Scottish Law Commission (Discussion Papers)

 


Part 8      Compounding of Interest

Compound interest in Scots law

8.1      "Interest upon interest" or "compound interest" has not generally been regarded as the appropriate method of calculating interest on awards by courts in Scotland. The Institutional writers state the principle that there should be no interest upon interest although scant reasoning is given. Its origin lies in the Canon Law and in Roman Law.
8.2      Bell wrote:^[1]

"Interest does not, in the general case, ipso jure bear interest: Therefore, however long arrears of interest may have continued unpaid, they cannot, without some voluntary or judicial operation, be converted into a principal bearing interest."

This principle, once stated, serves only as an introduction to a discussion of the exceptions to the general rule.

8.3      Erskine took a similar approach:^[2]

"It is unlawful to accumulate interest by any previous conditional stipulation. Thus it is criminal to stipulate in a bond, that the interest, if not paid precisely as it falls due, shall be accumulated into a principal sum bearing interest…Neither is it lawful, where the interest has run on unpaid for several years together, to state interest against the debtor upon that arrear of interest, from the day or term at which it fell due, except in the cases of distressed cautioner, or of a denunciation."

As with Bell, this principle is stated in an introductory paragraph to a more detailed exposition of the various exceptions.

8.4      Judicial opinions on this issue have followed a similar pattern. The basic rule - no interest upon interest - is assumed in judgments to be so well established as not to require further explanation. Maclean v Campbell^[3] was an appeal to the Inner House about a disputed executry. The pursuer had been kept out of his money and was entitled to interest but he contended for compound interest from the date of citation "…accumulated, and interest allowed on the accumulated sum, with biennial rests from the date of the summons." All four judges expressed the view that "rests" should not be allowed, ie that there should be no compounding at specified, in this case biennial, periods. No reasoning is given except that rests are seen to be of a "penal nature" and in the circumstances of the case it was not appropriate to penalise the defender.
8.5      Another statement of the law on this issue is found in Douglas v Douglas's Trs^[4] in a dictum of Lord Justice Clerk Patton, with stress again on the exceptions:

"A claim for compound interest, with annual rests, is a demand which can only be maintained, either in the case of a fixed usage in commercial dealings, or where there has been an abuse in a party trusted with funds, and violating his trust."^[5]

He offers no further explanation other than that the decision of the House of Lords in Jolly v McNeill^[6] has been followed and adhered to. However, as has been observed in subsequent case law, the report in Jolly v McNeill is inadequate. The Court of Session had allowed accumulated interest with biennial rests and the House of Lords reversed that decision. But the reasoning of the Lords is not set out. The implication in the report is that their Lordships accepted the appellant's argument that

"Accumulation of compound interest upon a loan of money is contrary to the established rules of the law of Scotland. To this there are no doubt exceptions, but none of them apply to the present case, and they fortify the general rule."

8.6      Lord Patton's dictum in Douglas was applied in 1992 by the Second Division in Roxburgh Dinardo's JF v Dinardo,^[7] a case which the court held was "special and exceptional" so as to warrant an award of compound interest. A judicial factor had been appointed to a partnership in which one of the partners had possession of the firm's assets and the other of its liabilities. The factor petitioned the Court of Session to have the accounts and a scheme of division approved and the Accountant of Court reported to the court. With the approval of the Accountant of Court, the factor had applied compound interest at 3% above base rate on the assets held by the partner who had possession of them. Observing that there was no rule that the "legal rate" (sic) had to be applied in all cases, the Inner House confirmed that the judicial factor and the Accountant had discretion to apply a commercial rate of interest if they thought that was appropriate in the exceptional circumstances. It was held that such circumstances were present in this case because (1) the partner who was left with the liabilities had financed them by overdraft to which compound interest was applied and (2) there was a fiduciary relationship between the partners and the assets were therefore subject to a constructive trust.^[8]
8.7      On the basis of the reported cases it may therefore be stated that there are three exceptions to the general rule:

(i) Where there is express agreement that compound interest should apply. In Bank of Scotland v Davis,^[9] Lord Justice Clerk Wheatley explained that where interest is to be paid in terms of a contractual agreement, it should be paid according to the contractual obligation (in that case, an obligation in respect of a loan). Also, where for example accounts have been rendered year by year by the creditor and the balance accumulated, acquiescence in this practice by the debtor can raise an implied contract in favour of compounding.^[10]

(ii) In cases of breach of trust or failure in an obligation to invest and accumulate.^[11] This is related to the rule that a person in a position of trust is obliged to collect interest on capital and accumulate further interest on that sum.

