An Interesting Decision - On Appeal

In October 2011 we reported on the Scottish case of Farstad Supply v Enviroco concerning the 8% judicial rate of interest on financial claims. The decision was appealed, and that was decided on 20 February 2013.

Interest rate of 8% too high

Prior to the economic downturn, a litigant would generally expect to recover interest on a financial claim at the rate of 8% a year, set by the rules of court. This judicial rate had been fixed at 8% since 1 April 1993. However, in view of the financial crisis and consequent reduction in the return on deposits, the Court of Session in this case (both at first instance and on appeal) departed from the usual 8% rate and applied instead a rate of 4% a year from December 2008. In doing so, the court noted the disparity between the judicial rate and that enjoyed by depositors using ordinary bank accounts. The bank base rate fell to 2% in December 2008, which Lord Hodge described as a "watershed".

The interest claim in this case was valuable, as it had been running since December 2002 on a figure of £1.7m. The defenders argued that even applying the 4% rate to a restricted period still afforded the pursuers a massive windfall in the present economic climate. The appeal court upheld Lord Hodge's decision. However, they aimed some barbed comments at the Scottish Government for not acting upon various representations from bodies such as the Scottish Law Commission, that the judicial rate of interest is wholly mismatched with economic reality. The decision sees the court doing what it can to cater for that reality, within the restricted role they have in interpreting, but not making, legislation. The appeal judges considered that in these circumstances, the responsibility for updating the current judicial rate fell to the body who amend the rules of court, the Rules Council, and they should do something urgently.

Comment

Hopefully, this issue will be addressed soon in a formal rule change. Until then, interest continues to be a matter of negotiation.

A confusing twist?

Given the court's approach in Farstad it might come as a surprise that the very next day it issued a judgment refusing to take account of the economic downturn when ruling on the amount a seriously injured pursuer should recover for his future losses in an action for damages...