Interest on costs is an outstandingly dull topic. Unfortunately, as the sums of money relating to it can be very significant, it is an area that must not be ignored. It is convenient to deal first with “judgment debt interest” and then to deal with “pre-judgment interest”. This distinction has practical relevance: generally speaking the latter is the domain of the trial judge whereas the former is the domain of the costs judge. There is, however, a significant degree of overlap. In particular, judgment debt interest can run from a date prior to judgment.
JUDGMENT DEBT INTEREST
When reference is made to “interest on costs”, that reference is usually to judgment debt interest: judgment debt interest is by far the most common form of interest awarded on costs.
There are four layers of discretion in relation to judgment debt interest; they are:
the court’s powers;
the date upon which interest begins to run;
the rate of interest (and the basis upon which interest is awarded); and
whether and to what extent any discount should apply.
Each is dealt with in turn.
The court’s powers
An order for payment of costs ranks as a judgment (see Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 1627, [1998] 1 All ER 305 at 1635). As such, an unpaid order for costs is a judgment debt.
Judgment debts in the High Court carry interest by virtue of the Judgments Act 1838 (as amended) (JA 1838), s 17 of which contains the following provision:
(1) Every judgment debt shall carry interest at the rate of [eight per cent 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 sub-s (1).
The relevant corresponding provision in the county court is s 74 of the County Courts Act 1984 (as amended) (CCA 1984):
(1) The lord chancellor may by order made with the concurrence of the Treasury provide that any sums to which this subsection applies shall carry interest at such rate and between such times as may be prescribed by the order.
(2) The sums to which sub-s (1) applies are:
(a) sums payable under judgments or orders given or made in a county court, including sums payable by instalments; and
(b) sums which by virtue of any enactment are, if the county court so orders, recoverable as if payable under an order of that court, and in respect of which the county court has so ordered.
(3) The payment of interest due under sub-s (1) shall be enforceable as a sum payable under the judgment or order.
(4) The power conferred by sub-s (1) includes power:
(a) to specify the descriptions of judgment or order in respect of which interest shall be payable;
(b) to provide that interest shall be payable only on sums exceeding a specified amount;
(c) to make provision for the manner in which and the periods by reference to which the interest is to be calculated and paid;
(d) to provide that any enactment shall or shall not apply in relation to interest payable under sub-s (1) or shall apply to it with such modifications as may be specified in the order; and
(e) to make such incidental or supplementary provisions as the lord chancellor considers appropriate.
(5) Without prejudice to the generality of sub-s (4), an order under sub-s (1) may provide that the rate of interest shall be the rate specified in JA 1838, s 17 as that enactment has effect from time to time.
The order mentioned above is the County Courts (Interest on Judgment Debts) Order 1991 (as amended) (SI 1991/1184 (L 12)). The combined effect of that order and CCA 1984 is that interest is payable on costs in the county court in much the same way as it is payable on costs in the High Court. In particular, Art 5 of that Order specifies that the rate of interest will be the same as that specified in JA 1838, s 17.
The position in the county court does, however, differ from the position in the High Court in the following ways, the first of which is of real practical importance in smaller cases:
Interest in the county court is generally not payable on sums of money of less than £5,000. See Art 1(2) and 2(1) of the County Courts (Interest on Judgment Debts) Order 1991).
The measure of the sums of money involved is the aggregate of the costs and the damages; thus, if a claimant recovers £3,000 in damages and £3,000 in costs, he will be entitled to judgment debt interest on the costs even though individually both the damages and the costs are below £5,000 (Twigg Farnell v Wildblood (1998) PNLR 211, (1998) 75 P & CR D17.
The restriction on the recovery of interest will not apply to judgments below £5,000 where the judgment is either due to or from the Crown (Crown Proceedings Act 1947, s 24).
Interest will be suspended if enforcement proceedings are brought, but only if those proceedings are successful (in the sense that they produce a payment from the debtor). See Art 4(1) of the County Courts (Interest on Judgment Debts) Order 1991. By Art 4(3), where an administration order or an attachment of earnings order is made, interest shall not accrue during the time the order is in force.