(iii) Where there is an established commercial usage allowing interest on interest such as in the case of bank accounts or bank loans.^[12] In Reddie v Williamson^[13] Lord Justice Clerk Inglis stated: "The privilege of a banker to balance the account at the end of the year, and accumulate the interest with the principal is founded on this plain ground of equity, that the interest ought then to be paid, and, because it is not paid, the debtor becomes thenceforth debtor in the amount, as a principal sum itself bearing interest."

8.8      Each of these exceptions can be supported on the basis of principle as well as on authority. If a contract specifies compound interest then it is only fair that the person who fails to carry out a contractual obligation should be no better off because of that failure. The court is simply giving effect to an agreement freely entered into. In the case of breach of trust, the law implicitly recognises that interest on investments or debts would be compounded so that gain or loss in a fiduciary relationship could be expressed in terms of compounded interest. A trustee is obliged to invest, to collect interest on capital and accumulate further interest on that sum, although not necessarily compound interest. Where an element of culpa enters into the reasoning of the courts in cases where there has been a breach of trust or failure to carry out the duties of a trustee, it has been regarded as appropriate to hold the trustee to the most strict form of accounting.^[14]
8.9      In the case of "established commercial usage" such as banking, it is recognised that any loss or gain will have been subject to compounding and it is therefore regarded as just that compensation should be compounded. In the Victorian period when most of the relevant cases were reported, banks prepared their accounts annually and added interest at the end of the year. In the case of an overdrawn account, the creditor could pay the interest at that point and it was known or assumed to be known that, if unpaid, the interest would be added to the debt. The logic of this exception must be related to that of the first (ie contractual) exception: the debtor has entered into a contract or an implied contract or has acquiesced in a practice where interest is accumulated annually.
8.10      A further exception to the rule against compounding occurs when post-decree interest is added to an award which already includes an element of interest. Where, for example, interest under the Interest on Damages (Scotland) Act 1958 is added to the award, any further post-decree interest is subsequently added to the interest which has accumulated at the date of the award.^[15] This practice has been adopted by the courts and arguments that it contravenes the rule on compounding have been rejected.^[16]
8.11      The principle of "no interest upon interest" applies to claims for damages as well as debt. As discussed elsewhere,^[17] prior to 1958, no interest was allowed on damages at all except from the date of decree. The Interest on Damages (Scotland) Act 1958 gave the courts power to include interest on a claim for damages from the date of citation, but expressly retained the stricture against "interest upon interest".^[18]

Law Commission proposals

8.12      In England and Wales there are similar restrictions on interest upon interest. Last year, however, the Law Commission recommended^[19] that the courts should have a power to award compound interest. In payments of £15,000 or more there should be a rebuttable presumption in favour of compound interest. Where less than £15,000 is due, there should be a rebuttable presumption in favour of simple interest.^[20] In order to address the problem, as it was perceived, of complexity of calculation, the Law Commission recommended that the Court Service should make a computer program freely available on its website to calculate compound interest. The Law Commission had previously set out the basis for its recommendations in a Consultation Paper:^[21]

"If a claimant should have had the money earlier, and in fact had it later, he or she has either missed an opportunity to invest, or had to borrow to cover, in either case at compound interest."

