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Interest on Costs – a new approach

Interest on Costs – a new approach

The debate over interest is one which has been ongoing since the inception of the aged legislation which still governs entitlement to it, section 17 of the Judgements Act 1838 as enacted, which stated

“XVII​ Judgment Debts to carry Interest. And be it enacted, That every Judgment Debt shall carry Interest at the Rate of Four Pounds per Centum per Annum from the Time of entering up the Judgment, or from the Time of the Commencement of this Act in Cases of Judgments then entered up and not carrying Interest, until the same shall be satisfied, and such Interest may be levied under a Writ of Execution on such Judgment. “

and thus the positions were largely left open for the Courts to determine when interest should run from and to, with a discretion to disallow the same for any given periods, as they saw fit.

Further guidance and interpretation with regard to when that entitlement should arise were then handed down over the course of some 145 years, with the courts ultimately adopting two approaches to interest as to when the same should run from, these being the ‘incipitur’ and ‘allocatur’ rules, the former providing for any entitlement to interest to run from the date upon which the Order for Costs is made, and the latter from the date upon which any liability for costs is quantified.

The established rule which has largely prevailed across the years has been the incipitur rule, however debate has been ongoing as the Courts have expressed concerns and dissatisfaction with both, most notably in Erven Warnink BV v J Townsend & Sons (Hull) (No 2) [1983] 3 All ER 312 and more recently in Thomas v Bunn [1991] 1 AC 362 and Hunt -v- R M Douglas (Roofing) Ltd [1998] 3 All ER 823.

After Hunt there was further change when the Civil Procedure Rules were introduced on 26 April 1999. Upon their introduction, section 17 of the Judgements Act 1838 was amended such that

(1) Every judgment debt shall carry interest at the rate of… [currently 8]… pounds per centum per annum from such time as shall be prescribed by rules of court until the same shall be satisfied, and such interest may be levied under a writ of execution on such judgment.

(2) Rules of court may provide for the court to disallow all or part of any interest otherwise payable under subsection (1).

with the main change being that interest was now to run “…from such time as shall be prescribed by rules of court…”.

The rules, in turn, at CPR 40.8(1) provided that

(1) Where interest is payable on a judgment pursuant to section 17 of the Judgments Act 1838 or section 74 of the County Courts Act 1984, the interest shall begin to run from the date that judgment is given unless –

(a) a rule in another Part or a practice direction makes different provision; or

(b) the court orders otherwise.

and so the previously established principle that the Court retained the discretion to award interest from a date later than any costs order was preserved.

So, it is fair to say that, whilst there has been an established principle that the incipitur rule prevails for a great many years, the position has never been set in stone and the Courts have retained a discretion to vary this position.

And so it is that, in the matter of Involnert Management Inc v Aprilgrange Limited & Others [2015] EWHC 2834 (Comm) the Commercial Court was asked once more to consider the position as to when interest should apply from.

The judgement of the Court focused on the single issue of interest, and noted continued dissatisfaction as to the established principles more traditionally applied, with Mr Justice Leggatt considering it to be “…desirable…” for a date from which interest should run to be “…some objective benchmark…”.

In adopting a benchmark, Mr Justice Leggatt considered (at [18] to [24]) that there were 6 conclusions which could be reached, which were

1. that pursuant to Hunt the Judgments Act provided a default date from which interest would be payable, unless the Court orders interest to run from some other date;

2. that there was nothing within either “…the Judgments Act or the Civil Procedure Rules which expressly or impliedly restricts the power of the court under CPR 40.8(1) to order the interest payable under section 17 of the Judgments Act to run from a different date, or which requires exceptional circumstances to be shown before that power is exercised.” and in fact the contrary was true given the very broad discretion afforded to the Court to “…order otherwise…” being exercised to deal with cases justly, in accordance with the overriding objective;

3. “…that the date from which Judgments Act interest runs should not be deferred simply because it is at a considerably higher rate than commercial rates. The rate at which interest should be payable under the Judgments Act is a matter for the Secretary of State to decide. The court’s concern is to identify the date from which it is appropriate that interest should run on the judgment debt at whatever rate is fixed by statutory instrument as the appropriate rate of interest for judgment debts to carry. Whether that statutory rate is (at the moment) higher or lower than commercial rates of interest cannot be a relevant consideration.”

4. that the decision of the House of Lords in Hunt did not prevent interest from running from the date upon which that payable amount is assessed, the allocator rule, although he did observe that such an approach had not been adopted in any of the cases considered;

5. “…in terms of what justice requires, I do not think it just to make an order under which interest begins to run at the rate appropriate for unpaid judgment debts before the paying party could reasonably be expected to pay the debt; and, in a case where the court has ordered a suitable interim payment to be made on account of costs, I do not think it reasonable to expect the party liable for costs to pay the balance of the debt until it knows exactly what sums are being claimed by the party awarded costs and has had a fair opportunity to decide what sums it accepts are properly payable…” as to do otherwise would have led to unfairness, especially in “…cases where a particularly large amount of costs is likely to be outstanding for a particularly long period…”; and

6. “…I think it desirable to set a date from which Judgments Act interest will run which is based, if possible, on some objective benchmark and does not depend simply on the judge’s general feeling of what length of postponement is fair…It will do no favours to litigants – particularly as the amount of money at stake, while not negligible, is never likely to be large – if the date from which Judgments Act interest will be ordered to run is unpredictable, thus encouraging argument on the issue in every case…”

Thus Mr Justice Leggatt concluded that

“…a reasonable objective benchmark to take is the period prescribed by the rules of court for commencing detailed assessment proceedings…”

namely 3 months from the date of the entitlement to costs under CPR 47.7.

This judgment presents an interesting new position as to the application of interest. At first blush, it appears to suggest that interest on costs should only run from the expiry of the period for commencing Detailed Assessment, thus in every case it will only be able to be recovered from 3 months after the entitlement arises. Indeed it is expected that many paying parties may adopt such an approach as their position.

However, when read in the context of the judgement as a whole, it is clear that such a position is intended only to be a desirable default as there is clear reference within the judgement to the injustice of a paying party being liable for interest during a period when they may not know the amount of the substantive costs which they are expected to indemnify, especially where there may be a delay in serving the Bill.

Thus, for receiving parties, it will be imperative, if they are to recover interest from the earliest possible point, to ensure that there are no unreasonable delays in presenting any Bill of Costs to the paying party.

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