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You are here: BAILII >> Databases >> Scottish Law Commission >> Scottish Law Commission (Discussion Papers) >> Interest on Debt & Damages [2005] SLC 127(4) (DP) (January 2005) URL: http://www.bailii.org/scot/other/SLC/DP/2005/127(4).html Cite as: [2005] SLC 127(4) (DP) |
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Part 4 Interest on Contractual Debt
Introduction4.1 Most debts have their origin in a contract between two or more parties. The contract may be for the supply of goods or services (including the sale or letting of heritable property), for the lending of money, for the provision of caution or insurance and so on. In each case the consideration given by one party consists of a sum of money payable to the other party. The parties may or may not expressly agree a date upon which the sum is payable or, alternatively, it may be that the due date for payment can be implied as a term of the contract.
4.2 The contracting parties may also expressly agree that interest will be payable on the sum due under the contract with effect from a specified date. If, however, the contract is silent on the question of entitlement to interest and no such entitlement arises by necessary implication, interest will not run unless and until provided for by the common law rules summarised in Part 2 of this Discussion Paper. In this Part of the paper we discuss the basis upon which an entitlement to interest on a contractual debt could be conferred by statute in circumstances where entitlement (or absence of entitlement) to interest is not determined by an express or implied contractual term.
A statutory entitlement to interest?4.3 There are two different conceptual bases upon which an entitlement to interest on contractual debt could be based:
(i) interest falls due as soon as the specified date for payment has passed without payment having been made (we refer to this as an "immediate entitlement"); and
(ii) interest for the whole period since the date for payment becomes due as a consequence of an action having been raised for payment of the debt (we refer to this as a "deferred entitlement").
The distinction might at first sight seem to be of more theoretical than practical significance. Once proceedings have begun for recovery of a debt, it makes no difference whether the right to interest was (in theory) previously in existence or whether it only came into existence when the action began. What matters is the commencement date for the running of interest which the law specifies and the rate at which interest runs. Even before proceedings have been raised, the fact that a debtor knows that if found liable he may also have to pay interest from an early date may make it more likely that a settlement prior to the commencement of a court action will include some compensation to the creditor for interest accrued during the period since the debt became due. This, however, is debatable: some debtors will take the view that so long as they pay before proceedings are begun, they will be able to resist any demand for interest because the creditor will prefer to receive the principal sum, albeit late, rather than to prolong the delay by insisting upon interest in addition.4.4 There is no Scottish case in which this distinction has been analysed. It may, however, be said that Scots law has implicitly adopted the "immediate entitlement" approach although, to some extent, this has been masked in recent years by the fact that interest has usually been awarded only for the period since the date of citation. The authorities prior to Blair's Trs v Payne[1] contain no indication that entitlement to interest was regarded only as an aspect of the giving of judgment in proceedings for recovery of debt. In any event, since 1884 interest has run from the date of citation not because the matter has been brought before a court for judgment but because a demand has been made in what was regarded as the appropriate form. As noted earlier,[2] there are circumstances in which interest has been held to run from the date of an intimation by the creditor that interest will be charged if the account remains unpaid. It is not suggested in these cases that the effect of such intimation is deferred until such time, if any, as an action for payment is raised.
4.5 The approach under English law has been different. At common law a contractual debt carried no entitlement to interest unless the parties agreed that it should. Statutory provisions introducing or extending entitlement to interest have taken the form of conferring power, or imposing a duty, on the court to include an award of interest in the sum for which judgment is given.[3] The present law is contained in the Supreme Court Act 1981,[4] in terms of which the High Court has power to include interest in any sum for which judgment is given for all or any part of the period since the date when the cause of action arose. Where payment is made after proceedings are raised but before judgment, or otherwise than in pursuance of judgment, the court has power to order interest to be paid up to the date of payment. Additional (non-statutory) powers to award interest exist with regard to equitable remedies.[5] This deferred entitlement approach was adopted, and continues to be used,[6] in most Commonwealth jurisdictions which began by adopting the 19th century English legislation. It has also obviously influenced the Scottish statutory provisions regarding interest on damages.[7]
4.6 The opposite approach is taken in most other European systems. Interest runs as a matter of statutory entitlement during the period of default, which may or may not require a formal demand to set interest running.[8] In their 1978 Report on Interest,[9] the Law Commission recommended the creation of an entitlement to what was called "statutory interest" but their recommendation was not implemented. This approach has, however, now been taken in the United Kingdom in the Late Payment of Commercial Debts (Interest) Act 1998, which created an entitlement to "statutory interest" from a specified date, by way of implied contractual provision.
4.7 In their 1994 Report Aspects of Damages: The Award of Interest on Money Claims,[10] the Law Commission of New Zealand considered replacing the existing deferred entitlement to interest with an immediate entitlement. They concluded that this would have an undesirable effect on the legal relations between creditor and debtor before proceedings are issued, while making no difference to the ultimate enforcement of the debtor's liability for interest after proceedings have commenced. In particular, if prior to commencement of proceedings the debtor tendered the amount of the principal and the creditor took the money without referring to a claim for interest, this would not extinguish the debt because the interest would remain outstanding. The apparent consensus at the time of payment would not be sufficient to bar the creditor's claim for interest. We agree with this analysis but for our part we do not regard it as creating a problem. If a statutory entitlement to interest on overdue payments is in force, both parties know (or are at least presumed to know) that payment of the principal alone does not extinguish the debt due to the creditor. If the creditor chooses to accept only the principal in full satisfaction of the debt, that is a matter for him. If he does not, then there seems to us to be no difference in principle from a situation in which a debtor tenders only part payment of the principal: the balance remains due and is recoverable by court action if necessary. The fact that entitlement to interest is not dependent upon the raising of proceedings would, it seems to us, operate as an increased incentive to the debtor to pay in time.
4.8 In our view, the creation of a statutory entitlement to interest, as opposed to the creation of an enlarged remedy applying only where proceedings have been raised, is more consistent with the rights-based approach traditionally adopted by Scots law. It seems unprincipled to assert that on the day before proceedings are raised no entitlement to interest exists and yet to empower or even oblige the court to award interest for the pre-commencement period as soon as the action begins. In President of India v La Pintada Compania Navigacion SA,[11] Lord Brandon of Oakbrook identified three cases in which the absence of a common law remedy for loss caused by late payment of a debt may arise: case 1, where a debt is paid late before any proceedings for its recovery have been begun; case 2, where it is paid late after proceedings have begun; and case 3, where it remains unpaid until the proceedings have been concluded and a judgment given in which the original debt becomes merged. Lord Brandon expressed the view (at page 129) that:
"An ideal system of justice would ensure that a creditor should be able to recover interest both on unpaid debts in case 1, and also in respect of debts paid late or remaining unpaid in cases 2 and 3."
