2      Each of these examples is currently governed by common law or statutory rules.^[2] It would be possible to effect a statutory reform of entitlement to interest on contractual debt and interest on damages without altering the existing law in relation to these non-contractual claims for payment. That this is feasible is demonstrated by the Late Payment of Commercial Debts (Interest) Act 1998 which is expressly restricted in its scope. Equally, however, it would be possible to bring some or all of these types of claim within the scope of the reform. Legislation in some other jurisdictions applies to "pecuniary judgments" or "orders for the payment of money" without attempting to distinguish between contractual and non-contractual claims.^[3] We see advantages of certainty and consistency in bringing non-contractual pecuniary claims within the scope of our proposed reforms:

•    The present law is lacking in certainty in view of the relatively small number of decided cases in which entitlement to interest on non-contractual debts has been a matter in dispute;

•    Some of the examples described above bear a close similarity to contractual debts. For example, there are both contractual and non-contractual situations in which a person may come to hold funds on behalf of another and incur a liability to interest by failing to make them over at the due date. There seems to be no good reason to have differing rules regarding entitlement to interest as a consequence of late payment.

In this Part we discuss the application of the general rule which we have proposed in relation to contractual claims, namely that interest should run from the date when payment is due, to various types of non-contractual pecuniary claim.

6.3      As with contractual debts, there are circumstances in which existing statutory provisions create an entitlement to interest on non-contractual claims. Examples are to be found in section 29 of the Trusts (Scotland) Act 1921 and in section 81 of the Adults with Incapacity (Scotland) Act 2000.^[4] We do not propose any amendment to these provisions in so far as they specify the dates between which interest runs or the extent to which the court has a discretion as to whether or not to award interest. Legislation giving effect to the scheme which we propose would exclude from its scope any debt on which interest is due under another statutory provision. Again, however, our proposals could affect the rate of interest payable under certain statutory provisions. We discuss this at paragraphs 7.55 to 7.62.

Unjustified enrichment

6.4      A claim founded on the principle of unjustified enrichment may take the form of a demand for money: for example, repetition of money paid in error or in contemplation of an event which did not take place, or recompense for the value of a benefit unjustly received by the defender and by which he has been enriched.^[5] It is appropriate to consider each of these possible bases for a claim for payment separately.^[6]
6.5      Repetition. In the simplest situation in which a claim for repetition may be made, namely of money paid by one party to another in error, it will normally be the case that the appropriate date for the commencement of the running of interest is the date of payment. From that date the creditor has been deprived of the use of the money and the debtor has had the benefit of its use. This accords with what is probably the current position under Scots law.^[7] It seems likely to be regarded as the date when payment fell due to the creditor. There are, however, other circumstances in which a claim to reverse unjustified enrichment takes the procedural form of a claim for repetition and where the date when payment fell due will not coincide with the date when the creditor was deprived of use of the money. Our provisional view is that it would be sufficient to provide, as with other pecuniary claims, for statutory interest to run from the date when payment is due by the defender/debtor to the pursuer/creditor, leaving it to the court to apply that general rule to the circumstances of a particular case.
6.6      Recompense. As regards claims for recompense, the measure of the claim is the value of the benefit to the defender^[8] rather than (if different) the extent of the loss or expense sustained by the pursuer. Recompense is an equitable remedy and it is not possible to foresee all of the circumstances in which it might be invoked in order to reverse an unjustified enrichment. Again, our provisional view is that it should be left to the court to apply the general rule which we have proposed to the circumstances of a particular case.
6.7      Assume, for example, as in Shilliday v Smith, that A, in contemplation of marriage to B, pays B the cost of various works to be carried out to B's house and also pays a contractor directly to carry out further works. The marriage does not take place and A sues for repetition and recompense. A has been out of pocket since the date or dates when she paid over money to B and to the contractor but these will not necessarily be the dates when payment should be regarded as having fallen due by B to A. So long as marriage was still in contemplation, A was not seeking payment from B; there was not yet any unjustified enrichment of B by A. Under our proposed rule, A would be entitled to statutory interest from the date when payment fell due: that is, from the date when marriage was no longer contemplated. We consider that this is a reasonable outcome, suggesting that the rule which we are proposing is capable of applying in a flexible manner to the variety of claims falling within the scope of the law of unjustified enrichment.
6.8      An alternative approach to that outlined above would be to leave the awarding of interest in unjustified enrichment claims to be determined by the exercise of judicial discretion. The argument in favour of such an approach is that the outcome of the action in relation to the principal sum will be heavily influenced by considerations of equity. As Professor Evans-Jones concludes:^[9]