8.13      Although concerns about complexity remain, it is now considered far easier to carry out complex arithmetical calculations: hence the Law Commission's proposal to have a calculator made available on the internet (backed up by printed tables in court buildings).
8.14      The Law Commission observed that compound interest can be calculated in several different ways and that this could lead to dispute. It is proposed that this problem should be addressed by having a prescribed system for calculating compound interest. The Law Commission recommends that the compounding interval be set by rules of court. All interest under the new statutory regime would then be calculated in accordance with the prescribed interval. The Commission also recommends that the calculations should be presented to the court by the claimant rather than calculated by a judge or court official.
8.15      In general terms, we are provisionally in agreement with the Law Commission's view of the advantages of compound interest. However, the Law Commission is proposing to make compound interest available by giving a power to the courts to award it. We would be inclined to the view that, if compounding is the fairest way of calculating interest, then it should be available as a statutory right. Also, in a Scottish context, it would be more appropriate to set the method of calculation and the compounding period in primary or secondary legislation rather than in procedural rules of court.
8.16      The Law Commission's proposals involve a system of rebuttable presumptions^[22] with different presumptions applying above and below claims of £15,000. This introduces an element of uncertainty and also a degree of judicial discretion. We welcome views on whether or not there should be an element of judicial discretion as to how (or whether) compound interest is applied^[23] but it seems logical to us that compound interest is either fair and correct, or it is not. The Law Commission presents evidence that compound interest is not significantly different in effect from simple interest where the debt is small and the period over which interest is due is short, but that does not in itself afford sufficient reason to disapply compounding in debts of less than £15,000. By way of comparison, a credit card or bank account still charges or pays compound interest if the debit or credit is less than £15,000. If there is no advantage to compounding on small sums of money, it seems odd that all major financial institutions are content to charge compound interest on any sum, however small.
8.17      The Law Commission argued^[24] that a fixed rule on compounding could import excessive complications into small cases. The Commission did not set out explicitly what these complications are, but any difficulties in calculating compound interest, whatever the sum of money involved, would be addressed by providing an online calculator backed up by printed tables.^[25] Where the amount claimed is small and the benefits of compounding are negligible, a pursuer may take the view that is not worth the expense of calculating compound interest. In these circumstances, the pursuer would retain a right to claim simple interest at the prescribed statutory rate.
8.18      In their response to the Law Commission's Consultation Paper, the Law Society of England and Wales stated that "simple interest never provides a full indemnity for the loss to the litigant".^[26] Although there are cases where a high rate of simple interest may, crudely, indemnify the litigant, we would endorse that view and, if it is true, it follows that compound interest should be the norm.

Other jurisdictions

8.19      Practice and law in respect of compounding varies across both common law and continental jurisdictions. Despite some proposals for reform,^[27] few jurisdictions yet allow interest to be awarded on a compound basis.
8.20      In British Columbia, the Court Order Interest Act^[28] 1974 provided for interest to be added to an award for pecuniary loss (a "pecuniary judgment"),^[29] but limited this power so that compound interest was excluded.^[30] In their report of January 1987,^[31] the Law Reform Commission of British Columbia recommended that this prohibition should not be carried forward into a new Act and, specifically, that pre-judgment interest should be compounded.^[32] They argued that compounding was a more accurate reflection of the market place and measured more accurately the cost of delay to the successful plaintiff. The difficulties perceived in other jurisdictions related to calculation but they advocated the official publication of tables of multipliers. The printed tables would show the value of a sum of money at a specific date adjusted to include compound interest. This would be possible because the rate of interest and the method of calculation would be prescribed by statute. A sum of money could, at a given date, be converted into an equivalent sum, including compound interest, at a later date.^[33]
8.21      The British Columbia recommendations were welcomed by some scholars^[34] who thought that compounding would bring the law closer to the principle of restitutio in integrum. However, that part of the Commission's recommendations was not implemented. The current Court Order Interest Act^[35] provides for mandatory payment of interest from the date on which the cause of action arose^[36] but retains the prohibition against compounding.^[37]

Should Scottish courts have the power to award compound interest?

8.22      In principle, compound interest best expresses the pursuer's loss. Nevertheless, consideration has to be given to the questions of whether this underlying principle should apply in all cases and whether there should be judicial discretion to award simple or compound interest.
8.23      When interest is paid in compensation it means that the sum at issue is being treated as if it were capital which was subject to a contractual obligation to pay interest. The court imagines a hypothetical sum of money on which the pursuer could have claimed interest or which the pursuer had to borrow to make good the loss. It is an estimate of the pursuer's loss and even if some precise arithmetical calculations are carried out, the figure is still an estimate. Only if we could visualise a world in which the pursuer never suffered a loss would we know how much that money would have cost (if borrowed) or earned (if invested). The question being asked is "what is it likely that this money would have cost or earned?" That can only be answered in terms of present-day financial practice: if this money were invested or borrowed would simple or compound interest apply? The fact is that compound interest is the accepted method of charging or paying interest in the financial services market. Our contractual debts, such as credit cards and bank overdrafts, are calculated using interest which is compounded monthly. If we open a savings account, we expect interest to be compounded monthly or even daily. If the model for interest as compensation is the cost of money, then compound interest ought to feature in that model.
8.24      And yet a borrower or lender in Victorian times would have had the same expectation. Why has compound interest not been accepted by the courts (or the legislature) before now? The courts have recognised exceptions to the rule but have not queried its basis. In the case of a failure to invest trust funds, it is accepted that compensation should include compound interest because this is what would have been paid on the trust's investments. Why, then, have the courts not accepted that compound interest would best compensate losses in other cases?

