Courts must recognise compound interest

The basis on which interest can be recovered by a wronged party has undergone
a fundamental change. Compound interest is a commercial reality that must be
recognised by the courts.

In a landmark decision in Sempra Metals Ltd vs Her Majesty’s
Commissioners of Inland Revenue and Anor [2007], the House of Lords
acknowledged that the English law approach to claims for the payment of interest
was confused, inconsistent and bore no relation to the way money was obtained
and used in the real world.

In 2001, the European Court of Justice found that the corporation tax regime
in the UK relating to ‘group income elections’, in force until 1999, contravened
EC law. In short, companies such as Sempra had wrongfully been required to pay
tax prematurely.

Sempra suffered by being required to part with its money before payment was
lawfully due. HMRC enjoyed the advantage of receipt before it became lawfully
entitled.

Sempra claimed restitution and showed HMRC had been unjustly enriched by the
premature payment and had, in effect, been the beneficiary of an interest free
loan from Sempra. The point of principle before the Lords was whether on a claim
for restitution Sempra was entitled to recover compound interest.

Despite the taxman’s objections, the Lords said Sempra was entitled to
recover compound interest. ‘We live in a world where interest payments for the
use of money are calculated on a compound basis. Money is not available
commercially on simple interest terms,’ said Lord Nicholls.

‘This is the daily experience of everyone… If the law is to achieve a fair
and just outcome when assessing financial loss it must recognise and give effect
to this reality.’

Although not a binding part of its decision, the Lords also indicated that,
in principle, compound interest is recoverable as a distinct head of loss.

Although this decision means in theory that an innocent party may be able to
recover greater interest than it could previously, this isn’t an end to the
matter.

Can an innocent party recover compound interest as a distinct head of claim
even without a contractual entitlement if that is the loss it actually suffered?

There are still questions to be answered but, the Lords created an
environment in which important commercial questions will be asked.

Clive Greenwood is a partner in the litigation
department at Lewis Silkin