"In Morgan Guaranty Trust Co of New York v Lothian Regional Council,^[10] the fact that the condictio is an equitable claim was underlined. There is authority to the effect that considerations of 'equity' rightly influence the question whether, at what level, and from what point in time interest is payable. There is a whole range of circumstances that may properly be taken into consideration in determining the equity of the matter of payment of interest: whether the pursuer was negligent in making an undue payment; whether the defender had been earning interest on the undue sum and even perhaps whether, as in Woolwich,^[11] the Revenue had made an ultra vires demand the validity of which the building society had disputed from the very beginning."

On this basis, Professor Evans-Jones suggests that interest should be claimed by the pursuer from the moment of receipt of money by the defender, with the onus resting upon the defender to demonstrate that equity requires a different result. He also expresses the view^[12] that there are in any event no grounds to exclude a claim for interest from the moment when the defender has formal notice that what he holds is being reclaimed.^[13]

6.9      One of the cases in which the influence of equitable considerations may be observed is Countess of Cromertie v Lord Advocate.^[14] Teinds were paid for many years to the Crown in error. When the mistake was discovered, an action was brought for repetition, with interest, by both the payer and the rightful recipient. The Crown consented to decree for repayment but disputed the liability to pay interest. The majority of the court held that no interest was due to the rightful recipient because she had been negligent in failing for many years to demand payment nor to the payer because he would thereby be enriched. Under our proposal interest would, if equitable considerations were disregarded, have been payable by the Crown to the payer.
6.10      The argument against the inclusion of a discretion is the same as that for excluding it in relation to claims for payment of contractual debt and/or damages: the function of an award of interest is simply to recognise that the pursuer has been deprived of the use of money. Whilst it is appropriate for equitable principles to determine whether any sum is payable to the pursuer and, if so, how much, there is (according to this argument) no reason to deprive him of the full financial compensation which an award of interest ensures. Thus, for example, in the Countess of Cromertie case described above, it is not easy to see why the Crown should have obtained the benefit of interest-free use of the teinds paid in error. The court was influenced by a reluctance to see the rightful recipient put in a better position than the creditor of an ordinary debt who would not, as the law stood (and still stands), have a right to interest from the date when the debt fell due. If our proposals in relation to contractual debt were to be accepted, this argument would disappear. But should the rightful recipient's negligence in failing to demand payment over a period of time be regarded as sufficient reason, as a matter of equity, to deprive her of interest when payment is eventually made?
6.11      We invite views on the following questions:

24.  (a) Should the new statutory scheme extend to claims for payment based upon the law of unjustified enrichment?

(b) If so, should the date when interest begins to run be the date when payment fell due by the debtor to the creditor, or should some other criterion be used instead?

(c) Is there a need for a judicial discretion which would operate either

(i) instead of the general rule proposed in Question 24(a);

(ii) alongside the general rule proposed in Question 24(a), but without restriction on the scope of the discretion;

(iii) alongside the general rule proposed in Question 24(a), and restricted to taking account of the conduct of the pursuer; or

(iv) in some other way?

