Statutory interest and the real world – time to bridge the gap?

24 October 2011

In the UK it is accepted that the aim of compensation is to put a person back into the position they would have been in had they not suffered loss.

Despite this, the current mismatch between the statutory interest rate on damages (currently a whopping 8%), and the dire prevailing market interest rates, means that claimants can get an undeserved bonus on top of their compensation.

However, the recent Scottish case of Farstad Supply AS v Enviroco Ltd may have signalled a welcome judicial shift away from ignoring this disparity between the real world and statutory interest rates. Enviroco successfully argued before the Scottish Court of Session that Farstad "were only entitled to that rate of interest which would put them into the same position in which they would have been if they had not suffered loss or damage". Lord Hodge was sympathetic to this argument, and after a "broad brush" analysis identified a shift in late 2008 and early 2009 when the Bank of England base rate sank from 5% to 0.5%. He held that interest be awarded at a rate of 8% until December 2008 and 4% thereafter.

Although not binding on the English Courts, there are those who hope that Lord Hodge's sympathy will spread south of the border. There are similar calls for the FOS (which, with UK-wide jurisdiction, ought to take heed of Scottish decisions and public sentiment) to reconsider its firm stance that "unless it is apparent what the consumer's borrowing cost (or investment loss) actually was, we are likely to award interest at 8% a year".

The FOS justifies its position as follows: "the current low rates paid on deposit accounts are not an appropriate yardstick. The rates of interest consumers have to pay in order to borrow are much higher. So the 8% interest rate (which is also the rate generally used by the courts) reflects the fact that:

  • The rate is gross before tax is deducted;
  • It often applies to historical losses at times when different base-rates applied;
  • It takes account of current interest rates being charged on overdrafts and loans – which have not reduced in line with the base rate".

The FOS' policy here is misguided. Although an Enviroco-style argument is yet to be tested before an English judge, there is some force in the suggestion that the Bank of England base rate hasn't been 8% for nearly twenty years (since 1992) – this makes it highly unlikely that any complaint the FOS now adjudicates could successfully be argued to have as its subject historical loss from a time when the base rate was 8%. Therefore, the continuing and uncomfortable relationship between the basic principles of compensation, and what clearly amounts to an 8% bonus on damages, provide a compelling reason for the FOS, and the English Courts, seriously to rethink their approach.

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