WHEN DOES INTEREST BEGIN TO RUN ON COSTS? AN IMPORTANT DECISION

In Involnert Management Inc -v- Aprilgrange Limited [2015] EWHC 2834 (Comm) Mr Justice Legatt addressed the issues of when interest runs on costs. The problem arose because interest under the Judgments Act 1838 carries interest at 8%. Interest on costs at 8% from the date of the judgement to the end of assessment can, in contemporary circumstances, be quite draconian.

“I do not think it just in these circumstances that interest on whatever further sums the claimant is ultimately found liable to pay to the defendants and OAMPS should begin to run at the rate applicable to judgment debts before the claimant has been provided with a detailed statement of the costs claimed so that it can take an informed view of the amount its liability. As also discussed, under the rules, the defendants and OAMPS have three months within which to provide this information”.

THE CASE

The claimant had been ordered to pay 75% of the defendant’s costs and the costs of a third party to be subject to a detailed assessment.  There was an issue as to the date on which interest on costs should run.

“I  do not think it just in these circumstances that interest on whatever further sums the claimant is ultimately found liable to pay to the defendants and OAMPS should begin to run at the rate applicable to judgment debts before the claimant has been provided with a detailed statement of the costs claimed so that it can take an informed view of the amount its liability. As also discussed, under the rules, the defendants and OAMPS have three months within which to provide this information.”

KEY POINTS

  • When an order for costs is made the “default” date from which interest runs is the date of the judgment, even though the costs have yet to be assessed.
  • The court has power to order interest to run from a different date.
  • Exceptional circumstances are not required in order for costs to run from a different date. Such a discretion has to be applied considering the overriding objective.
  • The judge did not think it just to make an order at which interest runs at Judgment Act rates until such time as a party had the opportunity exactly the sums being claimed and had a fair opportunity to decide what sums are reasonably payable.
  • The postponing of the interest for three months coincided with the period for which a bill of costs had to be lodged.