The case against compound interest

8.25      It may be that there remains a distrust of a practice which is seen as essentially usurious, a fear which still lurks in the background long after the repeal of the usury laws. Or there may be an underlying concern for its effect on disadvantaged sections of society. Although the application of simple and compound interest produce similar results over short periods, for large debts over a longer period compounding causes the total debt to rise exponentially. The effect can be dramatic and less predictable to those unskilled in financial matters. Compounding may more readily lead the debtor into a position where not only can the principal not be repaid but the debt cannot be serviced.^[38]
8.26      Moreover, there is a public policy argument underlying the historic distrust of compounding viz that it could lead to a higher level of awards in actions for damages.^[39] The result might be higher insurance premiums. It could also place a greater burden on the taxpayer due to increased cost to the NHS of settling claims. This is clearly not an argument based on principle because it is, in effect, an argument against full compensation. Nevertheless, it does express a concern which may lead to opposition to the introduction of compound interest. However, it would be possible to balance the extra cost to the public purse by introducing an interest rate which was a more realistic reflection of the current cost of money. At present, the judicial rate is set a level which can lead to over-compensation.^[40]
8.27      Another perception is that interest is a charge for delay and that the pursuer or creditor must share some of the responsibility for any delay. By compounding interest, the creditor may be seen as being rewarded for sitting for too long on the claim. Even if the courts have power to stop interest running where delay is the fault of the pursuer, it may still be difficult to identify culpability and creditors might be able to "bank" their debts with debtors by showing prolonged forbearance.
8.28      As the Law Commission concluded in 1978, the virtue of simple interest is its simplicity. It is easier to calculate and consequently its effect is more predictable. Compound interest is usually calculated with periodic rests which cause sudden jumps in the total sum outstanding. Compound interest is more complex and more difficult for the parties to calculate. Compound interest can be calculated in different ways leading to conflicting results between parties. This added complexity could cause problems for parties at crucial times in litigation such as the day of a proof when the parties are outside the court and are amenable to settlement.

The case for compound interest

8.29      In the case of a debt which is a liquidated sum, the case for compound interest is quite clear. The debt ought to have been paid at an agreed date and if it is not paid then periodic interest is due. If interest is not paid it should be added to the principal debt and interest should then be due on the aggregate figure. With damages, the difficulty is that quantum may be disputed and it may be quite proper for a defender to wait for the decision of the court before making payment. Once the court's decision is made, however, it is retrospective in respect of both liability and quantum. The intention is that the award should place the pursuer in the same position as if the wrong had never taken place and any sum due from that date becomes, in effect, the same as an ordinary debt and the same argument for compounding is applicable.
8.30      Compound interest also encourages early payment of claims. The sooner payment is made, the sooner interest stops running. If simple interest applies, the sum of money due can be invested by the defender and earn compound interest, yet only simple interest will be paid to the pursuer when the case is resolved. If a claim or debt is settled at an early stage the difference between simple and compound interest is not significant. It is only after a year that compound interest yields any advantage to the creditor.^[41]
8.31      In terms of social policy, there may be a concern that for debtors who cannot repay their debt, as opposed to those who will not repay, compound interest is harsh and raises the fear of debts spiralling out of control. However, social issues arise mainly in respect of consumer debt, which is nearly always contractual and typically provides for compound interest.^[42] If compound interest were available to the courts, it would to some extent redress the social balance in that it would become available to weaker parties in disputes rather than only to those in a strong contractual position. The effect of compounding is also more significant in long running cases,^[43] such as claims based on health and medical issues, which are commonly brought to court by economically weak members of society. Compounding can be said to provide a higher and arguably more just level of compensation to those raising actions against former employers for long-term health problems.