We agree. In our opinion, this can best be achieved by creating a statutory entitlement to interest on contractual debt from a specified date regardless of whether the creditor requires to raise proceedings in order to recover the debt. Such an entitlement already exists in relation to debts falling within the Late Payment of Commercial Debts (Interest) Act 1998. This entitlement should, in our view, be extended to all other contractual debts except where an entitlement to interest is conferred or expressly excluded by either (a) the terms of the contract itself or (b) any other statutory provision. We therefore propose that, as a general rule:
4.9 We address below the exceptions which may be required to this general rule and, in particular, whether (as the rule implies) the parties to a contract should be permitted to contract out of it. However, we emphasise the point that our proposal would confer on the creditor a right, not a duty, to demand interest on a debt which is unpaid at the due date. The creditor could, if he wished, choose to settle for the principal sum only.2. There should be created a general statutory entitlement to interest on contractual debts except where an entitlement to interest is conferred or expressly excluded either (a) by the terms of the contract itself or (b) by any other statutory provision.
Date from which interest runs4.10 The central issue in relation to contractual debt is the identification of the appropriate date from which the creditor in the obligation should become entitled to interest if payment is not made by the debtor. We are concerned with payments due under various types of contract, notably:
- contracts for supply of goods and services;
- contracts for sale or lease of heritable property;
- contracts of employment;
- cautionary obligations;
- claims under contracts of insurance.
In each of these cases, it is presumed that payment by the debtor has fallen due, either because the creditor has performed his obligation under the contract, or because of some other express or implied term of the agreement. In other words, the debtor is in default in failing to have made payment. Our approach has been to attempt to identify the time at which the creditor may be regarded as being deprived of the use of the money which is – or is after court proceedings held to be – due by the debtor. The amount of the debt will usually, but not necessarily, be quantifiable by then. Different considerations apply where the debtor has the use of the creditor's money in circumstances where there is no such default: for example:
- where repayment of a loan has not yet fallen due;
- where the creditor has yet to perform some or all of his obligations under the contract and would not be in a position to sue for payment; or
- where the "debtor" is holding money belonging to the "creditor" with the latter's consent in circumstances in which he will in due course be required to account for it: eg money held by an agent or factor.
We consider separately below the circumstances, if any, in which statutory interest should run in such circumstances.4.11 Our examination of other legal systems has disclosed no universally accepted criterion for selecting the date from which interest runs. English law and the Commonwealth systems which have adopted its approach provide for interest to be awarded, at the discretion of the court for the whole or any part of the period from "the date when the cause of action arose".[12] This is usually stated to be subject to any entitlement to interest already existing by virtue of agreement, statutory provision or otherwise. There are, however, variants. In Saskatchewan the court awards interest "from the day on which loss or damage is first sustained".[13] In Quebec the creditor is entitled to interest from "the date of default".[14] The Law Commission of New Zealand has recommended[15] that interest should run from the date on which the cause of action arose unless the amount of the principal was not quantified at that date in which case interest does not run until such later date as the court specifies as the date at which the amount is to be quantified. Within the United States there are a number of different formulations including the date when the cause of action accrues,[16] the date of breach of contract[17] and the date of notice of claim.[18] The most popular choice is the date when payment was due.[19] In France and Belgium interest begins to run on the date of demand for payment.[20] In Germany and the Netherlands interest runs during the period of default,[21] and in Italy from the date of default.[22]
4.12 Although these formulations vary and may not always lead to use of precisely the same starting date, they have in common the feature that a dispute over the principal sum due does not prevent interest running. It will also be noted that in none of the systems examined (other than four US states[23]) does entitlement to interest, even after the raising of proceedings, run only from the date when an action has been commenced.[24] Scots law is therefore out of step with modern European and Commonwealth systems, and most US states, in restricting interest to the period following the date of citation.
4.13 The principles elaborated by the Commission on European Contract Law (the "Lando Commission") provide for interest to run at a prescribed rate "from the time when payment is due".[25] This formulation seems to us to express in a succinct manner the general rule which we propose for a statutory entitlement under Scots law. It identifies the date after which the debtor may be regarded as being in default in failing to make payment but carries no implication that entitlement to interest is postponed until an action is raised or until the amount of the debt has been independently quantified.
4.14 For certain types of debts, it will be desirable to particularise in the legislation the date at which "payment is due". We discuss a variety of different types of contractual debt below. We would, however, welcome comment on the following proposal:
3. As a general rule, interest on a debt arising under a contract should run from the date when payment is due by the debtor.
Supply of goods and services4.15 The most common type of pecuniary obligation is the obligation to pay for goods and services received by the debtor. For such obligations there already exists a model: the Late Payment of Commercial Debts (Interest) Act 1998, section 4, which applies throughout the United Kingdom to business-to-business contracts for the supply of goods and services. This provision may be summarised as follows:
Where the parties agree a date for payment of the debt (whether fixed or dependent upon the happening or non-happening of an event), interest begins to run on that date;
In any other case, interest begins to run 30 days after the later of:
- the day on which the supplier's obligation is performed; and
- the day on which the purchaser has notice from the supplier of the amount of the debt or of the amount claimed by the supplier.
We regard this as a clear and helpful means of applying the general principle that interest should run from the date when payment is due to contracts (whether or not between businesses) for the supply of goods and services.4.16 So far as the "period of grace" before interest begins to run is concerned, it is clearly attractive to have consistency between the general entitlement to statutory interest which we are proposing and a creditor's entitlement under the 1998 Act. In our view, the period of 30 days specified in the Act represents a fair and reasonable time for which to delay commencement of the period during which the creditor of a contractual debt may be said to be deprived of the use of money due by the debtor.[26] It allows the debtor an appropriate period of time to pay after performance of the creditor's obligation and quantification of the sum demanded. At the same time the creditor is not disadvantaged by the continuation of any dispute over the amount properly due. The issue of an invoice by the creditor would constitute "notice" for this purpose.
4.17 We therefore invite comment on the following proposal:
4. Statutory interest should run on a debt due for the supply of goods or services from the following date:
Where the parties agree a date for payment of the debt (whether fixed or dependent upon the happening or non-happening of an event), that date;
In any other case, 30 days after the later of:
- the day on which the supplier's obligation is performed; and
- the day on which the purchaser has notice of the amount of the debt or of the amount claimed by the supplier.
Sale or lease of heritable property4.18 In practice, sale of heritable property is the situation in which entitlement to interest is most likely to be the subject of express contractual stipulation and a statutory provision applying in the absence of agreement to the contrary may seldom be required. The Late Payment of Commercial Debts (Interest) Act 1998 does not apply to heritable property,[27] but our view is that, in the interests of consistency, no distinction should be drawn in respect of the more general entitlement which we propose. The formulation in the 1998 Act which we propose to adopt in relation to supplies of goods and services generally could apply, with little adaptation, to sales of heritable property.