The date upon which interest begins to run
This is governed by CPR 40.8, which states:
(1) Where interest is payable on a judgment pursuant to JA 1838, s 17 or CCA 1984, s 74, 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.
(2) The court may order that interest shall begin to run from a date before the date that judgment is given.
Accordingly, interest on costs will usually run from the date of the costs order, but the court may order otherwise. In particular, the court may order that interest should run from an earlier date.
CPR 44.3(6)(g) makes a similar provision (which, unlike CPR 40.8, is specifically in respect of costs):
“The orders which the court may make under this rule include an order that a party must pay...(g) interest on costs from or until a certain date, including a date before judgment.”
The default position under the CPR, ie that interest runs from the date of the costs order,
reflects pre-existing common law. In ancient times, practice differed between common law courts and the chancery courts. The common law rule (often referred to as the incipitur rule) was that interest ran from the date on which judgment was pronounced. In the chancery courts a different rule (the allocator rule) applied: interest ran from the date of the costs certificate.
By the late 19th century Mr Justice Chitty noted that it was the “settled practice” generally to apply the incipitur rule (In re London Wharfing Company (1885) 54 L J Ch 1137 at 1,138), but it was not until the House of Lords gave judgment in Hunt v RM Douglas (Roofing) Ltd [1990] 1 AC 398, [1988] 3 All ER 823 that the law became entirely clear. Their lordships explained that (in so far as costs were concerned) they preferred the incipitur rule to the allocator rule for the following reasons:
“It is the unsuccessful party to the litigation who, ex hypothesi, has caused the costs unnecessarily to be incurred. Hence the order made against him. Since interest is not awarded on costs incurred and paid by the successful party before judgment, why should he suffer the added loss of interest on costs incurred and paid after judgment but before the taxing master gives his certificate? Since...payments of costs are likely nowadays to be made to lawyers prior to taxation, then the application of the allocatur rule would generally speaking do greater injustice than the operation of the incipitur rule. Moreover, the incipitur rule provides a further necessary stimulus for payments to be made on account of costs and disbursements prior to taxation, for costs to be more readily agreed, and for taxation, when necessary, to be expedited, all of which are desirable developments. Barristers, solicitors and expert witnesses should not be expected to finance their clients’ litigation until it is completed and the taxing master’s certificate obtained.”
Whether or not this reasoning still holds good where litigation is funded by way of conditional
fee agreements (and especially “CFA Lites”) is a moot point.
Not only is the inciputur rule the default position under the CPR, but also in the county court, Art 2(2) of the County Courts (Interest on Judgment Debts) Order 1991 (as amended) specifically applies the incipitur rule in relation to interest on costs in the county court.
Clear language is required to displace the incipitur rule. A phrase such as “such costs when taxed or agreed shall be paid” would not be sufficient to disapply the incipitur rule (Electricity Supply Nominees Ltd v Farrell [1997] 2 All ER 498, [1997] 1 WLR 1149).
The rate of interest and the basis on which it is calculated
Post-judgment interest is paid at the rate specified by order in JA 1838, 17(1). This has been eight per cent since 1 April 1993 (see the Judgment Debts (Rate of Interest) Order 1993 (SI 1993/ 564 (L 2)).
Save where judgment is given in a currency other than sterling (see the Administration of Justice Act 1970, s 44A and the County Courts (Interest on Judgment Debts) Order 1991, Art 5.2), the statutory rate of post-judgment interest may not be varied by the court (Thomas v Bunn [1991] 1 AC 362, [1991] 1 All ER 193 ). That said, the court may disallow interest pursuant to CPR rule 47.8(3) and 47.14(5), thereby achieving a result similar to a change of rate.
Whether a discount should apply
Interest may be disallowed as a result of a receiving party’s delay.