Judicial discretion

8.32      A possible approach would be for legislation which allows compound interest to be applied or disapplied at the discretion of the court. This would enable the courts to tailor the kind of interest to the particular circumstances of the case. If it appeared inequitable to allow a particular sum of money to be compounded then a judge could specify that only simple interest would be awarded.
8.33      The disadvantage of such an approach is that it introduces a measure of uncertainty into the system. Most cases will settle before reaching court but parties will not be able to predict with complete accuracy how a court would have awarded interest. This may result in settlements which are unsatisfactory for the weaker party in any negotiations or it may discourage parties from settling, at least until a body of case law develops. If the method of calculating interest on debt is clear, many disputes could be resolved even without recourse to legal advice. In damages actions, at the point where settlement becomes likely, parties should be able to obtain clear legal advice as to how interest will be applied to the claim.
8.34      A consequence of retaining a degree of judicial discretion would be the likely survival of some elements of the existing case law including the concept of "wrongful withholding". In applying their discretion, the courts would be entitled to consider past case law on interest. In cases where a defender has had use of the pursuer's money through no fault of the defender and no profit to the defender, courts may think it unfair to award compound interest and may use their discretion to mitigate the effect of the award on the blameless defender. On one view, this would be a reasonable and equitable approach; but on another view it would undermine one of the principles underlying the reforms proposed in this paper viz that an award of interest should be made simply for the realistic compensation of the creditor for loss of the use of money or property.
8.35      The same advantages and difficulties apply if compounding is mandatory but judicial discretion is allowed as to the frequency of compounding. If monthly compounding is specified in legislation, there may be cases where the court believes that annual, or even daily, compounding, best reflects the pursuer's loss in a particular case and in those circumstances it would be fairer for the court to be able to use its discretion and vary the period of compounding. On the other hand, it is hard to see how litigants can reach a fair extra-judicial settlement if they do not have a clear understanding of how the court would have awarded interest.

Compounding of risk

8.36      Interest, as explained above,^[44] consists of three elements of which one is the risk that the creditor will not be paid. In a contract of loan, for example, the creditor seeks a rate of interest which will reflect the likelihood of that sum being repaid. If the loan is unsecured and the debtor has a poor credit record, the risk of non-payment is high and a high rate of interest will be charged. It is the compounding of this risk element which can lead to concerns about debt becoming unmanageable. Arguably, the risk element in a rate of interest ought not to be compounded because it is not subject to inflationary pressures and does not necessarily increase over time: in the case of a contractual debt, for example, risk is a one-off element which should be priced over the anticipated term of the contract. The rate of interest proposed in this paper^[45] is similar to the rates applied to loans secured by a standard security, and also to the rates at which banks will lend to their corporate customers. These are rates with a relatively low risk element and the effect of compounding should not therefore be significant.

Claiming simple interest

8.37      If a right to claim interest is enshrined in legislation, it would still be possible to pursue a claim for a debt or for damages without claiming interest. The right would simply not be exercised. But if the right to claim interest is a right to claim interest calculated in a specified way, it is unlikely that a pursuer could claim any other form of interest. In our view a pursuer should remain entitled to elect to claim simple interest only (at the prescribed statutory rate). It may seem odd that some creditors may wish to claim less than that to which they are entitled, but it is envisaged that some businesses may have accounting systems which make it difficult for them to issue invoices and reminders with compound interest applied. We have included a question on this issue at 42(c) below.

Proposals

8.38      As outlined above, there are arguments against the compounding of interest and these have found favour both historically and in other jurisdictions. Nevertheless, we have inclined to the view that the case against compounding is essentially a case against interest itself. In principle, we are provisionally in agreement with the Law Commission's proposals in respect of compound interest.^[46] The pursuer's loss is more accurately compensated by the application of compound interest. If it is acceptable to charge interest, it becomes a debt like any other when it is charged. Interest should therefore attract interest like any other debt. We would welcome views on the following proposal:

41. If legislation is enacted specifying a rate of interest, it should allow for that interest to be compounded at specified intervals.

8.39      Views are also welcomed on:

42. (a) Whether there should remain a judicial discretion to refuse compound interest where it would be just to do so.