4.19 A situation which requires further consideration is where a purchaser obtains possession of heritable - or, indeed, moveable - property without having paid the purchase price. It was established at an early date that the unpaid seller was entitled to some form of compensation for relinquishing possession without having received payment. In some cases this compensation took the form of interest; in others a share of the profit of the lands.[28] It is possible to see this either as compensation for loss of use of the subjects of sale or of loss of use of the purchase price. If it were the former, then the compensation might be regarded as analogous to rent payable by the purchaser in possession. In all the modern cases, however, any compensation found payable has taken the form of interest on the purchase price rather than attempting to quantify the benefits accruing to the purchaser from possession of the subjects of sale.[29]
4.20 Our general rule is intended to apply in circumstances where the debtor is in default by failing to make payment. In the case of a purchaser of property who is in possession without paying the price, non-payment may or may not constitute default, depending on whether the seller is in a position to implement all of his obligations under the contract. The present law as regards heritable property is clear: interest starts to run when possession is taken unless the purchase price is consigned.[30] This is so even where the purchaser has a good reason for non-payment and would have a good defence to an action for payment.[31] If a seller were to be entitled to statutory interest in circumstances in which the purchaser is not in default in failing to make payment, this would require an extension of our proposed general rule. There would also, presumably, require to be an exception to the extension where the purchase price has been consigned. Our provisional view is that entitlement to interest (whether as a rent substitute or as compensation for loss of the use of purchase price) where the purchaser is not in default in failing to make payment should not be included within the statutory scheme but should be left to the common law to determine.[32] However, we invite views on the following question:
4.21 We propose that the general rule set out above would apply to arrears of rent. Once again the landlord's entitlement to interest is likely to be the subject of express provision in the lease[33] but we see merit in having the same statutory "default" provision for arrears of rent as applies to other sums payment of which is overdue. In their 1978 Report on Interest,[34] the Law Commission excluded rent and other sums payable by a tenant to his landlord from the scope of their scheme for two reasons. Firstly, the scheme for statutory interest which the Law Commission proposed was restricted to contract debts and it was noted that not all rent was contractual; for example, where a statutory tenancy had replaced a contractual tenancy protected by statute. Secondly, it was observed that there were special social policies involved in the rules as to payment and recovery of rent in relation to residential tenancies, one of the objects of which was to strike a balance between the economic strengths of the parties. The introduction of a statutory entitlement to interest might, it was thought, upset this balance. The first of these reasons is not strictly applicable to our scheme if, as we propose, it will not be restricted to contractual debt. In any event, even if it were so restricted, it would seem to us to be more consistent with principle to make special provision to include rent payable under statutory tenancies than to exclude rent altogether. The second of the Law Commission's reasons for exclusion seems to us to have less force in relation to a scheme, such as we propose, where the rate of interest is designed to be compensatory and not penal. We recognise that the conferment of a statutory entitlement to interest prior to judicial demand may, in the short term at least, result in an unforeseen benefit to landlords who have set rent levels a little higher than they would otherwise have done to take into account an assumption that interest would not run on rent arrears. This marginal benefit does not seem to us to warrant an exception from the general rule in relation to all rent.5. Should the entitlement to statutory interest extend to all circumstances in which the purchaser of property (whether heritable or moveable) has been granted possession without payment of the price to the seller, except during any period when the price has been consigned at an appropriate rate of interest?
4.22 Perhaps of greater concern is the potential effect of extending a statutory entitlement to interest to public sector landlords who, we understand, do not presently charge interest. It might be thought undesirable for individuals who may already be financially vulnerable to be exposed to a further liability in the form of interest on unpaid rent. We would emphasise, however, that we do not envisage that the charging of interest will be compulsory. As discussed below,[35] we consider that parties to a contract should have the right to contract out of the statutory entitlement to interest which would otherwise apply. It would therefore be open to a public sector landlord, should it wish, to include a provision in its tenancy agreements that interest would not run on arrears of rent. In any event, as we have already observed, the proposed new legislation would confer a right and not impose a duty to demand interest. Where, for example, a tenancy agreement which had been entered into prior to the new legislation taking effect did not provide for arrears of rent to be interest-free, there would be no obligation on the landlord to enforce any entitlement which the legislation created. On balance, we consider that there is insufficient risk of creation or exacerbation of hardship to justify excepting tenants' pecuniary obligations from our proposed general rule. We therefore invite comment on the following proposal:
6. Interest should run on arrears of rent and other sums payable by a tenant to a landlord as it runs on other sums which have fallen due for payment.
Contractual debt where entitlement or quantification requires determination by a third party4.23 Entitlement to payment under a contract may be dependent upon a determination or certification made by a third party. A common example is a provision, such as those which appear in the commonly-used standard-form building contracts, that the contractor's right to payment does not accrue until the sum payable has been certified by the architect. Cases such as British Railways Board v Ross & Cromarty County Council[36] and Farrans (Construction) Ltd v Dunfermline District Council[37] have raised the issue of when interest begins to run where the creditor's entitlement to receive payment is dependent upon a determination by a third party such as an arbiter. In both cases, it was held that interest did not begin to run until the arbiter had determined the principal sum due. Under the new test proposed, if the claim was not covered by a contractual provision regarding payment following certification, interest would begin to run 30 days after the creditor made his claim for payment. This is a situation in which it may well be that no criticism can be made of the debtor for waiting for the arbiter's determination before making payment. Nevertheless, our view is that no exception to the general rule is required. The creditor is deprived of the use of money even though the amount due has not been ascertained by the method agreed by the parties. We invite comment on the following proposal:
7. Statutory interest should run on a contractual debt even where the amount of the debt, if found to be due, remains unascertained pending determination by a third party.
Contracts of employment4.24 We are aware of no modern Scots cases in which the question of entitlement to interest on remuneration from employment prior to date of citation has been raised as an issue, although it will have been normal practice to seek interest from the date of citation in actions raised to recover arrears of pay. We propose that debts falling due under contracts of employment should fall within the scope of statutory interest.[38] The Late Payment of Commercial Debts (Interest) Act 1998 contains an express exclusion,[39] for the avoidance of doubt, of contracts of service, ie employment, and apprenticeship. This reflects the restriction of the scope of that Act to business-to-business transactions and we see no need to reproduce the exclusion in the more general scheme which we propose.
4.25 The rule which we propose in relation to supplies of goods and services requires some adaptation to make it work for earnings. In the first place, performance of an employee's duties takes place on a day to day basis and it seems undesirable to create a situation where interest falls to be calculated on each day's earnings separately. It would also seem unnecessarily complicated, where wages are paid on a weekly basis, to calculate interest separately on each weekly instalment. We suggest that a pragmatic solution would be to provide for interest to run from the last day of the month following the month in which the service under the contract was performed. This would require only one calculation of interest per month and would recognise that earnings from employment are normally paid in arrears. Secondly, it will seldom occur that an employee would give notice of the amount which he claims is due to him and so this branch of the rule regarding goods and services is likely to be inapplicable. Thirdly, where, unusually, the remuneration of the employee has not been expressly agreed so that payment quantum meruit has to be demanded, we do not regard it as appropriate that the running of interest should be deferred until a rate has been proposed or agreed. We therefore invite comment on the following proposal:
8. (a) Statutory interest should run on sums due under a contract of employment or apprenticeship.
(b) Unless the contract contains a contrary provision, interest should run from the last day of the month following the month in which the service under the contract was performed.(c) Entitlement to interest should not be deferred by virtue of there having been no agreement as to the amount due under the contract.