CPR rule 47.8(3) makes the following provisions about delay in commencing detailed assessment proceedings:
(3) If:
(a) the paying party has not made an application in accordance with paragraph (1); and
(b) the receiving party commences the proceedings later than the period specified in rule 47.7,
the court may disallow all or part of the interest otherwise payable to the receiving party under:
(i) section 17 of the Judgments Act 1838(1); or
(ii) section 74 of the County Courts Act, 1984(2),
but must not impose any other sanction except in accordance with rule 44.14 (powers in relation to misconduct).
CPR rule 47.14(5) makes almost identical provision about delay in applying for an assessment hearing. It should be noted, however, that the court may not exercise this power if the paying party has made an application for an order requiring the receiving party to commence detailed assessment proceedings.
Where delay amounts to misconduct, the sanction may extend beyond the mere disallowance of interest (CPR 44.14(2)(a) and Haji-Ioannou v Frangos [2006] EWCA Civ 1663, [2006] All ER (D) 72 (Dec).
PRE-JUDGMENT INTEREST
The following layers of discretion exist in relation to pre-judgment interest on costs:
the court’s powers;
the date upon which interest begins to run; and
the rate of interest and the basis on which it will be awarded.
Each is dealt with in turn.
The court’s powers
There are two statutory mechanisms by which pre-judgment interest may be awarded. The first is pursuant to mechanisms (mentioned above) relating to judgment debt interest; the second—which is rarely specifically relevant in costs litigation—is under 35A(1) of the Supreme Court Act 1981 (SCA 1981) or, in the county court, under CCA 1984, s 69(1)).
Broadly speaking, the discretionary power to award interest conferred by SCA 1981, s 35A (or its county court equivalent) does not specifically apply to costs because it is confined to the payment of interest on a debt or damages. (These provisions may, however, occasionally be relevant to the recovery of interest on a solicitor-and-client basis).
In practical terms, other than in the commercial court the most important manifestation of the power to award pre-judgment interest is pursuant to Pt 36 of the CPR. Where judgment is entered against the defendant which is at least as advantageous to the claimant as the proposals contained in a claimant’s Pt 36 offer, the court may make an award of enhanced interest on the claimant’s costs from the date on which the relevant period (within the meaning of CPR 36.3(1)(c)) expired. The rate must not exceed 10% above base rate. The court will make such an award unless it considers it to be unjust to do so.
Other than pursuant to Pt 36 of the CPR, awards of pre-judgment interest are a rarity in most courts. This is despite the fact that in Bim Kemi AB v Blackburn Chemicals Ltd [2003] EWCA Civ 889, Waller LJ said:
“In any event in principle there seems no reason why the Court should not do so [ie, make an award of pre-judgment interest] where a party has had to put up money paying its solicitors and been out of the use of that money in the meanwhile.”
Such awards are not a rarity in the Commercial Court, however. If anything, it is the rule rather than the exception that in the Commercial Court interest is awarded on costs from the date (or dates) on which they were paid (or on which they became due), rather than from the date of judgment. There is no requirement of exceptional circumstances to make such an award (Nova Productions Ltd v Mazooma Games Ltd (No 2) [2006] EWHC 189 (Ch), [2006] RPC 445). The applicable rate is (probably) in the discretion of the court (see below).
The date upon which interest begins to run
Where pre-judgment interest is awarded pursuant to CPR 36.14, pre-judgment interest is usually awarded from the date of the expiry of the relevant offer. While interest may be awarded from the date upon which solicitors’ invoices are raised, it has been held that that the more appropriate date is the date on which invoices were paid (see, for example, Douglas & Ors v Hello! Ltd. & Ors [2004] EWHC 63 (Ch), [2004] All ER (D) 202 (Jan)). Clearly, if pre-judgment interest is awarded, it should stop when it is replaced by post-judgment interest.
The rate of interest and the basis on which it is calculated
While in certain (rare) circumstances the court does have the power to award compound interest on costs, in the vast majority of cases the court is limited to making an award of simple interest. Where an award is made, the rate will also have to be set.