(b) If judicial discretion is retained, should it be restricted to allowing simple rather than compound interest or should there be judicial discretion to allow compounding at a different frequency from the recommended period?

(c) Whether the pursuer should retain a right to claim simple interest provided that the sum claimed is less than would be claimed if compound interest were applied.

How should compound interest be calculated and what should be the frequency of compounding?

8.40      As stated above, compound interest can be calculated in different ways creating potential for dispute even where the principle of compounding is accepted. The answer to this problem is to prescribe a formula for calculating compound interest which would be used by all parties. The formula would be something like: Total Sum = P x (1 + i)ⁿ , where P = the principal sum, i = the periodic interest rate, and n = the number of time periods. i would either be the prescribed rate or a contractual rate and n would depend on the frequency of compounding. In order that n could be calculated consistently by all parties, it would be necessary to prescribe the frequency at which interest should be compounded.
8.41      The prescribed frequency could be annual, half-yearly, quarterly or monthly. The Law Commission's Consultation Paper Compound Interest^[47] suggested that annual rests would be appropriate because it would simplify the calculation in long-running cases, ie in those cases in which compounding would have the greatest significance. Annual rests would also reflect the approach taken by the Lando Commission in Principles of European Contract Law which provides that interest be "added to the outstanding capital every 12 months".^[48]
8.42      However, in the Report which followed the Consultation Paper, Pre-judgment Interest on Debts and Damages,^[49] the Law Commission accepted the views of consultees that monthly compounding should be prescribed. Monthly compounding reflects current commercial practice and would be the frequency used by most lenders and investors. It also avoids the sudden jump in the amount of the debt which results from annual compounding.
8.43     We are provisionally of the view that monthly rests would be the best form of compounding. Whether a successful pursuer has had to borrow money to make up a shortfall or has lost an opportunity to invest in an interest bearing account, it is likely that that loss would have included monthly compounding. For ease of calculation, a computer program for calculation of interest could be made available on a public site on the internet for use not only by parties to litigation but to creditors calculating interest on debts in respect of which litigation is not, or not yet, in contemplation. An example of a program which, given the appropriate variables, calculates compound interest may be accessed on the website of the Scottish Law Commission.^[50] Parties would not therefore have to calculate interest themselves although they would remain responsible for presenting figures to the court. The program would carry out the calculations using the prescribed formula thus reducing the potential for disputes. A set of printed tables could be made available in areas such as public libraries and court buildings for the use of parties who did not have access to the internet.^[51] We would welcome views on the following question and proposal:

43. (a) Should interest be compounded at monthly or annual intervals or any other period suggested by consultees?

(b) A computer program for calculating interest according to the prescribed formula should be made available free of charge on a website which can be accessed by the general public. Printed tables for the calculation of interest should be made available in appropriate places such as court buildings and public libraries.

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Note 1   Bell, Commentaries, Vol I, 5th edn, 651.     [Back]

Note 2   Institute III.iii.81.     [Back]

Note 3   (1856) 18D 609.     [Back]

Note 4   (1867) 5M 827.     [Back]

Note 5   P 836.     [Back]

Note 6   (1830) 4 W & S 458.     [Back]

Note 7   1992 SC 188.     [Back]

Note 8   Applying Douglas v Douglas’s Trs (1867) 5M 827.    [Back]

Note 9   1982 SLT 20.     [Back]

Note 10    Graham's Exrs v Fletcher's Exrs (1870) 9M 298, per Lord Kinloch, 304. See also Munro's Trs v Murray and Ferrier (1871) 9 SLR 174.     [Back]

Note 11   Cranston & Hay v Scott (1826) 5S 62; Douglas v Douglas’s Trs (1867) 5M 827; Roxburgh Dinardo's JF v Dinardo 1992 SC 188.    [Back]

Note 12   Douglas v Douglas’s Trs (1867) 5M 827; Munro's Trs v Murray and Ferrier (1871) 9 SLR 174; Bank of Scotland v Davis 1982 SLT 20.    [Back]

Note 13   (1863) 1M 228, 237.    [Back]