Salvage

6.12      In The "Ben Gairn",^[15] which appears to have been the first case in which the question of interest on salvage awards came before a Scottish court for decision, the Lord Ordinary (Allanbridge) doubted whether salvage could be characterised as a debt and described it instead as a unique maritime right in a class of its own, based on a right to recompense by the common law of Scotland. He awarded interest on the salvage award from the date when the salvage services ceased, partly because he considered that a salvor was at least as entitled to interest as a person claiming damages and partly to ensure comity with the admiralty law of England and Wales.
6.13      Both the reasons given by Lord Allanbridge for awarding interest on salvage services seem persuasive. Selecting the date of cessation of the service as the date when interest begins to run is consistent with our proposals in relation to other pecuniary claims and we propose no change in the law in this regard. We see advantage, however, in there being a statutory statement of this rule alongside the others. We invite views on the following questions:

25.  (a) Should the new statutory scheme extend to claims for payment for salvage services?

(b) If so, should the date when interest begins to run be the date when the salvage services are completed or some other date?

Limitation funds

6.14      In actions arising out of ship collisions, oil pollution and other events causing loss, the party alleged to be at fault may be entitled under various enactments, including the Merchant Shipping Act 1995, to limit his liability by paying into court a limitation fund of an amount determined by factors which include the tonnage of the vessel. It is settled by case law in both England and Scotland^[16] that a claimant on the fund is entitled to interest on his claim from the date of the event until the date when the fund was paid into court. We do not wish to disturb this rule. It could be retained either by express provision in new legislation or by exception from the scope of such legislation. We provisionally favour the latter course and invite comment on the following proposal:

26.  There should be an express exclusion from the new statutory scheme in respect of interest on claims on limitation funds established under the Merchant Shipping Acts or similar legislation.

Obligations to account for money to which another person is entitled

6.15      In Part 4 of this Discussion Paper we considered circumstances arising out of a contractual relationship in which a person may have possession of funds to which another person is entitled and in respect of which the holder will in due course be required to account for his intromissions. Such a situation may also arise where there is no contractual relationship or, alternatively, no continuing contractual relationship. Examples include:

•    funds held by executors administering an estate;

•    funds held by trustees under express trusts;

•    funds held on constructive trust;

•    funds of a child administered by a parent or guardian as the child's legal representative in terms of the Children (Scotland) Act 1995, section 10.

Holders of funds in such circumstances are subject to statutory and common law duties to invest them appropriately.^[17] If they fail to do so, they may be found personally liable for a sum representing the interest which the capital would have earned if properly invested. If on the other hand they have acted reasonably, then they will not be obliged to account for interest at a rate different from that actually earned on the capital.

6.16      It might be regarded as inconsistent to include in the proposed statutory scheme obligations to account which arise out of contract but to exclude other circumstances such as those instanced above which are closely analogous. The provisional view which we have expressed in relation to obligations arising out of contract is that if a statutory interest scheme is to be introduced, it should be restricted to circumstances in which the debtor is in default in failing to pay the principal sum to the creditor.^[18] We consider that it would be possible to include non-contractual obligations to account in the statutory scheme, subject to the same restriction. The date when payment by the holder of funds falls due will be determined by the underlying substantive law. Entitlement of the owner to interest in respect of any period prior to the date when payment became due would be left to be regulated by the substantive law applicable to the parties' relationship: the law of trusts or otherwise as the case may be.
6.17      An example of a situation giving rise to an obligation to account is the right of an outgoing partner to be paid the value of his share in the partnership. Although the obligation to account arises as a consequence of a pre-existing contractual relationship, it is not a contractual debt; rather it arises from the fact that following the resignation of the outgoing partner the other partners are left holding funds due to him. The recommendation in our Report on Partnership Law^[19] is that in such circumstances the outgoing partner should be entitled to interest on the value of his share at a commercial rate from the date of his withdrawal from the partnership. Our proposals in relation to a statutory right to interest are consistent with that recommendation.
6.18      Applying the principle of our proposal to situations in which money is held by one person in trust for others is less straightforward. There are a variety of circumstances in which a beneficiary may have a claim which includes a demand for interest. Not all of these involve issues of late payment. Our view is that a beneficiary's entitlement to interest in circumstances other than late payment should be left to the common law to determine. Examples would include the following:

(i) Where a beneficiary claims that trustees have, during the trust period, failed to invest the trust fund so as to produce a reasonable rate of return;

(ii) Where a trustee is called upon to account for trust funds which he has misappropriated for his own benefit;^[20]

(iii) Where a child who has attained age 16 claims that his legal representative has failed to administer his property to the standard required by section 10(1) of the Children (Scotland) Act 1995 (ie has failed "to act as a reasonable and prudent person would act on his own behalf").