Cautionary obligations: cautioner's right of relief4.26 We are not aware of any modern case law which addresses the issue of a cautioner's right to interest prior to date of citation on sums sued for by way of relief from the principal debtor. Three old Acts of Sederunt (of 1590, 1610 and 1613 respectively) made provision for interest to run from the date when the cautioner made payment and these Acts were applied in a number of 17th and 18th century cases.[40] This is consonant with the current law as regards payments under dishonoured bills of exchange.[41] In terms of our proposed general rule, it seems to us that the date when payment is made by the cautioner should be regarded as the date when payment is due to him by the principal debtor. It may be that no specific statutory provision is needed for cautionary obligations but we invite comment on the following proposal in principle:
9. Statutory interest should run on a sum paid by a cautioner in satisfaction of a debt due by the principal debtor from the date when payment by the cautioner was made.
Insurance and other claims for indemnity4.27 Contracts of insurance are likely to contain provisions regulating the policyholder's entitlement to interest on the proceeds of the policy. As with other forms of contractual debt, it seems desirable to have a statutory provision which will apply where a contract is silent. The obligation of an indemnity insurer is characterised by Scots law as a contractual obligation to pay a sum of money equivalent to the loss sustained by the insured.[42] In principle there seems to be no reason why late payment by an insurer, or by a party liable under any other contract of indemnity, should not result in entitlement to statutory interest. However, the model which we have borrowed for contractual debt from the 1998 Act may require some adaptation to render it suitable for fixing a commencement date for the running of interest on a sum due by an insurer under a policy of insurance. The insurer's liability arises as a consequence of the occurrence of an event, such as the insured having sustained a loss, and not as a result of the insured having performed an obligation. In some cases, such as third party and public liability insurance, the insured's loss may not actually occur until some time after the event giving rise to the claim. Non-indemnity insurance, such as life assurance, is in a different position in respect that it does not necessarily involve the insured sustaining a loss. On the other hand, the date when the insurer's liability is triggered is not in doubt. In all cases the insurer may require time to investigate the claim.[43]
4.28 In England, the running of interest on insurance policy proceeds has been treated as a matter for the discretion of the court. In exercise of that discretion, interest has been awarded from the date of the loss,[44] from the date of the claim,[45] from the date of repudiation,[46] from the date when the policy proceeds were held to have been "wrongfully detained"[47] and from the date of commencement of proceedings.[48]
4.29 The question of when payment is due under a contract of insurance or other contract of indemnity is a matter for the underlying law (including the terms of the parties' contract) to determine. There are at least three conditions which must be satisfied before it may be said that payment is due by an insurer:
(i) the event insured against has occurred;
(ii) as regards indemnity insurance, the insured has sustained a loss as a consequence of the occurrence. In cases such as third party liability claims this will not occur until the insured has had to make payment to the third party, whether as a result of a court decree or not;[49] and
(iii) the claim has been intimated to the insurer.
It might also be argued that payment is not due until the insurer has had a reasonable opportunity to investigate the claim. We understand that it is normal for contracts of insurance to contain a term entitling the insurer to a period of investigation before deciding whether or not to make payment. In cases where no express contractual provision is made, the question is whether interest should begin to run before such a period has ended. It seems to us that there is a reasonable case for allowing a period for investigation before interest begins to run. This is not a situation in which non-payment immediately indicates default. We have provisionally selected a period of 30 days as appropriate for investigation, although we would welcome views on whether a period of 30 days is regarded as too short. We invite comment on the following proposal which is intended to take into account all of the conditions mentioned:
10. Where a contract of insurance or indemnity contains no express provision with regard to the running of interest, it should begin to run from whichever is the later of:
(a) the date 30 days after the date when a claim in respect of the occurrence of the event insured against is intimated to the insurer; and(b) where the insured has sustained a loss as a consequence of the occurrence of the event insured against, the date when the loss was sustained.
Interaction with the Late Payment of Commercial Debts (Interest) Act 19984.30 The provisions of the Late Payment of Commercial Debts (Interest) Act 1998 cannot be amended in such a way that the amended Act would cease to implement Directive 2000/35/EC. It is therefore necessary to preserve entitlements under the 1998 Act and consequently to exclude any entitlement to interest under our proposals where interest is running under that Act. This does not mean that our proposals could never apply to business-to-business debts. There is no obligation upon a creditor to demand interest at the rates to which he is entitled by virtue of the 1998 Act. If a creditor were to choose instead to demand interest under an Act giving effect to our proposals, then we consider that he should be free to do so. Given that the 1998 Act is intended to impose a penal rate of interest for late payment and that our proposals are intended merely to compensate the creditor for loss of the use of money, it will normally be to the advantage of the creditor to exercise his rights under the existing Act. There may, however, be sound practical reasons why he would decide not to do so. He may, for example, have a continuing business relationship with the debtor which he would not wish to jeopardise by demanding interest at a punitive rate. There may even be circumstances in which it is to his advantage to claim interest under our proposals. For example, if an Act implementing our proposals were to provide for compound interest to be charged, it might be to the creditor's advantage, with regard to a debt which remained outstanding for a very long time, to charge compound interest at a low rate instead of simple interest at a higher rate.
4.31 Our view is that conflict between the two regimes can be avoided, and the United Kingdom's obligations under European law respected, by providing that a debt does not carry interest under the proposed new scheme if or to the extent that it consists of a sum in respect of which a creditor's remedy for late payment under the 1998 Act is enforced, as opposed merely to being enforceable. It will then remain open to a creditor to choose to pursue his entitlement to demand interest at the punitive rate specified in the 1998 Act, or, alternatively, to seek statutory interest under the proposed new scheme. We invite comment on the following proposal:
11. A debt shall not carry interest under the proposed new scheme if or to the extent that it consists of a sum in respect of which a creditor has elected to claim interest under the Late Payment of Commercial Debts (Interest) Act 1998.
Exception for interest due under other statutory provisions4.32 As noted in our discussion of the present law,[50] there exist a large number of statutory provisions other than the Late Payment of Commercial Debts (Interest) Act 1998 which confer an entitlement to interest. Some of the circumstances in which they apply will arise out of a contractual relationship. 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 any other statutory provision. Nevertheless, our proposals could affect the rate of interest payable under certain statutory provisions. We discuss this at paragraph 7.55.
4.33 Certain taxes and duties payable to local or central government do not presently bear interest. An example is the council tax: no interest is charged on arrears but when the sheriff grants a summary warrant authorising recovery a 10% surcharge is added to the arrears.[51] Such debts do not fall within the scope of our reference and we do not propose that a new liability to interest shall be created in such circumstances.
Contracting out of the new scheme4.34 Section 8(1) of the Late Payment of Commercial Debts (Interest) Act 1998[52] provides as follows:
"Any contract terms are void to the extent that they purport to exclude the right to statutory interest in relation to the debt, unless there is a substantial contractual remedy for late payment of the debt."