Note 14   For example, Douglas v Douglas’s Trs (1867) 5M 827. Lord Justice Clerk Patton explained (836) that "… where there is a fiduciary relation constituted between two parties, so that a party who is trustee is bound either to recover or to account for sums of money, and fails in his duty, and, it may be, uses the property held by him in trust for his own purposes, he shall be held to account upon the very strictest system of accounting."    [Back]

Note 15   See para 7.46.    [Back]

Note 16   Smith v Middleton 1972 SC 30; Mouland v Ferguson 1979 SLT(N) 85. The case law is discussed at paras 7.46-7.47.    [Back]

Note 17   Paras 2.24-2.33.     [Back]

Note 18   S 1(2)(a), which was not amended by the Interest on Damages (Scotland) Act 1971.    [Back]

Note 19   Report on Pre-judgment Interest on Debts and Damages (Law Com No 287).    [Back]

Note 20   Ibid para 1.18.     [Back]

Note 21   Compound Interest (Consultation Paper No 167), para 4.1.    [Back]

Note 22   Para 8.12 above.     [Back]

Note 23   See para 8.39.    [Back]

Note 24   Para 4.29 of Consultation Paper No 167 and para 5.24 of Law Com No 287.     [Back]

Note 25   See para 8.43.    [Back]

Note 26   Quoted in Law Com No 287 at para 4.4.     [Back]

Note 27   British Columbia, (Report on the Court Order Interest Act LRC 90 1987); Manitoba (Report on Pre-judgment Compensation on Money Awards (1982)); and Ontario (Report on Compensation for Personal Injuries and Death (1987)).    [Back]

Note 28   SBC 1974 c 65.     [Back]

Note 29   S 1.     [Back]

Note 30   S 2(c).     [Back]

Note 31   Report on the Court Order Interest Act LRC 90 1987.     [Back]

Note 32   Ibid, p 21.     [Back]

Note 33   As suggested below (para 8.43) this process can be carried out even more easily using a web-based computer program.     [Back]

Note 34   Bowles and Whelan, "Compound Interest: Could Multipliers be the Way Forward?" (1986) 136 New LJ 876; and "The Law of Interest: Dawn of a New Era?" (1986) 64 Canadian Bar Review 142.     [Back]

Note 35   RSBC 1996 c 79.    [Back]

Note 36   S 1.    [Back]

Note 37   S 2.     [Back]

Note 38   This effect is especially marked when the risk element of interest is compounded: see para 8.36 below.    [Back]

Note 39   See table G and graph H in Appendix E. Simple and compound methods are used to calculate interest on a sum of £10,000. After about 12 months, compounding produces a significantly higher figure than simple interest at the same rate.     [Back]

Note 40   Table G and graph H in Appendix E also compare the effect of applying 8% simple interest to £10,000 with base rate plus 1% simple and base rate plus 1% compound. See also graphs B and C in Appendix D: 8% is a higher rate than could be obtained on a timed-deposit account (ie an account with a notice period for withdrawal).     [Back]

Note 41   See table G and graph H in Appendix E.    [Back]

Note 42   The rate of interest for a consumer debt under a contract (eg a credit card debt) is likely to include a large risk element to reflect the possibility of non-payment. The risk element of the rate can be far greater than other elements (eg in an APR of 20%, the risk element might account for 14%) and the effect of compounding that element would be dramatic. See para 8.36.    [Back]

Note 43   See table G and graph H in Appendix E. For the first 12 months there is little difference between compound and simple interest but after five years the difference between the two rates is more pronounced (£427 on £10,000).     [Back]

Note 44   Para 7.13.    [Back]

Note 45   Para 7.21.    [Back]

Note 46   See paras 8.12-8.18.     [Back]

Note 47   Consultation Paper No 167.    [Back]

Note 48   Principles of European Contract Law, Part III (revd 2002) Art 17:101.     [Back]

Note 49   Law Com No 287.     [Back]

Note 50   www.scotlawcom.gov.uk/html/calculator.htm. Further examples of online compound interest programs may be viewed at http://allchin.net/converter/compoundinterest.html www.kbapps.com/calculators/default.html http://javascript.internet.com/calculators/compound-interest.html www.3pumpcourt.com/compound.html    [Back]

Note 51   It should be noted that even if printed tables are updated frequently they would include a degree of approximation. For example, the tables might be updated every month with interest rates calculated as at the end of the previous month.    [Back]