THE DECISION

Mr Justice Leggatt:
Introduction
  1. Among the orders made at a hearing on 22 September 2015 to deal with matters consequential on my judgment handed down on 10 August 2015, I ordered the claimant to pay (i) 75% of the defendants’ costs of the action and (ii) the costs of the action incurred by the second third party, OAMPS Special Risks Limited (“OAMPS”) – such costs in each case to be the subject of a detailed assessment on the standard basis, if not agreed. I also ordered the claimant to make interim payments of £1,030,554 to the defendants and £600,000 to OAMPS on account of the costs payable.
  2. There was insufficient time at the hearing to deal with one issue – being the date from which interest under section 17 of the Judgments Act 1838 should run on the remaining costs payable by the claimant. It was agreed that I should decide this issue on the basis of written submissions. I received written submissions on behalf of the claimant and on behalf of OAMPS, and the defendants adopted the submissions of OAMPS.
  3. These are the reasons for my decision that interest should in each case run from 22 December 2015 – that is, three months after the date of the costs order.
The statutory position
  1. Section 17(1) of the Judgments Act 1838 provides:
“Every judgment debt shall carry interest at the rate of 8 pounds per centum 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.”
  1. In Thomas v Bunn [1991] 1 AC 362, 380, Lord Ackner (with whose speech the other law lords agreed) said:
“The wording of section 17 clearly envisages a single judgment which constitutes the ‘judgment debt’. This ‘judgment debt’ can only arise where the judgment itself quantifies the sum which the judgment debtor owes to his judgment creditor. The language of the section does not envisage an interlocutory judgment, but only a final judgment.”
The House of Lords held in that case that, where a defendant is ordered to pay “damages to be assessed”, interest on the damages under section 17 of the Judgments Act runs only from the date of the judgment or order assessing the damages payable and not from the date of the order establishing liability.
  1. Only two years earlier, however, in Hunt v RM Douglas (Roofing) Ltd [1990] 1 AC 398, the House of Lords had adopted the opposite approach to an order for the payment of costs to be assessed. In Hunt’s case Lord Ackner had also given the leading speech. In Thomas v Bunn [1991] 1 AC 362, 380, Lord Ackner accepted that treating such a costs order as a judgment debt for the purpose of section 17 is “an anomaly” but said that, for the reasons which he had given in Hunt’s case, the balance of justice favoured continuing so to treat such an order, even though, until the costs have been assessed, there is no sum for which execution can be levied. The reasons given in Hunt’s case were based on the absence (at that time) of any power to award interest on costs for any period before the date of judgment. That meant that, even if a litigant had incurred and paid costs over a period of years before another party was ordered to pay those costs, the litigant could not on any view recover interest to compensate it for being out of pocket prior to the date of the costs order. If interest did not run under the Judgments Act from the date of the costs order but only from when the amount of costs payable was subsequently assessed, the injustice would be all the greater. It would also place an incentive on a litigant to delay payment of the costs owed to its lawyers and experts until the costs were assessed and an incentive on the party ordered to pay the litigant’s costs to delay the process of assessment: see [1990] 1 AC 398, 415-6.
  2. Since Hunt’s case was decided, the Civil Procedure Rules have given the court power to order interest to be paid on costs from a date before judgment: see CPR 44.2(6)(g). This power is now routinely exercised when an order for costs is made following a trial to award interest at a commercial rate from the dates when the costs were incurred until the date when interest becomes payable under the Judgments Act. In the usual way, I have made such orders in this case. Now that such orders can be made, it is hard to see that the balance of justice still favours continuing – anomalously – to treat an order for payment of costs to be assessed as a judgment for the purpose of section 17 of the Judgments Act 1838. As the House of Lords recognised in Thomas v Bunn, such an interpretation does not fit the wording of the section, which clearly envisages a quantified judgment debt for which execution can be levied. Unless and until the Supreme Court departs from it, however, the decision in Hunt’s case remains binding authority.
  3. There has been a further relevant statutory change since Hunt’s case was decided. At the time of that decision section 17 of the Judgments Act provided for judgment debts to carry interest “from the time of entering up the judgment” – which was construed as meaning the date on which the judgment was pronounced. When the Civil Procedure Rules were introduced in April 1999, section 17 was amended so as to provide for interest to run “from such time as shall be prescribed by rules of court”. CPR 40.8(1) provides that, where interest is payable on a judgment pursuant to section 17 of the Judgments Act 1838, “the interest shall begin to run from the date that judgment is given unless … (b) the court orders otherwise”. That rule accordingly gives the court power to order interest under the Judgments Act to run from a later date than the date of the costs order.
  4. Now that interest on costs can anyway be awarded to compensate the receiving party for the loss of use of the money before judgment, the existence of this power would be of little importance if the rate of interest payable under the Judgments Act was in line with commercial rates. Since March 2009, however, the Bank of England base rate has stood at 0.5%, while the judgment rate has remained at 8% per annum. At the present time a commercial rate of interest is generally taken in the Commercial Court to be 2% above base rate, i.e. 2.5%. When large sums have been spent on costs, it is therefore a matter of some significance whether interest at the higher rate payable under the Judgments Act starts to run when the costs order is made or not until some later date.
The rival contentions
  1. In the present case the claimant asked the court to exercise its power under CPR 40.8 to order that the interest payable under the Judgments Act on the costs which the claimant has been ordered to pay to the defendants and to OAMPS should in each case begin to run from a date six months after the date of the costs order. OAMPS, supported by the defendants, opposed this application and argued that there is no proper justification for departing from the general rule set out in CPR 40.8 that such interest should begin to run from “the date that judgment is given” – which, in accordance with the decision in Hunt’s case, means the date when the order for costs is made rather than the date when the liability is quantified.
Recent cases