6.19      The next complication which requires to be addressed is that, depending on the circumstances, a beneficiary's demand for interest may take the form either of a claim against the trust estate or of a claim against the trustee personally. For example, the claim of a legatee for interest on a pecuniary legacy is a claim against the executry estate, thus ensuring that the benefit of interest earned by the legacy during the period between the date of death and the date of payment accrues to the legatee and not to the person entitled to residue. On the other hand, where a trust has come to an end and the capital falls to be made over to one or more beneficiaries, any demand for interest arising out of delayed payment would be made against the trustee personally. We are concerned here only with situations in which there is default by a trustee or executor in failing to make payment when it has fallen due. If an executor were to delay unreasonably in distributing the estate, it would not be appropriate to penalise the residuary beneficiary by awarding the legatee interest, payable out of the estate, at a rate higher than that which had actually been earned. A claim for such excess over the rate actually earned ought to be a claim against the executor personally.
6.20      We recognise that the position of a trust beneficiary is not on all fours with that of a party to a contract. Nevertheless, it seems to us, as a matter of principle, that a beneficiary who has been deprived of the use of funds which ought to have been paid over by a trustee or executor should have the same entitlement to interest as persons in other circumstances where payment is overdue. Although we are proposing that statutory interest should be payable at a compensatory rather than a punitive rate, this may still exceed the rate of interest actually earned by the money in the trustee's hands. If so, the difference should be payable by the trustee personally rather than out of another beneficiary's share of the fund.
6.21      The question whether there should be an element of judicial discretion arises once again, even if no such discretion were to be considered necessary in cases of contractual debt. If, as we suggest above, the statutory scheme is to apply only where the holder is in breach of his obligation to account, this requires a judgment to be made as to when the breach occurred. It might be regarded as harsh for persons such as trustees and executors to be told, with the benefit of hindsight, that they were in default in failing to make payment by a particular date and are personally liable for interest as a result. Such cases of potential unfairness could be dealt with if the rule which we propose could be varied by the exercise of judicial discretion.
6.22      Against inclusion of a discretion, it may be said that it is liable to lead to uncertainty as to the parties' respective rights. It might also be argued that if the matter is looked at primarily from the point of view of the pursuer/creditor, it should make no difference what kind of claim is being made: the entitlement to interest should be uniform. This is not the only situation in which a person who has a reasonable excuse for delaying payment may be found liable to pay interest; the same would occur where the defender in a damages action is justifiably dissatisfied with the quality of the evidence supporting the pursuer's claim which eventually turns out to be well founded. We invite views in response to the following proposals and questions:

27.  (a) Should the new statutory scheme extend to claims for payment based upon an obligation to account for funds in circumstances where the obligation is non-contractual?

(b) If so, should interest run only from the date when the holder is in default in failing to make over the funds to the person entitled to them?

(c) Should the new scheme extend to beneficiaries' claims arising out of late payment by trustees or executors, imposing personal liability on the trustee or executor for the difference between statutory interest and the interest actually earned?

(d) Is there a need for a judicial discretion and, if so, at what rate and during which period?

