Paul Bugden, Bugden + Co., London

Section 17(1) of the 1838 Act, as amended, provides as follows:

“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.”

An order for payment of costs ranks as a judgment (sect 18 of the 1938 Act and Thomas v Bunn [1991] 1 AC 362).

The statutory provisions giving the court power to award interest on sums for which judgment is given provide only for the award of simple interest in contrast to Section 49 of the Arbitration Act 1996 which specifically permits the award of compound interest. It is the general practice in London maritime arbitrations to give post-award compound interest on damages and costs.

As originally enacted the 1838 Act provided for a rate of interest of 4%, per annum, but section 44 of the 1970 Act gave the Lord Chancellor power by statutory instrument to vary the rate of interest payable from time to time. The rate was varied on a number of occasions until by the Judgment Debts (Rate of Interest) Order 1993 it was set as 8% per annum, where it has remained ever since, despite significant variations in both the Bank of England Minimum Lending Rate (“MLR”) and rates available commercially. The MLR currently stands at 0.5% per annum.

Since 1993, when the rate of interest payable on sterling judgment debts was last reviewed, much has happened. The failure to vary the rate broadly in line with changing market conditions has produced the anomaly and resulted in a somewhat penal rate even when taking in to account the fact that it is not compounded.

The rate as such is not open to variation by the Court but it is however open to the court to order that interest under the Act should run from a day other than the date of the judgment under CPR 40.8 in an appropriate case; in other words the court has discretion to defer the start date for the interest.

The court will only rarely defer the start date and it seems then principally in connection with costs orders which remain to be quantified. The court may also disallow interest on costs pursuant to CPR rule 47.8(3) and 47.14(5) in certain cases, thereby achieving a result similar to a change of rate.

The position is somewhat different with judgments in foreign currencies where there seems to be far more room for the discretion of the court to apply a truly compensatory rate.

The recognition by the House of Lords in Miliangos v George Frank (Textiles) Ltd [1976] A.C. 443 that the courts had power to give judgment in currencies other than sterling gave rise in1995 to an amendment to the 1970 Act by the insertion of section 44A, which provides as follows:

“44A.— Interest on judgment debts expressed in currencies other than sterling.

(1) Where a judgment is given for a sum expressed in a currency other than sterling and the judgment debt is one to which section 17 of the Judgments Act 1838 applies, the court may order that the interest rate applicable to the debt shall be such rate as the court thinks fit.

(2) Where the court makes such an order, section 17 of the Judgments Act 1838 shall have effect in relation to the judgment debt as if the rate specified in the order were substituted for the rate specified in that section.”

In Novoship at trial the Claimants obtained judgment in the sum of US$108,497,732.39, together with interest as agreed between the parties at 2.5% over the three-month US dollar LIBOR rate compounded with three-monthly rests.

The trial judge also made an order in the exercise of his discretion under section 44A of the Administration of Justice Act 1970 that the judgment debt should carry simple interest at the rate of 2.5% over three-month US dollar LIBOR, rather than the rate of 8% currently prescribed in respect of sterling judgment debts by section 17 of the Judgments Act 1838 and the Judgment Debts (Rate of Interest) Order 1993.

On appeal the Claimant contended that the judge erred in the exercise of his discretion, either by departing from the ordinary judgment debt rate of 8% or in so doing by declining to recognise that the interest rate adopted should be higher to reflect the absence of compounding.

The Court of Appeal held however that the compensatory principle provided sufficient (and indeed compelling) grounds for departing from the prescribed rate applicable to sterling judgments.

It also held that the cessation of compounding was a necessary consequence of entering judgment. In the eyes of the law simple interest is generally regarded as adequate compensation. The court considered an award of an artificially high rate of interest in order to achieve the equivalent of an award of compound interest was inadmissible and in any event posed its own problems, since the court cannot know how long the judgment will remain outstanding.