Client Alert: Interest on Costs Interest on costs - from what date should interest run?

On 8th October 2015, the Commercial Court considered the date from which interest at the judgment rate should run on costs

Background to the case

In Involnert Management Inc v Aprilgrange Ltd and others [2015] EWHC 2834 (COMM) the paying party invited the court to make an order for interest on costs to run from six months after the date of the costs order. The receiving parties contended that there was no justification for departing from the general rule that interest should run from the date of judgment.

The Statutory Position

Interest on costs is recoverable pursuant to Section 17 (1) of the Judgments Act 1838, which provides that on every judgment debt, interest is carried at 8%.

In Hunt v RM Douglas (Roofing) Ltd [1990] 1 AC 398 the House of Lords established that interest on costs is recoverable from the date of judgment rather than when costs are assessed. As the Judgments Act contemplated a judgment for a quantified sum, this was seen as an anomaly.

However, the balance of justice required this approach because, at the time when the House of Lords considered the issue, interest was not recoverable on costs incurred before judgment which meant that a litigant could not be compensated for being out of pocket in relation to costs paid to his lawyer prior to the assessment.

Matters have since moved on as the court now has the power under CPR 44.2 (6)(g) and CPR 40.8(1) to order a party to pay interest on costs from a date before or after judgment. Given the court’s ability to exercise such discretion, Mr Justice Leggatt in the Involnert case considered that it was difficult to justify continuing to treat an order for payment of costs as a judgment debt.

Moreover, due to the disparity between the rate of interest payable under the Judgments Act and commercial rates, he recognised that where large sums have been spent on costs, whether interest at 8% runs from the date of the costs order or from a later date was a matter of “some significance”.

Conclusion

Having considered recent case law and the applicable principles, Leggatt J concluded that:

1. The default date from which interest is payable under the Judgments Act is the date when an order for costs is made.
2. Neither the Judgments Act nor the CPR restricted the power of the court under CPR 40.8(1) to order interest to run from a different date. Neither was there a requirement for exceptional circumstances before that power could be exercised.
3. Interest should not be deferred simply because it is at a considerably higher rate than commercial rates.
4. The House of Lord’s decision in Hunt does not prevent the court from ordering that Judgment Act interest should run from the date of assessment of costs.
5. It is unfair to make an order at which interest runs at Judgment Act rates until such time as the paying party had the opportunity to consider exactly the sums being claimed and had a fair opportunity to decide what sums are reasonably payable.
6. The date upon which Judgment Act interest will run should be based on a “reasonable objective benchmark” which was the period prescribed by the rules of court for commencing detailed assessment proceedings i.e. three months from the date of the order for costs.

Leggatt J therefore ordered that interest should run:

• At the Bank of England rate plus 2% from the dates when the costs were incurred until three months after the orders for costs were made.
• At the rate prescribed by the Judgments Act 1838 thereafter.

Implications

Given the imbalance between the rate of interest under the Judgments Act and the Bank of England rate which has stood at 0.5% since March 2009, this is an important decision. The purpose of an award for interest is to compensate a party who has been deprived of the use of his money. However, where interest on costs is recoverable at a rate significantly above current commercial rates, it could be said that such an award represents a windfall for receiving parties whilst being punitive in effect for paying parties.

As a receiving party has three months within which to present their claim for costs, any reduction to the period during which interest at the judgment rate is recoverable may translate into substantial savings in costs for compensators. There is potential for this judgment to have a significant impact in large loss cases but Leggatt J’s comments also suggest that the approach he adopted should not just be limited to cases where costs are very high. We would not be surprised if this case resulted in further litigation but if it remains unchallenged, Keoghs will place reliance on it in future assessments of costs.

Insurers should continue to make reasonable payments on account of costs at an early stage as the courts will be more inclined to look favourably upon applications for interest to be deferred where this is the case. Backed up by such interim payments, Keoghs will be in a strong position to challenge claims for interest and, given that the court in this case recognised the need to set a benchmark to introduce more predictability, we anticipate that in future courts will be more willing to exercise their discretion in a similar manner.