UK: Interest-ing Time Warp? High Court Considers Link Between Conduct And Conventional Interest Rate

In case, like many of us, you cannot keep up with the spate of changes to the special account rate, the below grid summarises the latest changes, the most recent of which seems to have gone largely unnoticed:

This grid provides context to understanding the reasoning behind the recent case of Phillip Smout v Wulfrun Hotels Limited [2023] EWHC 1128 (KB) ("Smout"). In Smout, Mr Justice Ritchie considered whether the conventional interest rate on awards on pain, suffering, and loss of amenity could be increased by a judge at trial as a result of the conduct of the Defendant.

The Factual Background

On 10^th October 2018 the Claimant was injured when he tripped outside the First Defendant's barbershop. He brought a claim against the First Defendant, initially in the portal and then via a claim form. Mr Parvinder Jit Singh (PJ Shawker), company secretary, who represented the First Defendant throughout, drafted a defence and wrote several abusive messages to the Claimant's Solicitor.

At First Instance

Recorder Wilson KC ("the Recorder") found for the Claimant on liability and awarded £4,000 for PSLA and special damages totalling £125.

The Claimant submitted that as a result of the First Defendant's abusive correspondence and pleading, the Recorder should award interest on pain, suffering, and loss of amenity at a rate higher than the normal rate of 2% per annum from the date of service of the proceedings. The Recorder accepted this submission and awarded interest at 6%. The Recorder went on to calculate interest, reaching an award of £673.03. This resulted in a total award of £4,798.03, and consequently, that sum was greater than the Claimant's Part 36 offer which the First Defendant had rejected. The Recorder therefore also awarded a 10% additional liability on damages and interest at 10% on costs.

The Appeal

It was the Appellant's case that the Recorder should have followed the standard rule and awarded 2% on the damages for PSLA and all or one half of the special investment account rate from the date of the accident to the date of trial on the special damages award. The Appellant also sought to challenge the additional liabilities consequent to the Claimant beating his own CPR Part 36 offer.

The Judge considered a range of case law. In Cookson v Knowles [1979] AC 556 the House of Lords had ruled that judges had a broad discretion in relation to the rate of interest. The discretion had to be exercised judicially in a selective, rather than arbitrary, manner. In Pickett v British Rail Engineering Limited [1980] AC 136, the House of Lords ruled that interest on general damages for pain and suffering should be at the Special Investment Account Rate. However, in Birkett v Hayes [1982] 1 WLR 6, the Court of Appeal ruled that the rate of interest should be set at 2% per annum, taking into account that awards of damages for PSLA were updated for inflation by the courts every year. So, all that was needed was the loss of investment profit that the Claimant could have made as a result of being kept out of his money. Subsequently, the House of Lords upheld the rate of 2% in Wright v British Railways Board [1983] 3 WLR 211. The rate stood unchallenged for 17 years.

In Lawrence v Chief Constable of Staffordshire [2000] PIQR Q9, CA, the rate of 2% was challenged on the basis that the lost profit on investment rate (the discount rate) had been recently set at 3% per annum therefore the interest rate needed to be adjusted to reflect that. The Court of Appeal rejected this argument because interest on PSLA was not only a future award, but an award for past PSLA, as well as being discretionary.

The Outcome of the Appeal

The appeal in relation to interest was allowed. It was held that:

• Whilst there is statutory discretion, the body of case law from the 1970s onwards had produced the conventional rate of 2% per annum for interest on awards of PSLA. CPR Part 36 only worked properly if there was consistency with not only the scale of the award, but also with the awards of interest on damages.
• The objective of the award of interest was compensatory rather than a punishment (Reinhard v Ondra [2015] EWHC 2943).
• It was wrong in law and not justifiable on the facts for the Recorder to award interest on PSLA at 6% per annum based on conduct grounds.
• The Recorder's order which related to interest on damages was set aside. In its place, the Judge substituted the award of interest on damages at 2% per annum on the award of £4,000 which amounted to £220. The Judge also awarded interest on the special damages of £125 at the full special account rate (amounting to £1.45) because the sums were incurred in the first few months after the injury was suffered. The total was £4,346.45.
• The effect of this was that the Claimant had not beaten his own CPR Part 36 offer. The Recorder's award of indemnity costs and interest on costs and additional liability on damages was consequently set aside.
• The final issue for the court was whether the Recorder would have penalised the First Defendant in costs due to their conduct, had he calculated interest correctly. The Judge held that he would have, and therefore awarded costs on the standard basis up until the date the abusive correspondence began, and indemnity costs thereafter.

Significance

This case provides much-needed clarity on the rate of interest on general damages, which was held to be compensatory in nature rather than a punishment to be imposed on an unprofessional party. This did not mean that the First Defendant could not be punished using other mechanisms within the CPR.

Moreover, the decision should ensure more certainty when predicting the likelihood of Part 36 offers being beaten. Unfortunately for practitioners, as concerns special damages, that certainty is clouded by the ever-changing special account rate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.