In the paragraphs which follow, we explain how the court is likely to assess the rate in each of a number of different situations, where pre-judgment interest may be awarded.
Pursuant to CPR 44.3(6)(g)
The applicable rate for pre-judgment interest awarded pursuant to CPR 44.3(6)(g) is usually regarded as being a discretionary matter. There are those who argue that this is not correct; this is because such awards are usually made pursuant to JA 1838, s 17 (as amended)(or the corresponding county court provision), and the court’s discretion in this regard is limited to the period during which interest is allowed as opposed to the rate.
However, it would seem that the practice of allowing a discretionary rate has arisen, and that this has arisen as a result of the court drawing guidance from analogous cases dealing with awards of interest on damages.
In Bim Kemi AB (above), the Court of Appeal dealt with the issue of the rate of pre-judgment interest (albeit principally in relation to an overpayment of costs, but also in relation to costs payable to a receiving party). Lord Justice Waller commented with approval on the approach adopted by Lord Justice Rix in Jaura v Ahmed [2002] EWCA Civ 210, [2002] All ER (D) 289 (Feb). Jaura related to damages, but Waller LJ could see no reason why a similar approach should not be taken to interest on costs and went on to imply that evidence of actual expenditure would be required if a high rate was sought.
In practice, awards tend to be between one and two per cent above base rate. On the basis of the law as it presently stands, only simple interest may be awarded under CPR 44.3(6)(g).
Under Pt 36 of the CPR
Where the court makes an award of interest pursuant to CPR 36.14(3)(c), the rate must not exceed 10% above base rate.
Where the court awards interest under CPR 36.14(3)(c) and also awards interest on the same sum and for the same period under any other power, the total rate of interest must not exceed 10% above base rate. In practice, awards tend to be between four per cent and 10% above base rate. Only simple interest may be awarded under CPR 36.14(3)(c).
Interest recoverable as costs or as special damages
The issues of interest on costs as damages (or debt) will arise where costs are payable pursuant to contract or as a result of breach of contract. Interest on costs as damages differs from the other types of interest in that interest may be recoverable as costs/damages, rather than on costs/damages. The relevance of this is that (in some circumstances) compound interest may be recoverable.
Under contract
In some circumstances (such as litigation between a mortgagor and a mortgagee, and under some government-run compensation schemes) one party to litigation may be contractually liable to the other party for interest on costs. The amounts of interest payable will depend on the terms of the contract. Where costs are payable under a contract, the court will usually assess the costs (including any applicable interest) in accordance with that contract (Gomba Holdings Ltd v Minories Finance Ltd [1993] Ch 171, [1992] 4 All ER 588). Such interest may be compound if the contract so provides.
Section 69(4) of CCA 1984 states:
“(4) Interest in respect of a debt shall not be awarded under this section for a period during which, for whatever reason, interest on the debt already runs.”
If, therefore, there is a contractual agreement to pay interest, then this statutory provision will yield to the contractual provisions.
The Late Payment of Commercial Debts (Interest) Act 1998 is capable of implying into a contract a term for payment of simple interest. Its relevance in so far as costs are concerned is limited to solicitor and client transactions in a business setting.
Breach of contract
Broadly speaking, special damages arising out of breach of contract may be recovered under two heads (Hadley v Baxendale (1854) 9 Exch 341, 156 ER 145): the first is where losses “may fairly and reasonably be considered arising naturally, ie according to the usual course of things”, and the second is where the damages “may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract”. Until recently, the House of Lords had found that the first head will not extend to include recovery of interest as damages (London, Chatham and Dover Railway Co v South Eastern Railway Co [1893] AC 429), but this has recently changed (see Sempra Metals below). Where it does apply, the first head can result in an award of compound interest.