Section 9 defines "substantial remedy" by providing that a remedy shall be regarded as a substantial remedy unless (a) it is insufficient for the purpose of compensating the supplier for late payment or for deterring late payment, and (b) it would not be fair or reasonable to allow the remedy to be relied on to oust or vary the right to statutory interest which would otherwise apply in relation to the debt. Apart from the prospective obligation to implement the 2000 Directive which was at that time in draft, the inclusion of these provisions was regarded as essential to protect the intended beneficiaries of the legislation. In the Consultation Paper[53] which preceded the 1998 Act, the DTI had stated:[54]
4.35 Our provisional view is that the same considerations do not apply to the running of interest generally on contractual debt. We reach this view for the following reasons. In the first place there is less of an incentive for a party to contract out of payment of interest at a compensatory rather than a punitive rate. It is, after all, open to parties under the present law to agree that interest shall not run after date of citation on an overdue debt but we have not come across any instance of this being done. Secondly, it would seem to be wrong to prohibit parties from agreeing that one shall have interest-free use of the other's money. We noted above[55] the current position regarding public sector tenancies and it seems right that the parties to a tenancy should remain able to agree that no interest is to be payable on arrears of rent. It should also remain possible for parties to agree that loans shall be interest-free even after the date for repayment has arrived. Some Muslims, for example, would regard the charging of interest as forbidden by Islamic law and this should be recognised by some means in a new statutory scheme. Thirdly, any statutory provision will inevitably be in general terms which are unlikely to work equally well in all circumstances. In our view, it should remain open to parties to devise their own rules where they regard this as appropriate. Fourthly, the situation envisaged in the DTI Consultation Paper of a large business putting pressure on a small business does not seem likely to arise in the case of debts to which the 1998 Act is not applicable. There are few circumstances in which a large business is likely to incur debt under a contract with a person who is not acting in the course of a business. (One of these circumstances is a contract of employment.) Conversely, it seems unlikely in a contract where the creditor is the business and the debtor is the person not acting in the course of a business that the former would allow the latter to contract out of liability for interest on debts paid late. But there seems to be no obvious reason to prohibit this if it is what the parties want. An example might be debts to utility companies, one of the few remaining situations in which consumers might contract with large businesses on interest-free credit. The utility company should, we think, be free to agree with its clients that late payment of bills will be enforced by methods other than the charging of interest.[56] Finally, in business to business transactions there will be no incentive to contract out of liability for interest under the new provisions because the punitive liability under the 1998 Act would remain unless some other "substantial remedy" was provided."To permit contracting-out would negate the purpose of the legislation by enabling large businesses to put pressure on small businesses to forego their right to statutory interest. It will still remain for any business to decide whether it wishes to exercise the right or not, but this decision will be voluntary not coerced."
4.36 A distinction could be drawn between, on the one hand, contracting out of an entitlement to interest altogether and, on the other hand, contracting for payment of interest at a different rate, or during a different period, or on a different principal sum from that which would be recoverable under the proposed legislation. In our view there is no need to draw such a distinction for present purposes. If, as we consider, parties should be free to contract out of entitlement to statutory interest, they should be free to agree an entitlement which is less than that which would be afforded by statute. They should also, in our opinion, be free to agree an entitlement which is greater than that afforded by statute, subject to the existing legislation regulating unfair contract terms, extortionate credit bargains and so on.
4.37 We invite comment on the following proposal:
4.38 If, contrary to our provisional view, it were felt that there was a need for a general prohibition on contracting out of the creditor's entitlement to statutory interest, it would be necessary to consider whether contracting out might be permitted in some circumstances, as is the case under the 1998 Act, and, if so, what those circumstances might be. We think that it would create undesirable complexity to introduce a new test to sit alongside the test contained in the 1998 Act and that if it is regarded as appropriate to include a prohibition on contracting out, the same test as that used in the 1998 Act should apply.12. There is no need for statutory provision to prohibit parties from contracting out of the creditor's entitlement to interest under the proposed new legislation.
Judicial discretion to remit interest4.39 Section 5 of the Late Payment of Commercial Debts (Interest) Act 1998 provides for remission of interest due under that Act for the whole or part of the period for which it would otherwise run, and for interest to be allowed for any period at a lower rate than that at which it would otherwise run, if this is required in the interests of justice, "by reason of any conduct of the supplier" at any time.[57] Having borrowed from the 1998 Act the principle that interest should begin to run from an early date, we invite comment as to whether this principle should be accompanied by a judicial discretion to withdraw entitlement to interest if it is in the interests of justice to do so.
4.40 There are persuasive arguments both for and against the inclusion of a judicial discretion to remit interest. Other law reform bodies who have considered this matter have reached differing conclusions. Most Commonwealth jurisdictions follow England and Wales[58] in conferring a wide discretion on the court to award interest at such rate, for such period and on such part of the principal sum as the court thinks fit.[59] This discretion was regarded by the Law Reform Commission of Western Australia[60] as justified by the many variables relevant to awards of interest, including:
• interest rates varying over time;
• whether there was delay on the part of the claimant in pursuing the claim;
• whether there was a legitimate reason for not paying the sum claimed earlier;
4.41 In some other jurisdictions the court is given a discretion regarding the award of interest but the discretion is not unlimited. For example, in Ontario[61] the court may disallow interest, or award it at a higher or lower rate or for a longer or shorter period than that specified in the statute, taking into account various factors including the circumstances of the case, the amount claimed and the amount recovered, the conduct of any party tending to shorten or to lengthen unnecessarily the duration of the proceedings, and "any other relevant consideration". In an unimplemented report,[62] the Law Reform Commission of Hong Kong recommended that "where payment is withheld due to genuine doubts or dispute as to the terms of the agreement or the amount of the principal the courts should be able to intervene".[63]• any agreement between the parties that interest should not be recoverable.
4.42 By way of contrast, in British Columbia judicial discretion has been excluded by statute. The court is obliged to add pre-judgment interest at a rate the court considers appropriate from the date when the cause of action arose until the date of the order.[64] The Law Reform Commission of British Columbia considered and rejected the arguments for judicial discretion.[65] Delay by the claimant in prosecuting his action was not regarded as causing prejudice to the debtor because he has had the use of the money during the period of such delay. Good faith on the part of the debtor in withholding payment was regarded as entirely irrelevant: if the debtor is liable to pay money, either he had the use of the money which ought to have been paid to the creditor forthwith or else he has been saved the expense of borrowing it. To introduce a discretion was considered to result in uncertainty and confusion and to complicate the legislation. A similar view was taken by the New Zealand Law Commission[66] who did, however, recommend that there be a limited discretion to vary the rate of interest in judgments given in a foreign currency and that a discretion was also needed as regards awards by the Employment Tribunal. No discretion exists in the systems of continental Europe or in the Civil Code of Quebec.
