Interest clauses – displacing the courts’ wide discretionary powers to award interest on debt or damages

Rolls-Royce Holdings plc v Goodrich Corporation [2023] EWHC 2002 (Comm)

The question

What is the courts’ approach to awarding statutory interest when a contract provides for contractual interest. 

The key takeaway

A party who fails to plead its entitlement to contractual interest in proceedings is not entitled to statutory interest.

The background

Following the conclusion of Rolls-Royce Holdings plc v Goodrich Corporation [2023] EWHC 1637 (the Judgment), an issue arose between the parties as to whether, and if so for what period, Goodrich was entitled to pre-judgment interest on the sum of $112,285,440 awarded to it by the Judgment. 
The agreement the subject of the original dispute (the Agreement) contained a contractual entitlement to claim interest, in clause 44:

“Interest on Late Payment

If R-R does not make payment in accordance with this Agreement, GR shall be entitled to recover (in addition to the principal sum owed) a sum from R-R equal to the interest which it pays or loses as the case may be in consequence of such late payment upon provision of evidence of such payment/loss. The amount recoverable for the first three months following such late payment shall not in any event exceed a sum equivalent to interest at 2.0% above the Bank of England’s Base Rate on the overdue payment for the period between the dates on which such payment was due and not made. For these purposes, the Bank of England’s Base Rate shall be that applicable at the date the overdue payment was due. The Parties acknowledge and agree that such payments are sufficient to compensate GR for any such late payment”. 

In the original proceedings for which the Judgment was given, no claim for contractual interest was pleaded. After the Judgment was handed down, Goodrich wrote to the Rolls Royce entities setting out the amount which they contended they were entitled to by way of statutory interest. Rolls Royce’s response was to point to clause 44 (the first time the clause was raised in the entire litigation) which it claimed precluded a claim for statutory interest. 

The decision

Section 35A of the Senior Courts Act 1981 gives the court the power to award interest on debts and damages. Section 35A(4) states that interest in respect of a debt shall not be awarded by the court for a period during which, for whatever reason, interest on the debt already runs.
Acknowledging that there had been no attempt to assert or prove any interest claim permitted by clause 44, the court held that no award of interest should be made under s 35A:

The effect of s.35A(4) is to prevent interest being awarded under s.35A when it is already “running” for some other reason on the debt. That could be because a contractual rate of interest is running or because it is a statutory debt on which interest runs. Section 35A(4) avoids interest being recovered twice on the same debt.

The court’s reasoning was that the parties had by clause 44 reached an agreement as to when and in what amount interest should be paid, and it would be inappropriate to award statutory interest where the contractual conditions for the payment of interest have not been shown to be satisfied.

Why is this important?

It confirms the limits of the court’s discretionary powers concerning statutory interest when a contract already contains provisions for interest. It reflects the principle that that if the parties have mutually agreed the terms of interest payment in a contract, the court will refrain from granting interest on an alternative basis. This extends to where the contract provides for interest to be payable in particular circumstances only or fixes the interest rate at a specific rate. In these cases, the court can only enforce that provision and its statutory power does not allow it to fix a different interest rate.

Any practical tips?

A contract will typically provide for contractual interest and the applicable rate. Consider whether there are any circumstances in which interest does not accrue/ is not payable. If the parties decide not to include an entitlement to interest, consider providing for this expressly.
If a monetary claim is pursued, ensure that it includes a claim for any available contractual interest.

Winter 2023