Pursuant to the equitable jurisdiction of the court
Interest may be awarded in respect of equitable remedies such as the taking of an account. Compound interest may apply, especially in cases of fraud or misapplication by someone in a fiduciary position. Compound interest may, however, be awarded in situations which do not involve fraud or misapplication (Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v Inland Revenue Commissioners and another [2007] UKHL 34, [2007] 4 All ER 657). This very significant case could in due course lead to changes in statutory law on interest.
Interest in arbitrations
Section 49 of the Arbitration Act 1996 specifically permits the award of compound interest. The London Maritime Arbitrators Association reported to the Law Commission that (in respect of damages) it was “the general practice” to award compound interest “quite simply because it seems commercially just to do so”.
While it is open to an arbitrator to make an award of compound interest on an award of costs, in practice such awards are rare.
SPECIAL SITUATIONS
Deemed costs orders
Deemed costs orders arise on acceptance of a Pt 36 Offer, on discontinuance of a claim, and where a claim is struck out for non-payment of fees (CPR 44.12 (1)).
CPR 44.12(2) provides as follows:
“Interest payable pursuant to section 17 of the Judgments Act 1838 or section 74 of the County Courts Act 1984 on the costs deemed to have been ordered under [the situations set out above] shall begin to run from the date on which the event which gave rise to the entitlement to costs occurred.”
Thus, interest will run from the date of acceptance, discontinuance or striking out.
Reversal of costs orders on appeal
In Bim Kemi AB (above), the Court of Appeal held that interest on the ultimately successful party’s costs should run from the date of the original costs order, rather than the date of the order on appeal.
Interest on repayable costs
Where a party is found to have overpaid costs to an opponent, the court has the jurisdiction to award interest on that overpayment (CPR 44.3(6)(g)). See also Nykredit Mortgage Bank plc v Edward Erdman Group Ltd (No 2) [1997] 1 WLR 127 at 1,636). The rate of interest is in the discretion of the court.
Advance and multiple orders for costs
It is commonly the case that a party will be awarded costs at more than one stage during litigation. An example would be where there has been a split trail on liability and quantum and separate costs orders are made in respect of each. Less commonly, a party might become entitled to costs before those costs have been incurred; an example is where a party is given permission to appeal on a point of general principle, but this is on the condition that that party will bear the costs of the appeal in any event.
Difficulties can arise in circumstances such as these. CPR 44.3(6)(g) is the mechanism by which the court can make an order that meets the justice of the situation.
An example of the problems that can arise is Powell v Herefordshire Health Authority [2002] EWCA Civ 1786, [2003] 3 All ER 253; this was a clinical negligence case in which liability had been agreed (together with an entitlement to costs) in 1994. The case did not settle until 2001. If interest were to run from 1994, not only would the claim for interest have been almost as great as the claim for costs itself, but interest would have been carried on a substantial part of the costs for many years before those costs were actually incurred. At first instance the costs judge’s attention had not been drawn to CPR 44.3(6)(g), and as a result, he felt constrained to allow interest at the full rate from 1994. The Court of Appeal found that such an award was unjust; in allowing the appeal, Lord Justice Kay made the following comments:
“There was…no need in law for [the costs judge] to find himself in the legal straightjacket that the parties had suggested. He had a discretion which enabled him to look at the dates when the costs had been incurred, and to come to a conclusion in relation to the payments of interest that fitted the justice of the circumstances of the particular case.”
Interest payable out of a fund
In Wills v Crown Estate Commissioners [2003] EWHC 1718 (Ch), [2003] All ER (D) 410 (Oct) Mr Justice Peter Smith considered the issue of whether the court should make an award of interest where costs are payable out of a fund. He found that: “It is quite clear that whenever there are funds, out of which costs are paid, there is not an order which attracts interest. The reason for that is that there is not an order of the court in adversarial litigation.”
Interest on the costs of the assessment
CPD Art 45.5(1) makes the following provisions:
“In respect of interest on the costs of detailed assessment proceedings, the interest shall begin to run from the date of the default, interim or final costs certificate as the case may be.”
This reverses the pre-CPR position, where interest on the costs of the taxation ran from the date of the costs order.