4.43 The arguments in favour of a discretion may be categorised as either economic or non-economic. Economic arguments support the retention of a discretion to ensure that the creditor is neither over- nor under-compensated. It may be, though, that this can be ensured by means other than a judicial discretion; for example, by maintaining rates of interest in line with current market rates and by appropriate definition of the starting date for the running of interest. Non-economic arguments support the retention of a discretion to cover cases where it might be regarded, for whatever reason, as unfair to the debtor to have to pay interest on the whole sum due for the whole period to the date of payment or decree. One of these is that the debtor has been in good faith in refusing to pay. For example, assume that A carries out work for B and submits an excessive bill which B refuses to pay. After several months' negotiation, a settlement is reached whereby B agrees to pay a lesser amount. B could not have paid earlier because A would not have accepted a cheque for a lesser sum than that initially demanded. Our provisional view is that this is not a good reason to refuse to award interest on the sum ultimately agreed to be payable. Under our proposals the award is compensatory and not penal. A has gained nothing by the tactic of submitting an excessive bill. B has lost nothing because he has had the use of the money for a longer period. Were a discretion to be retained to remit interest in such circumstances, it would re-introduce the concept of "wrongful withholding" which has created the present uncertainties and anomalies in the law.
4.44 As noted above, the 1998 Act contains a discretion to remit interest, but only by reason of any conduct of the supplier. For example, A carries out work for B and submits a bill which B refuses to pay on the ground that the work was not properly executed. A does nothing about this for more than four years but eventually raises an action for payment within the prescriptive period. On one view, this too is irrelevant to entitlement to interest on any sum found due at a rate which is compensatory and not penal. Whilst it may be unfair to require a debtor to pay interest at a rate which is set intentionally high to penalise late payment when the delay is wholly or mainly due to the conduct of the creditor, it is not so obviously unfair to require the debtor to pay interest at a rate which merely compensates the creditor for not having had the use of the money during the period since the debt fell due. It may be argued therefore that no judicial discretion to remit interest is required.
4.45 There is one further argument against the inclusion of a judicial discretion to remit interest. With the exception of the limited discretion in the 1998 Act, the systems in which a discretion is conferred are all "deferred entitlement" systems, ie systems where entitlement to interest arises only if proceedings have been raised. We have proposed an "immediate entitlement" system in which statutory interest runs irrespective of the raising of proceedings. It might be thought that the inclusion of a judicial discretion is inconsistent with a statutory entitlement to interest. In any event, it may be that it would lead to uncertainty as to the parties' rights in the absence of court action and would therefore discourage the resolution of claims for interest on debts paid late without recourse to the court.
4.46 We invite comment on the following alternative approaches to remission of interest by judicial discretion:
13. (a) there should be no judicial discretion to remit interest;
(b) there should be a judicial discretion to remit interest where the interests of justice so require, but only by reason of any conduct of the creditor (as in the 1998 Act); or(c) there should be a wide judicial discretion to remit interest in any circumstances where the interests of justice so require.
Interaction with claims for interest as a head of damages4.47 Interest payable to a third party may sometimes be claimed as a head of damages: for example, where a purchaser repudiates a contract to purchase a house and the seller incurs bridging loan interest during the period prior to concluding missives for a re-sale. As we noted earlier,[67] we have not regarded such claims as falling within the scope of our reference. However, there can be circumstances in which a claimant will seek to recover both statutory interest for late payment and also interest paid to a third party as a head of damages.
4.48 These circumstances are well illustrated by the facts of Tiffney v Bachurzewski.[68] Missives were concluded for the sale of a house but on the date of entry (31 December 1977) the purchaser failed to pay the purchase price. The missives contained no express provision entitling the seller to interest in this eventuality. The seller, who had been in a position to give entry and a good title, raised an action seeking implement of the contract of sale. Eventually the sale settled on 26 February 1980 and the seller amended his claim to one for damages. Among the sums claimed by the seller were (i) interest on part of the purchase price during the period between the date of citation and 26 February 1980, and (ii) the cost of a bridging loan arranged to purchase his new house. Proof before answer was allowed of the first of these claims, but the second was held irrelevant on the ground that it had not been explained why the cost of a bridging loan should have been within the reasonable contemplation of the purchaser.
4.49 One may take issue with the court's view that it was not within the reasonable contemplation of a purchaser of domestic property that the seller might require a bridging loan if the price were not paid on time,[69] and it may be that a different decision would be reached today on similar facts. For present purposes, the point is that there was no overlap between the seller's two claims. The bridging loan interest was an amount in respect of which he was actually out of pocket: in other words, he ended up receiving the purchase price of the house less what he had had to pay to his bank. Moreover, he received the purchase price late and lost the use of that money during the period of default. For that loss he would, under our proposals, receive statutory interest from the date when the purchase price fell due (the original date of entry) until the date when it was eventually paid to him. He would also be entitled to seek statutory interest on that part of the sum sued for consisting of the bridging loan interest, assuming that this were to be held to be a relevant head of claim. Thus he would be fully compensated, but not over-compensated, for the purchaser's breach of contract.
Money held with the consent of the person entitled to it4.50 The common feature of all the circumstances so far discussed is that money has not been received by the creditor after the date when it ought to have been paid: put another way, the debtor is holding the funds to which another person is entitled without the consent of the latter. On the other hand, there are circumstances, some of which arise under contract and some of which do not, in which one person will have the use of another's money but where no question of default arises or, at least, where no question of default has yet arisen. The most obvious example is an express loan of money. Another is where a person acting in a capacity such as that of agent holds money for which he will at some future date be bound to account to his principal. Subject to what is said below in relation to the rate of interest on loans, we do not propose to include such circumstances in our proposed reform. So long as payment has not fallen due, we consider that the obligation, if any, of the holder to pay interest should be left to the existing law to determine. But it is necessary to consider situations in which a person who has been holding funds with the consent of the creditor continues to hold them after payment has fallen due.
Loans4.51 Under the present law there is a presumption that loans of money carry interest from the date when the loan is made. This presumption may be displaced by circumstances or by agreement to the contrary.[70] We see no reason to interfere with the common law presumption. The anomalies which have occurred, for example in relation to interest running on IOUs,[71] have not arisen because there is something wrong with the current law regarding interest on loans but because the law did not permit interest to be demanded prior to the date of citation on debts other than loans.[72] The common law presumption does not go so far as to specify the rate at which loans are presumed to carry interest. It may be that it would be helpful for it to be provided by statute that where the legal presumption operates, there shall be a rebuttable presumption that interest runs at the rate which we propose in Part 7 of this Discussion Paper. As yet we have reached no view on this but would welcome responses to the following question:
4.52 There remains the situation where a loan has fallen due for repayment but has not been repaid. Under the present law, if a rate of interest was agreed then this contractual rate will continue after default, after an action for payment has been raised and even after decree.[73] We do not propose any change to this rule. We consider that where no contractual rate was agreed, the general rule stated at paragraph 4.14 above should apply to loans where repayment of the principal sum has become due. Accordingly, statutory interest would run at the prescribed rate from the time when the debtor is in default in failing to make repayment. This would apply in various circumstances, for example:14. Where a loan carries interest as a matter of common law presumption, should there be a rebuttable presumption that interest runs at the rate prescribed for statutory interest?
• where, at the time when the loan was made, the parties agreed a date for repayment but did not agree a rate of interest;
• in the case of a loan repayable on demand, the creditor has demanded repayment but the debtor has failed to pay and no rate of interest was agreed;
• where, by agreement or by implication, the loan was interest-free but the creditor has now demanded repayment and the debtor has failed to pay.