  1. Counsel in their written submissions cited a number of recent cases in which consideration has been given to the date from which interest on costs should run under the Judgments Act.
  2. In Schlumberger Holdings Ltd v Electromagnetic Geoservices AS [2009] EWHC 773 (Pat), Mann J rejected an argument that the court should use its power under CPR 40.8(1) to postpone the date from which interest became payable under the Judgments Act until the date when the costs were quantified on a detailed assessment. Mann J did not accept that the differential between the judgment rate and a commercial rate of interest provided a good reason to order such a postponement in circumstances where fixing the judgment rate is a matter for Parliament. He also did not consider that it would be proper to use the power conferred by CPR 40.8(1) to address the anomaly that an order for costs to be assessed is treated as a judgment for the purpose of the Judgments Act, in circumstances where that rule has been fixed by a higher court.
  3. In Colour Quest v Total Downstream [2009] EWHC 823 (Comm), [2010] 2 Costs LR 140, at para 43, on the other hand, David Steel J decided that justice required a six month postponement of the date on which interest started to run under the Judgments Act in a case where the costs were very large indeed and the claimants themselves wished to double the time allowed for the presentation of a detailed bill of costs for assessment.
  4. In London Tara Hotel Ltd v Kensington Close Hotel Ltd (Costs) [2011] EWHC 29 (Ch), [2011] 2 Costs LO 197, Roth J ordered a four month postponement in a case where the overall costs were “substantial” and an interim payment of £400,000 had been ordered (see para 39). He said, at para 38:
“I respectfully agree with Mann J that it would be inappropriate to exercise the discretion under rule 40.8 to postpone the start of the judgment rate on costs until after assessment or agreement as a matter of course. But that does not preclude a limited postponement of the application of the judgment rate as applied to costs in a case where the costs are large and there may be real issues of proportionality and reasonableness on taxation. Whereas there may be some justification for the maintenance of a rate under the Judgments Act significantly in excess of the commercial rate in recognition of the fact that payment of a judgment debt is not to be viewed simply like another commercial debt, that reasoning does not apply before the amount which has to be paid is known.”
  1. In Fiona Trust & Holding Corporation v Privalov [2011] EWHC 1312 (Comm), [2011] 3 Costs LO 338, Andrew Smith J agreed that the date from which Judgments Act interest runs should not be deferred simply because it is at a considerably higher rate than commercial rates and expressed the view that it is for the party applying for deferral to show that there is something about the circumstances of the particular case that justifies a departure from the general rule. He said, at para 4:
“Typically the applicant would have to show that particular features of the case mean that the application of the general rule would be so unfair to him that justice requires departure from it. This might be because a large amount of costs is likely to be outstanding for a particularly long period and the applicant cannot be expected to avoid this by assessing what costs he will have to pay and making (or tendering) a substantial payment on account.”
Andrew Smith J declined to defer the date in that case as he did not consider that there were any unusual difficulties involved in the assessment of costs. He also did not accept that it is in itself a sufficient justification for deferral that the costs are likely to be unusually large.
  1. It is also relevant to mention Fattal v Walbrook Trustees (Jersey) Ltd [2009] EWHC 1674 (Ch). This was an appeal from a decision of a costs judge on a detailed assessment to order that interest should run from the date when the order for costs was made (in circumstances where the trial judge had not made any order for the payment of interest on the costs awarded). In his judgment dismissing the appeal, Christopher Clarke J observed that there is nothing in the Judgments Act as amended or in the Civil Procedure Rules which indicates that an order for interest to run from a date other than the date of judgment is only to be made in exceptional circumstances. He said, at para 25:
“No doubt there must be a good reason to make such an order, but the Court does not, in my judgment, need to be able to label the circumstances as exceptional.”
He emphasised that the most important criterion is that any order should reflect what justice requires (see para 26).
  1. Those observations were approved by the Court of Appeal in Simcoe v Jacuzzi UK Group plc [2012] 1 WLR 2393, para 48.
Discussion
  1. Looking at the issue on the basis of principle and in the light of these cases, I draw the following conclusions.
  2. First, it has been assumed and I think it clear that, on the authority of Hunt’s case, the date when an order for costs is made is “the date that judgment is given” for the purpose of CPR 40.8(1), even though the amount of the costs payable has still to be assessed. This is therefore the default date from which interest payable under the Judgments Act will begin to run if the court does not order the interest to run from a different date.
  3. Second, I respectfully agree with Christopher Clarke J that there is nothing in the Judgments Act or the Civil Procedure Rules which expressly or impliedly restricts the power of the court under CPR 40.8(1) to order the interest payable under section 17 of the Judgments Act to run from a different date, or which requires exceptional circumstances to be shown before that power is exercised. To the contrary, the power to “order otherwise” is to be exercised in accordance with the overriding objective of dealing with cases justly, and the essential question is therefore what justice requires. It follows that, in so far as some remarks of Andrew Smith J in Fiona Trust & Holding Corporation v Privalov [2011] EWHC 1312 (Comm), [2011] 3 Costs LO 338, might be taken to suggest that it is necessary to show that a case has unusual features in order to justify departure from the default rule, I am unable to agree with that suggestion. If justice usually requires that interest under the Judgments Act ought to run from a date other than the date that the order for costs is made, then the court ought usually to “order otherwise”. There is no necessity for the default position to be the usual position.
  4. Third, I do however agree with Andrew Smith J and with Mann J in the Schlumberger case that the date from which Judgments Act interest runs should not be deferred simply because it is at a considerably higher rate than commercial rates. The rate at which interest should be payable under the Judgments Act is a matter for the Secretary of State to decide. The court’s concern is to identify the date from which it is appropriate that interest should run on the judgment debt at whatever rate is fixed by statutory instrument as the appropriate rate of interest for judgment debts to carry. Whether that statutory rate is (at the moment) higher or lower than commercial rates of interest cannot be a relevant consideration.
