Farstad Supply As V. Enviroco Limited
| Jurisdiction | Scotland |
| Judge | Lord Hodge |
| Judgment Date | 2011 |
| Neutral Citation | [2011] CSOH 153 |
| Published date | 14 September 2011 |
| Date | 14 September 2011 |
| Court | Court of Session |
| Docket Number | CA23/07 |
| OUTER HOUSE, COURT OF SESSION [2011] CSOH 153 | |
| CA23/07 | OPINION OF LORD HODGE in the cause FARSTAD SUPPLY AS Pursuer; against ENVIROCO LIMITED Defender: ________________ |
Pursuer: A M Clark QC, O'Brien; H B J Gateley
Defender: Howie QC, Delibegovic-Broome; Paull & Williamsons
14 September 2011
[1] The pursuer in this action ("Farstad") sued the defender ("Enviroco") for £2,514,761.38 in damages for loss which it sustained when a fire broke out on the oil rig supply vessel, MV Far Service, in Peterhead harbour on 7 July 2002. The action settled on the eve of a proof diet on 23 August 2011. The parties entered into a Joint Minute by which they invited the court to pronounce a decree ordering Enviroco to pay £1,750,000 to Farstad together with interest from 31 December 2002 "at such rate or rates as the court shall think fit."
[2] The issue, which the parties debated, was the appropriate rate of interest under section 1 of the Interest on Damages (Scotland) Act 1958 as amended ("the 1958 Act").
[3] Enviroco had flagged up this issue in its defences in which it averred (in Answer 5) as follows:
"to the extent the defenders are found liable for any loss and damage suffered by the pursuers, the pursuers are not entitled to the interest at 8 per cent a year from 7 July 2002. .... The pursuers are only entitled to that rate of interest which would put them into the same position in which they would have been if they had not suffered loss and damage. The rate of 8 per cent is far in excess of that rate of interest and would provide the pursuers with a bonus, rather than properly compensate them for their loss."
Accordingly, when agreeing the settlement figure in the Joint Minute, Farstad had notice of the challenge which Enviroco has now made.
The statutory provisions
[4] Section 1(1) of the 1958 Act as originally enacted empowered the court to include in a decree for payment of damages an award of interest from the date of citation. This provision was amended by the Interest on Damages (Scotland) Act 1971 to empower the court to award interest for any period between the date when the right of action arose and the date of the interlocutor. Section 1(1) of the 1958 Act as amended provides:
"Where a court pronounces an interlocutor decerning for payment by any person of a sum of money as damages, the interlocutor may include decree for payment by that person of interest, at such rate or rates as may be specified in the interlocutor, on the whole or any part of that sum for the whole or any part of any period between the date when the right of action arose and the date of the interlocutor."
Section 1(2) provides that
"Nothing in this section shall - (a) authorise the granting of interest on interest."
The factual background
[5] For some time insurers and others have been concerned that the judicial rate of interest, which is 8 per cent a year, gives excessive compensation in awards of pre-decree interest under the 1958 Act.
[6] Rule of Court 7.7 contains the default position on the judicial rate of interest . It provides:
"Where interest is included in, or payable under, a decree, it shall be at the rate of 8 per cent a year unless otherwise stated."
It has been the general practice of the Court of Session to award interest due under the 1958 Act at that rate. See Boots The Chemist Ltd v G. A. Estates Ltd 1992 SC 485.
[7] The judicial rate of interest in this jurisdiction has changed over time. In 1965 the rate was set at 5 per cent. It was amended to 7 per cent in 1970, 11 per cent in 1975, and 12 per cent in 1983. Between 15 August 1985 and 1 April 1993 the rate was 15 per cent. Since then the rate has been 8 per cent. While the variations are not inconsiderable, they have been relatively infrequent when compared with the fluctuations in market rates.
