SCOTTISH LAW COMMISSION Discussion Paper No 127 Discussion Paper on Interest on Debt and Damages January 2005 This Discussion Paper is published for comment and criticism and does not represent the final views of the Scottish Law Commission EDINBURGH: The Stationery Office £xx.xx This publication (excluding the Scottish Law Commission logo) may be re-used free of charge in any format or medium for research for non-commercial purposes, private study or for internal circulation within an organisation. This is subject to it being re-used accurately and not used in a misleading context. The material must be acknowledged as Crown copyright and the title of the publication specified. For any other use of this material please apply for a Click-Use Licence for core material at www.hmso.gov.uk/copyright/licences/core/core_licence.htm or by writing to: OQPS Licensing Division, St Clements House, 2-16 Colegate, Norwich, NR3 1BQ; Fax: 01603 723000; Email: [email protected]. ii The Scottish Law Commission was set up by section 2 of the Law Commissions Act 19651 for the purpose of promoting the reform of the law of Scotland. The Commissioners are: The Honourable Lord Eassie, Chairman Professor Gerard Maher, QC Professor Kenneth G C Reid Professor Joseph M Thomson Mr Colin J Tyre, QC. The Chief Executive of the Commission is Miss Jane L McLeod. Its offices are at 140 Causewayside, Edinburgh EH9 1PR. The Commission would be grateful if comments on this Discussion Paper were submitted by 29 April 2005. Comments may be made on all or any of the matters raised in the paper. All correspondence should be addressed to: Mr Alastair Clyde Scottish Law Commission 140 Causewayside Edinburgh EH9 1PR Tel: 0131 668 2131 Fax: 0131 662 4900 Email: [email protected] NOTES 1. Where possible, we would prefer electronic submission of comments, either by email to [email protected] or through the Contact page on our website. We should make it clear that the comments we receive from you may be (i) referred to in any later report on this subject and (ii) made available to any interested party, unless you indicate that all or part of your response is confidential. 2. The Discussion Paper is available on our website at www.scotlawcom.gov.uk or can be purchased from TSO Scotland Bookshop. 3. If you have any difficulty in reading this document, please contact us and we will do our best to assist. You may wish to note that an accessible electronic version of this document is available on our website. 1 Amended by the Scotland Act 1998 (Consequential Modifications) (No 2) Order 1999 (SI 1999/1820). iii Contents Paragraph Page Part 1 Introduction 1 Terms of reference 1.1 1 Background to the reference 1.2 1 Scope of the Discussion Paper 1.3 2 Research: rates of interest claimed 1.6 2 Structure of the Discussion Paper and outline of our proposals 1.7 3 Legislative competence 1.15 5 Part 2 The Present Law 6 Interest on debt 2.1 6 Historical background 2.1 6 Foundations of the modern law 2.10 10 Summary of the present law 2.15 12 (a) Interest due by agreement 2.16 13 (b) Interest due by statute 2.17 13 (c) Interest due by implication at common law 2.19 15 Loans 2.20 16 Possession of heritable property without payment 2.21 16 Use of funds belonging to another 2.22 17 (d) Interest due on money wrongfully withheld 2.23 17 Interest on damages 2.24 18 Historical background 2.24 18 Statutory interventions 2.26 20 Summary of the present law 2.34 23 Damages other than for personal injury 2.34 23 Damages for personal injury 2.35 24 Interest on sums other than debts or damages 2.36 25 Interest on sums due in order to reverse unjustified enrichment 2.37 25 Ship collisions and salvage 2.38 25 Legal rights in a deceased's estate 2.39 26 Aliment and financial provision on divorce 2.40 26 Awards by tribunals 2.43 27 Arbitration and adjudication 2.44 27 Part 3 The Case for Reform 29 The purpose of an award of interest: our guiding principles 3.1 29 Criticisms of the present law 3.7 31 Inconsistent treatment of debt and damages 3.8 31 The wrongful withholding concept 3.10 31 iv Contents (cont'd) Paragraph Page Interest on damages 3.15 33 Interest in other circumstances 3.18 34 Rate of interest 3.19 34 Part 4 Interest on Contractual Debt 36 Introduction 4.1 36 A statutory entitlement to interest? 