Legal rights in a deceased's estate

6.23      As noted in Part 2 of this paper, the general rule under Scots law has been that legal rights carry interest from the date of death. Where there has been delay in payment which is not attributable to any fault on the part of the executors, it has been held that interest should not run at a rate higher than that which the funds have in fact earned.^[21] On the other hand, where it has been considered that payment ought to have been made, for example where a claim has been made or where there is no doubt that legal rights will be claimed because the claimant has been disinherited, the courts have awarded interest at the "legal rate".
6.24      The peculiarity of legal rights is that payment may be delayed for many years through the fault of no-one, for example during the period when a potential claimant lacks the capacity to make an election. However, the funds which are potentially subject to the claim will normally be capable of earning interest during the period of uncertainty and it seems reasonable that whoever eventually becomes entitled to those funds should also receive the interest which has accrued on them regardless of the period during which the uncertainty has subsisted. Consistently with our other proposals, our provisional view is that we should not amend the substantive law rules which determine a legal rights claimant's entitlement to interest in circumstances where there has been no default on the part of the executors in making timeous payment. Where, however, there has been delay on the part of the executors in making payment, we propose that statutory interest should run at the prescribed rate. The discussion above of the desirability of a judicial discretion, instead of or in addition to, such an entitlement to interest^[22] applies mutatis mutandis to interest on sums due by way of legal rights whose payment has been delayed. We therefore invite views in response to the following questions:

28.  (a) Should the new statutory scheme extend to claims for sums due by way of legal rights in a deceased person's estate, from the date when the executor is in default in failing to make payment to the person claiming legal rights?

(b) Is there a need for a judicial discretion as to whether to award interest and, if so, at what rate and during which period?

Aliment and financial provision on divorce

6.25      Entitlement to a sum by way of aliment^[23] or by way of a capital sum awarded as financial provision on divorce arises by virtue of a decree having been pronounced by the court. In so far as interest will run post-decree, the law in this area will be affected only by our proposals in relation to the rate of post-decree interest.^[24] In relation to aliment, however, the court has power in certain circumstances to backdate the award^[25] and the question arises whether instalments referable to periods prior to the date of the award should carry interest from the time at which they ought to have been paid or from some other date. We understand that it is not current practice to claim interest in these circumstances. In principle it seems to us that interest should run: by backdating the award the court is recognising that the debtor ought to have been paying aliment throughout the period of backdating and, correspondingly, that the creditor has been deprived of the use of the money during the same period. We therefore invite views in response to the following question:

29.  (a) Should an award of aliment which has been backdated carry interest from the date or dates when the instalments ought to have been paid?

(b) If so, is there a need for a judicial discretion as to whether to award interest and, if so, during which period?

6.26      It appears that as the law stands arrears of aliment which are recoverable by court action carry interest although the authority for this is not particularly strong.^[26] Given the range of remedies available to enforce an award of aliment, it seems likely that actions to recover arrears of aliment awarded under a previous court order will be rare. However, in principle we suggest that such arrears should carry interest from the date or dates when they ought to have been paid and not merely from the date of the decree permitting recovery.

30.  (a) Should arrears of aliment carry interest from the date or dates when they ought to have been paid?

(b) If so, is there a need for a judicial discretion as to whether to award interest and, if so, during which period?

6.27     In relation to financial provision on divorce, the existing legislation^[27] affords the court a discretion as to the date from which interest shall run on any amount awarded which must be exercised under reference to the principles set out in the Act and with regard to the resources of the parties. This seems to us to be an appropriate means of giving effect to the objectives of the legislation and we do not propose any change to it. In particular, we do not propose to disturb the current interpretation of section 14(2)(j) as permitting the court, where circumstances require, to award interest on a capital sum from the date of separation as a means of compensating a party inter alia for loss of use of an item of property such as the former matrimonial home.
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Note 1   Geddes v Geddes 1993 SLT 494, Lord President Hope at 500.    [Back]

Note 2   See paras 2.36 to 2.42.    [Back]

Note 3   Eg British Columbia Court Order Interest Act 1996, s 1(1); Ontario Courts of Justice Act RSO 1990 c 43, s 128(1).    [Back]

Note 4   See paras 7.57 and 7.59.    [Back]