[8] In a Joint Minute the parties agreed for the purposes of the debate the terms of two documents setting out historic interest rates. So far as relevant, the first revealed that during 1985, shortly before the judicial rate was increased from 12 per cent to 15 per cent, the minimum band 1 dealing rate fluctuated in the range of 11.375 per cent to 13.875 per cent. By late 1992 the rate was 6.875 per cent and in 1993 it was changed to 5.875 per cent on 26 January and to 5.375 per cent in November. Thus when the judicial rate was reduced to 8 per cent, that was in excess of 2 per cent over the minimum band 1 dealing rate. Between 2003 and October 2008 the Repo rate and then, when it was again renamed, the official bank rate fluctuated between 3.5 and 5.75 per cent. On 6 November 2008 it was reduced from 4.5 per cent to 3 per cent and on 4 December to 2 per cent. The descent to the historically low rates continued in 2009 with the official bank rate falling to 1.5 per cent on 8 January, 1 per cent on 5 February and 0.5 per cent on 5 March 2009, where it has remained thereafter. I will refer to those rates, howsoever named, as "the base rate".
[9] Turning to the Bank of England's table of interest rates of UK monetary financial institutions sterling instant access deposits from households, the agreed document revealed interest rates in the range between 0.76 per cent and 2.1 per cent between 2003 and 2006, with lower rates in 2003 (ranging between 0.76 and 1.08) and higher rates between 2005 and 2006 (ranging between 1.52 and 2.08). Between early 2007 and October 2008 there was a slight rise (with a range between 2.1 and 2.83). Thereafter there was a sharp fall to 0.15 per cent by February 2009, dipping to 0.12 per cent in March 2010; and it had not risen above 0.3 per cent by April 2011.
The contentions of the parties
[10] Mr Howie QC for Enviroco submitted that the principle underlying the payment of interest was that it was to compensate a person for the loss which he incurred from having been kept out of sums of money. Thus, in cases not covered by the 1958 Act, interest was due when money was wrongfully withheld and not paid on the day on which it ought to have been paid: Carmichael v Caledonian Railway Co (1870) 8 M (HL) 119, Kolbin & Sons & Co v Kinnear & Co Ltd 1931 SC (HL) 128. The same principle applied to interest on damages under the 1958 Act: Macrae v Reed and Mallik Ltd 1961 SC 68, James Buchanan & Co Ltd v Stewart Cameron (Drymen) Ltd 1973 SC 285, Wilson v Dunbar Bank plc 2008 SC 457. Once a pursuer had incurred loss by paying for the repairs he was deprived of money which he could have used to generate income. The court should fix the rate of interest to compensate for the loss of income which the money might have generated: Spence v Wilson 1998 SC 433, Wisely v John Fulton (Plumbers) Ltd 2000 SC (HL) 95. The problem in recent years had been that the judicial rate of interest was not compensatory but gave the pursuer a bonus which he could not obtain in the market. The court had a discretion under the 1958 Act to fix a rate or rates of pre-decree interest adopting a "selective and discriminating approach": Smith v Middleton 1972 SC 30. In some cases, but not others, judges had adjusted the rate of interest to take account of changes in the judicial rate during the period covered by the 1958 Act in the particular case. See Starkey National Coal Board 1987 SLT 103 and Tait v Campbell 2004 SLT 187. But that did not address the mischief. In 2006, before the collapse of interest rates, the Scottish Law Commission in its "Report on Interest on Debt and Damages" (Scot Law Com No 203) had recognised (in paragraph 2,21) that use of the judicial rate often resulted in an award of interest which was not truly compensatory because the debtor had to pay interest at a rate higher than the creditor could have obtained in the market.
[11] Mr Howie also referred to the practice of the English courts, which also adopted the fundamental principle that interest was awarded not as a punishment but to compensate a claimant for having been deprived of the money which was due to him: B.P. Exploration Co (Libya) Ltd v Hunt (No. 2) [1979] 1 WLR 783, Robert Goff J at p.845. In the Commercial Court and the Admiralty Court it was normal practice to award interest at 1 per cent over the base rate but a party could seek to persuade the court to award a different rate. The thinking behind that rate was that it was to reflect the rate at which the claimant would have to borrow money to make up for what had been withheld. See Tate & Lyle Food and Distribution Ltd v Greater London Council [1982] 1 WLR 149, Polish Steam Ship Co v Atlantic Maritime Co [1985] QB 41, and Shearson Lehman v MacLaine Watson (No 2) [1990] 3 All ER 723.
[12] He submitted that the court should apply a compensatory rate of interest as a general rule and that, if a particular pursuer sought to argue for a different rate, he could put his own circumstances in issue by pleading them. Farstad had not sought to do so. He therefore invited me either to take an average of the...
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