4.3 36 Date from which interest runs 4.10 39 Supply of goods and services 4.15 41 Sale or lease of heritable property 4.18 42 Contractual debt where entitlement or quantification requires determination by a third party 4.23 44 Contracts of employment 4.24 45 Cautionary obligations: cautioner's right of relief 4.26 46 Insurance and other claims for indemnity 4.27 46 Interaction with the Late Payment of Commercial Debts (Interest) Act 1998 4.30 48 Exception for interest due under other statutory provisions 4.32 48 Contracting out of the new scheme 4.34 49 Judicial discretion to remit interest 4.39 51 Interaction with claims for interest as a head of damages 4.47 53 Money held with the consent of the persons entitled to it 4.50 54 Loans 4.51 54 Obligations to account for money belonging to another 4.53 55 Part 5 Interest on Damages 57 Introduction 5.1 57 Date for commencement of running of interest 5.3 58 Application of the general rule to particular types of loss 5.9 60 Pecuniary losses (including out-of-pocket expenses) 5.9 60 Solatium 5.12 61 Property lost or destroyed 5.13 62 Date for termination of running of interest 5.19 64 Judicial discretion to remit interest 5.21 65 Part 6 Interest in Other Circumstances 67 Introduction 6.1 67 Unjustified enrichment 6.4 68 Repetition 6.5 69 Recompense 6.6 69 v Contents (cont'd) Paragraph Page Salvage 6.12 71 Limitation funds 6.14 71 Obligations to account for money to which another person is entitled 6.15 72 Legal rights in a deceased's estate 6.23 74 Aliment and financial provision on divorce 6.25 75 Part 7 Rate of Interest 77 Introduction 7.1 77 The judicial rate of interest 7.5 78 What does "interest" represent? 7.12 80 Fluctuation and base rate 7.14 81 Selection of base rate 7.18 82 Prescribed rate in other legal systems 7.23 85 Judicial discretion 7.29 87 Foreign currency awards 7.33 88 Changes to the prescribed rate 7.36 88 Method of calculation 7.39 89 Interest at half the prescribed rate 7.40 89 Post-decree interest 7.43 90 Interest under the Late Payment of Commercial Debts (Interest) Act 1998 7.53 93 Rates of interest under other existing statutory provisions 7.55 94 Judicial rate specified 7.56 94 No rate specified 7.59 95 Rate other than the judicial rate specified 7.60 95 Part 8 Compounding of Interest 98 Compound interest in Scots law 8.1 98 Law Commission proposals 8.12 101 Other jurisdictions 8.19 102 Should Scottish courts have the power to award compound interest? 8.22 103 The case against compound interest 8.25 104 The case for compound interest 8.29 105 Judicial discretion 8.32 105 Compounding of risk 8.36 106 Claiming simple interest 8.37 107 Proposals 8.38 107 How should compound interest be calculated and what should be the frequency of compounding? 8.40 107 vi Contents Paragraph Page Part 9 Tenders 110 Part 10 Tribunals 112 Part 11 Arbitration, Adjudication and other forms of Dispute Resolution 115 Introduction 11.1 115 Arbitration 11.2 115 Adjudication 11.10 118 Other forms of dispute resolution 11.11 119 Part 12 Transition 120 Introduction 12.1 120 Contractual debts 12.2 120 Non-contractual debts 12.7 121 Damages 12.8 121 Conclusion 12.10 122 Part 13 List of Proposals and Questions 123 Appendix A Current Statutory Provisions 133 Appendix B Statutory Provisions Creating Entitlement to Interest 144 Appendix C Research Project 151 Appendix D Comparison of Interest Rates 156 Appendix E Comparison of Simple and Compound Interest 160 Appendix F Law Reform Projects in Other Jurisdictions 163 vii Part 1 Introduction 1. Terms of reference 1.1 In November 2003 we received the following reference1 from the Minister for Justice, Cathy Jamieson MSP: "To examine the law of Scotland relating to interest on claims for payment of money arising from contractual and other obligations, including claims within the jurisdiction of tribunals and courts or submitted for decision to arbitration, adjudication or some other form of dispute resolution, and to make recommendations as to possible reform of the law." This Discussion Paper is issued as the first part of our work on this reference. In preparing it we have been greatly assisted by an Advisory Group whose members are listed below.2 Background to the reference 1.2 The law in relation to entitlement to interest on claims for payment of money has evolved in a piecemeal fashion over a period of many centuries. To begin with, interest could only be demanded in limited circumstances which were regarded as acceptable departures from the general prohibition of usury. Interest has since come to be regarded as an appropriate means of compensating a person for the loss of the use of money which he ought to have had but at no time has there been a comprehensive statutory statement of entitlement to interest.