In the case of supplies of goods and services, we have adopted a "period of grace" of 30 days before interest starts to run. This approach could be adapted for loans by providing for interest to run from the date agreed by the parties for repayment of the principal or, failing such agreement, the date 30 days after the day when repayment is demanded by the creditor. We seek views on the following proposal:
15. In the absence of agreement to the contrary, statutory interest should run on a loan of money from the date agreed by the parties for repayment of the loan or, failing such agreement, from the date 30 days after the day when the creditor demands repayment of the loan.
Obligations to account for money belonging to another4.53 In a variety of circumstances, a person may have possession of funds to which another is entitled in respect of which he will in due course be required to account for his intromissions. Some arise out of a contractual relationship, others do not. The most obvious example of a situation arising out of contract is where funds are held on behalf of a principal by an agent or factor. In England, an agent has a duty to account for interest which he has received on the principal's funds[74] and it is thought that the same rule applies in Scotland. The attitude of the court has been coloured by whether or not the holder of the funds has acted improperly. In Wellwood's Trs v Hill,[75] trustees to whom a landed estate had been conveyed appointed one of their number to be agent and factor. In the course of his management, the agent placed funds held on behalf of the trust in his own bank account. The court found him liable to account for interest not merely at the rate earned but at "the highest legal rate" in view of the risk to which the funds had been put. Similarly, an agent who has failed properly to invest funds under his management may be found liable for interest which would have been received had the funds been invested properly. These appear to us to be rules of the substantive law of agency which we do not propose to disturb.
4.54 Our provisional view is that the statutory interest scheme which we propose should be restricted to circumstances in which the debtor is in default in failing to pay the principal sum to the creditor. This would include situations where the agent was initially in possession of the principal's funds with the latter's consent but is overdue in accounting for them. Interest under the statutory scheme would run from the date when payment fell due in accordance with the general proposal in paragraph 4.14 above. Entitlement of the principal to interest prior to that date would be left to the common law applicable to the particular circumstances in which the funds come to be so held. We would welcome views on the following proposal:
16. Statutory interest should run on funds held by one person on behalf of another from the date when the holder is in default in failing to make them over to the person entitled to them.
Note 1 (1884) 12R 104: see Part 2 above. [Back] Note 2 See the cases discussed at para 2.13, fn 53. [Back] Note 3 Originally the Civil Procedure Act 1833 ("Lord Tenterden’s Act"), s 28, allowing the court to award interest where interest was stipulated for in a written instrument or demanded in writing, and the Judgments Act 1838, s 17, providing for interest on judgment debts; subsequently the Law Reform (Miscellaneous Provisions) Act 1934, s 3, which gave "courts of record" a discretion to award interest on the whole or any part of the debt for any part of the period since the date when the cause of action arose; latterly the Supreme Court Act 1981, s 35A. [Back] Note 4 S 35A, inserted by the Administration of Justice Act 1982, s 15(1); Sch 1, Part I. For county courts there are parallel provisions in the County Courts Act 1984, s 69. [Back] Note 5 See Law Commission Consultation Paper No 167 Compound Interest (2002), para 2.19, referring to the speech of Lord Brandon of Oakbrook in President of India v La Pintada Compania Navigacion SA [1985] 1 AC 104 at 116. [Back] Note 6 Eg New Zealand (Judicature Act 1908, s 87); British Columbia (Court Order Interest Act 1996); Ontario (Courts of Justice Act 1990, s 128); New South Wales (Supreme Court (Interest) Amendment Act 1983). The same applies in most other Australian states and Canadian provinces. [Back] Note 8 Eg France (Code Civil, art 1153); Belgium (Code Civil, art 1153); Germany (Bürgerliches Gesetzbuch, art 288(1)); Italy (Codice Civile, art 1224); Netherlands (Burgerlijk Wetboek, art 6:119); also Quebec (Civil Code, art 1617). [Back] Note 9 Law Com No 88 (Cmnd 7229). [Back] Note 11 [1985] 1 AC 104 at 122 [Back] Note 12 See eg Supreme Court Act 1981, s 35A(1) (England and Wales); Court of Queen’s Bench Act 1988, s 80(1) (Manitoba); Court of Justice Act 1990, s 128(1) (Ontario); Judicature Act 1973, s 45(1) (New Brunswick); Common Law Practice Act Amendment Act 1972, s 4(1) (Queensland); Supreme Court Act 1935, s 32(1) (inserted by Supreme Court Amendment Act 1982, s 3) (Western Australia); Supreme Court Act 1933, s 53A(1) (Australian Capital Territory); Supreme Court Act 1970, s 94 (New South Wales); Supreme Court Act 1935, s 30C (South Australia); Supreme Court Act 1986, s 60 (Victoria). [Back] Note 13 Pre-judgment Interest Act, s 6(1), which in terms of s 5(1) applies to judgments for recovery of debt as well as judgments for damages. Amounts due are cumulated at three-monthly intervals from the date when the loss was first sustained and interest is calculated from the last day of each three-month period. [Back] Note 14 Civil Code, art 1617. [Back] Note 15 Report No 28 on Aspects of Damages: The Award of Interest on Money Claims (1994). To date there has been no statutory implementation of the recommendation. [Back] Note 16 Eg Alaska, New Mexico, Rhode Island, South Carolina, Vermont, Washington, West Virginia. Similarly, in New York interest is awarded from the date when damage was incurred. [Back] Note 17 Eg Alabama, Florida, Georgia, Massachusetts, Mississippi, North Carolina, Wisconsin. [Back] Note 18 Maine, Michigan, Nevada, New Hampshire. [Back] Note 19 Eg California, Colorado, Delaware, District of Columbia, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Minnesota, Missouri, Montana, Nebraska, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania. [Back] Note 20 Code Civil (France), art 1153; Code Civil (Belgium), art 1153. [Back] Note 21 Bürgerliches Gesetzbuch (Germany), art 288(1); Burgerlijk Wetboek (Netherlands), art 6:119.1. The Dutch Civil Code contains the following detailed provisions to determine when default commences:
Note 22 Codice Civile, art 1224. [Back] Note 23 Maine, Michigan, Nevada, New Hampshire. [Back] Note 24 Paradoxically, in England and Wales interest is awarded from the date of service of a writ on damages for non-pecuniary loss in personal injury actions (Jefford v Gee [1970] 2 QB 130, Lord Denning MR at 147), but this rule has not been adopted in relation to contractual debt. [Back] Note 25 Principles of European Contract Law (revd 1998), art 9:508. As noted in para 4.11, fn 19 above, a similar formulation is used by many US states. [Back] Note 26 In 2003/2004, 1,007 of the 2,706 public limited companies in the United Kingdom had an average payment period of 30 days or less. (Source: Federation of Small Businesses: Private Sector Payment Performance League Tables 2003/4.) [Back] Note 27 The term "goods" is defined as in the Sale of Goods Act 1979, s 61(1). [Back] Note 29 Eg Cadzow v Wilson (1830) 5 Mur 98; West Highland Railway Co v Place (1894) 21R 576; Grandison’s Trs v Jardine (1895) 22R 925. [Back] Note 30 Prestwick Cinema Co v Gardiner 1949 SC 645 (affd 1951 SC 98). [Back] Note 31 Eg Grandison’s Trs v Jardine (1895) 22R 925, in which the purchaser was unable to pay the price because his lender would not lend until the seller could deliver a clear title. This decision has been criticised as being contrary to the doctrine of mutuality. [Back] Note 32 This might involve a reconsideration ofGrandison's Trs v Jardine supra. [Back] Note 33 At least in tenancies granted by private landlords; we understand that public sector landlords do not presently provide in leases for the charging of interest on unpaid rent. There is no provision for payment of interest in the Model Scottish Secure Tenancy Agreement produced by the Scottish Executive (for the text of which see www.scotland.gov.uk/library3/housing/msst.pdf). Interest could, of course, be demanded from the date of citation. [Back] Note 38 One consequence of this would be that awards by the Employment Tribunal under the Employment Rights Act 1996, s 13 (unauthorised deductions from wages) would include statutory interest. At present the entitlement to interest of a claimant in the Employment Tribunal in such cases is conferred by the Employment Tribunals (Interest) Order 1990 (SI 1990/479), in terms of which interest does not begin to run until 42 days after the date of the Tribunal's determination. This entitlement would be superseded by our proposals. [Back] Note 41 Bills of Exchange Act 1882, s 57. [Back] Note 42 Scott Lithgow Ltd v Secretary of State for Defence 1989 SC (HL) 9, Lord Keith of Kinkel at 20. Scots law has not adopted the English analysis of treating the occurrence of the event as a breach of contract by the insurer (see eg Firma C-Trade SA v Newcastle P&I Association [1991] 2 AC 1 and "The Italia Express" (No 2) [1992] 2 Lloyds Rep 281). [Back] Note 43 In The Rosarino [1973] 1 Lloyds Rep 21, a sum was held by an arbitrator to be payable by the guarantor of a charterer’s liability under a charterparty. Exercising the discretion conferred on the court by the Law Reform (Miscellaneous Provisions) Act 1934, s 3, Mocatta J awarded interest from a date some 39 days after the arbitrator’s award, to allow the guarantor some time "to think about it". [Back] Note 44 Sillem v Thornton (1854) 3 E & B 868. [Back] Note 45 Burts and Harvey Ltd and Alchemy Ltd v Vulcan Boiler and General Insurance Co Ltd (No 2) [1966] 1 Lloyds Rep 354; see also Macbeth & Co Ltd v Maritime Insurance Co Ltd (1908) 24 TLR 559. [Back] Note 46 Mackie v European Assurance Society (1869) 21 LT 102. [Back] Note 47 Webster v British Empire Mutual Life Assurance Co (1880) 15 Ch D 169. [Back] Note 48 J Gliksten & Son v State Assurance Co (1922) 10 Lloyd LR 604. [Back] Note 49 The amount of such a payment might of course include interest payable to the third party. [Back] Note 51 Local Government Finance Act 1992, Sch 8, para 2(2). [Back] Note 52 Implementing Art 3(3) of Directive 2000/35/EC. [Back] Note 53 Improving the Payment Culture: A Statutory Right to Claim Interest on Late Payment of Commercial Debt (July 1997). [Back] Note 56 We believe that in practice it is common for electricity and gas supply contracts to confer an option on the supplier to demand interest on outstanding charges, typically at a rate 4% above the Bank of England base rate. However we understand that for public relations reasons it is uncommon for the supplier to enforce its entitlement to interest unless court proceedings are raised. It would remain open to suppliers to adopt this approach under our proposals whether the interest was due by contractual provision or by statutory entitlement. [Back] Note 57 Directive 2000/35/EC requires Member States to ensure that interest is payable "unless the debtor is not responsible for the delay" (art 3(1)(c)(ii)). [Back] Note 58 Supreme Court Act 1981, s 35A(1). [Back] Note 59 Eg New South Wales (Supreme Court Act 1970, s 94(1)); Western Australia (Supreme Court Act 1935, s 32(1), as inserted by the Supreme Court Amendment Act 1982, s 3); New Brunswick (Judicature Act, RSNB 1973 cJ-2, s 45(1); Saskatchewan (Pre-Judgment Interest Act, cP-22.2, s 5(3)). [Back] Note 60 Report on Pre-Judgment Interest (Project No 70(1)), 1981. [Back] Note 61 Court of Justice Act, RSO 1999 c 43, s 130. [Back] Note 62 Report on Interest on Debt and Damages (Topic 19), 1990. [Back] Note 63 Other examples include Nova Scotia (Judicature Act, RSNS 1989 c 240, s 41(k)): the court has discretion to refuse interest if the claimant has not been deprived of the use of the money during the whole pre-judgment period, or if the claimant has been responsible for undue delay in the litigation; and Manitoba (Court of Queen’s Bench Act, CCSM 1988 c 280, s 81(2)): court must have regard to changes in the quarterly interest rate, the circumstances of the case, and the conduct of the proceedings. [Back] Note 64 Court Order Interest Act, RSBC 1996 c 79, s 1(1), implementing the recommendations of the Law Reform Commission of British Columbia in their Report on The Court Order Interest Act (LRC 90), 1987. [Back] Note 65 Report, pp 15-22. [Back] Note 66 Report No 28 on Aspects of Damages: The Award of Interest on Money Claims (1994), as yet unimplemented. [Back] Note 69 Lord Hunter at 113 described the submission as "a somewhat extravagant proposition". [Back] Note 70 Neilson v Stewart 1991 SC (HL) 22, Lord President Hope in the Inner House at 34-5, citing Bell, Commentaries 1.693; Gloag, Contract (2nd edn), p 681; Smellie's Executrix v Smellie 1933 SC 725, Lord Justice Clerk Alness at 727. [Back] Note 71 See the discussion at para 2.20. [Back] Note 72 Eg Winestone v Wolifson 1954 SC 77. [Back] Note 73 Bank of Scotland v Davis 1982 SLT 20. [Back] Note 74 Bowstead and Reynolds, Agency (16th edn), para 6-101. [Back]
"6.81 Except to the extent that the delay cannot be imputed to him or performance is already permanently impossible, the debtor is in default during the period that the prestation is not rendered, once it has become exigible and the requirements of Art 82 and 83 have been met.
6.82 Default commences
(1) when the debtor is put into default by a written warning granting him a reasonable period for the performance and when there is no performance within this period.
(2)If the debtor is in a temporary impossibility to perform or if it is evident from his attitude that a warning would serve no purpose, he may be put into default by a written declaration to the effect that he is held liable for his non-performance.
6.83 Default commences without the formality of putting into default:
(a) Where a term which has been set for payment lapses without the obligation having been performed, unless it appears that the term has another purpose;
(b) Where the obligation results from an unlawful act or relates to reparation of damage as referred to in Art 74 paragraph 1 and the obligation is not immediately performed;
(c) Where the creditor must conclude from a communication by the debtor that the latter will fail in the performance of the obligation." [Back]