  5. Fourth, I do not see that the decision of the House of Lords in Hunt’s case would prevent the court from ordering that Judgments Act interest should run from the date when the amount of costs payable is assessed, if that is what in current circumstances justice requires. Hunt’s case decides that an order for payment of costs to be assessed is a judgment for the purpose of section 17 of the Judgments Act. It also decided that, as the law stood before the Civil Procedure Rules were introduced, the balance of justice favoured a rule that interest automatically ran from the date of the costs order over a rule that interest automatically ran from the date of assessment. The House of Lords did not decide that, if the court were in future to be given a discretion to set the date from which interest under the Judgments Act is to run and a separate power to award interest for periods prior to that date, it would not be just to exercise the court’s discretion by ordering Judgments Act interest to run from the date of assessment. I do, however, recognise that in none of the cases mentioned above has it been thought appropriate to make such an order.
  6. Fifth, in terms of what justice requires, I do not think it just to make an order under which interest begins to run at the rate appropriate for unpaid judgment debts before the paying party could reasonably be expected to pay the debt; and, in a case where the court has ordered a suitable interim payment to be made on account of costs, I do not think it reasonable to expect the party liable for costs to pay the balance of the debt until it knows exactly what sums are being claimed by the party awarded costs and has had a fair opportunity to decide what sums it accepts are properly payable. It is this principle which seems to me to have informed the approach of Roth J in the London Tara Hotel case, when he could see no reason why the judgment rate should apply “before the amount which has to be paid is known”. It also reflects the unfairness which Andrew Smith J in the Fiona Trust case recognised as potentially arising where it is predictable that there will be an amount of costs outstanding for a period after the costs order has been made which the party liable for costs cannot reasonably be expected to avoid. I do not, however, see this unfairness as confined to cases where a particularly large amount of costs is likely to be outstanding for a particularly long period, albeit that it is clearly more acute in such cases.
  7. Sixth, in translating this principle into practice, I think it desirable to set a date from which Judgments Act interest will run which is based, if possible, on some objective benchmark and does not depend simply on the judge’s general feeling of what length of postponement is fair. I agree with Andrew Smith J that certainty and clarity are important in this context. It will do no favours to litigants – particularly as the amount of money at stake, while not negligible, is never likely to be large – if the date from which Judgments Act interest will be ordered to run is unpredictable, thus encouraging argument on the issue in every case. With this in mind, it seems to me that a reasonable objective benchmark to take is the period prescribed by the rules of court for commencing detailed assessment proceedings. Pursuant to CPR 47.7, where an order is made for payment of costs which are to be the subject of a detailed assessment if not agreed, the time by which detailed assessment proceedings must be commenced (unless otherwise agreed or ordered) is three months after the date of the costs order. In order to commence such proceedings, the receiving party must serve on the paying party a bill of costs giving particulars of the costs claimed. It is then for the paying party to decide which items in the bill of costs it wishes to dispute. Postponing the date from which Judgments Act interest begins to run by three months will therefore generally serve to ensure that the party liable for costs has received the information needed to make a realistic assessment of the amount of its liability before it begins to incur interest at the rate applicable to judgment debts for failing to pay that amount.
  8. If the receiving party commences detailed assessment proceedings after the expiry of the specified period, CPR 47.8(3) provides that the court may disallow all or part of the interest otherwise payable to the receiving party under section 17 of the Judgments Act. There is thus a power to remedy any injustice which may arise in the event that the paying party is not provided with details of the costs claimed within three months of the date of judgment.
  9. Using this benchmark seems to me to be consistent with the approach adopted in Colour Quest v Total Downstream [2009] EWHC 823 (Comm),[2010] 2 Costs LR 140, although the date from which interest on costs would start to run under the Judgments Act was postponed for six months in that case. As mentioned earlier, in explaining this decision David Steel J noted that the claimants wanted an extension of time for presenting their bill of costs which would double the usual time allowed. The date on which Judgments Act interest would start to run was therefore fixed so that it corresponded with the date by which the claimants had in that case to commence detailed assessment proceedings if the amount payable was not agreed.
Decision in this case
  1. In the present case, for the purpose of their application for an interim payment on account of costs the defendants provided some limited information about their costs incurred in defending the proceedings, which were said to amount in total to a sum in excess of £1.8 million. OAMPS asserted that its total costs of the litigation amounted to £1,067,852, but provided no breakdown of this figure or supporting detail at all. In each case I have ordered the claimant to pay what I considered to be a reasonable sum on account of costs as an interim payment, based on such broad estimate as it is currently possible to make of the amount of costs that is likely ultimately to be recoverable. As discussed above, I do not think it just in these circumstances that interest on whatever further sums the claimant is ultimately found liable to pay to the defendants and OAMPS should begin to run at the rate applicable to judgment debts before the claimant has been provided with a detailed statement of the costs claimed so that it can take an informed view of the amount its liability. As also discussed, under the rules, the defendants and OAMPS have three months within which to provide this information.
  2. I have accordingly ordered interest on the costs payable by the claimant to the defendants and to OAMPS to run at the Bank of England Base Rate plus 2% from the dates when the costs were incurred until a date three months after the orders for costs were made, and at the rate prescribed by section 17 of the Judgments Act 1838 thereafter.

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