Note 5   Useful examples of both are found in Shilliday v Smith 1998 SC 725, a case in which the pursuer had incurred expense and made payments to the defender in contemplation of a marriage which did not take place. The claims were described by Lord President Rodger at 728-9 as follows: "The larger part of the pursuer's claim is based on the fact that, in contemplation of the parties' marriage, she paid for repairs and for materials used in repairs to the defender's house and that she installed various items in the house and garden. The defender has benefited from these materials, repairs and items… In this aspect of her case the pursuer is therefore seeking payment of a sum of money which will reverse the defender's enrichment by transferring from him to her a sum which represents the value of the benefit enjoyed by him as a result of the outlay which she incurred. The remainder of the pursuer's claim is different. It is based on the fact that in contemplation of the parties' marriage she paid £1,880 to the defender, which he used to pay for materials and for work on his house. The pursuer is asking the court to reverse the defender's enrichment by ordering him to repay that sum to her. This part of her claim is therefore one for repetition of the money which she paid to the defender. Although the two aspects of the pursuer's claim can be distinguished in this way, none the less for each of them she relies on the same ground of action, which falls under the rubric of thecondictio causa data. On the one hand the pursuer says that she paid money to the defender in contemplation of marriage, on the other she says that she expended money on his house in various ways in contemplation of marriage. Although the usual situations discussed in connection with the condictio causa data are where money is paid or property transferred on a particular basis, in my view there is no relevant difference between the two aspects of the pursuer's claim. If she is entitled to recover money paid to the defender in contemplation of a marriage which never took place, in principle she must equally be entitled to recompense for the materials and work she paid for on the same basis."    [Back]

Note 6   We do not consider it necessary to address the third remedy for unjustified enrichment, namely restitution, because it is a claim for return of a specific item of property and not for payment of money. A claim for restitution might, of course, be accompanied by a claim for recompense for the defender’s use of the property which would be a claim for money upon which interest should in principle run.    [Back]

Note 7   See para 2.37.    [Back]

Note 8   See Evans-Jones, Unjustified Enrichment, Vol 1, chapter 9.    [Back]

Note 9   Unjustified Enrichment, Vol 1, para 9.54.    [Back]

Note 10   1995 SC 151.    [Back]

Note 11   Ie Woolwich Building Society v Inland Revenue Commrs [1993] AC 70.    [Back]

Note 12   Op cit para 9.55.    [Back]

Note 13   As in Sprot’s Trs v Lord Advocate (1903) 10 SLT 452. This would, however, re-introduce an element of wrongful withholding into the criteria for the running of interest.    [Back]

Note 14   (1871) 9M 988. See also Bank of Scotland v Grimm-Foxen 1992 GWD 37-2171, in which interest was awarded only from date of citation because the claim for repetition arose as a consequence of an error by the pursuer.    [Back]

Note 15   1979 SC 98.    [Back]

Note 16   The "Olga" v The "Anglia" (1905) 7F 739, following The "Crathie" [1897] P 178.    [Back]

Note 17   See eg Wilson & Duncan, Trusts, Trustees and Executors (2nd edn), ch 25.    [Back]

Note 18   See para 4.54.    [Back]

Note 19   Report of the Law Commission and the Scottish Law Commission on Partnership Law (Scot Law Com No 192) at para 8.75.    [Back]

Note 20   In such cases the courts have been inclined to award compound interest at a high rate: see paras 8.7-8.8.    [Back]

Note 21   Ross v Ross (1896) 23R 802.    [Back]

Note 22   Paras 6.21-6.22.    [Back]

Note 23   A lump sum could be payable where, for example, the court has backdated an award of aliment or where the claim is for arrears of aliment payable under a previous decree.    [Back]

Note 24   See paras 7.48-7.52.    [Back]

Note 25   Family Law (Scotland) Act 1985, s 3(1)(c): see para 2.40.    [Back]

Note 26   See para 2.41.    [Back]

Note 27   Family Law (Scotland) Act 1985, s 14(2)(j): see para 2.42.    [Back]