William Redgrave
Partner, Jersey
William is a Partner in the firm. He is both a Jersey Advocate and an English Barrister.
Introduction
In the latest decision in the long-running Sheyko v Consolidated Minerals Limited litigation1, the Royal Court has revised its approach to awards of pre judgment interest.
The power to award pre and post judgment interest is conferred by the Interest on Debts and Damages (Jersey) Law 1996 (“the Law”). The rate of post judgment interest (i.e. interest which runs from the date of judgment to the date of payment) is set at 2% above the base rate by Royal Court Practice Direction 05/06. The position on pre judgment interest is less straightforward. Article 2(1) of the Law gives the Court a very broad discretion in the following terms:
“Subject to paragraph (4), in any proceedings, whenever instituted, for the recovery of any debt or damages, the Court may, if it thinks fit, order that there shall be included in the sum for which judgment is given simple interest at such rate as it thinks fit on the whole or any part of the debt or damages in respect of which judgment is given, or payment is made before judgment, for the whole or any part of the period between the date on which the cause of action arose and –
(a) in the case of any sum paid before judgment, the date of the payment; and
(b) in the case of a sum for which judgment is given, the date of the judgment.”
The Court can therefore set the rate, and the period for which interest should be awarded – going back as far as the date at which the cause of action arose.
The Present Case
It is settled law that the purpose of pre judgment interest is to provide fair compensation to the plaintiff; not to punish the defendant. However, the principles underpinning this objective had not been considered in Jersey since Pell Frischmann v Bow Valley2 where the Court approved a rate of 1% over base. This reflected the general practice in England and Wales at the time, when the base rate was 5.75%. The base rate has declined sharply since 2008; it was 0.5% when the present case was commenced and has subsequently decreased to 0.1%.
In the present case the plaintiff claimed that 1% over base did not represent fair compensation and invited the Court to take a different approach, based on more recent decisions in England. In doing so the Master confirmed that (following Bow Valley) interest ordinarily accrues from the date a cause of action arises. He also accepted the plaintiff’s submission that 3% over base provided fair compensation, and ordered interest at that rate up to judgment.
In reaching this conclusion the Master followed a line of English authorities in which the appropriate rate was determined by reference to different categories of plaintiff. In particular he referred to Challinor v Juliet Bellis & Co3 in which the English High Court affirmed that courts should take a ‘broad brush’ approach rather than focus on the specific circumstances of the applicant in question. It identified three main categories of case: (a) where a business has wrongly been kept out of funds, where the general assumption would be that those funds would have to be replaced by borrowings; (b) where any award is a ‘windfall’ addition to the funds of the plaintiff, rather than the replacement of monies which the plaintiff had lost; and (c) cases involving financially sophisticated individual plaintiffs, which do not fit into (a) or (b) because the plaintiff is not running a business that depends upon credit, but not having the funds deprived the plaintiff of opportunities to profit from them.
In type (a) cases, an appropriate rate is determined by approximating the borrowing costs that such a business would have incurred to replace the funds it has lost (“the borrowing rate”). In type (b) cases – of which the paradigm example is a personal injury case – an appropriate rate puts the plaintiff in the position they would have been in if the money had been placed on deposit (‘the deposit rate’). After 2008 there was a big difference between such rates, as deposit rates plummeted but borrowing rates remained relatively high. In type (c) cases, neither of the above are a logical proxy because a sophisticated plaintiff would not leave funds on deposit, but is also unlikely to have borrowed to replace the lost funds4. An appropriate rate therefore falls somewhere between the two5.
The plaintiff submitted that he belonged in the third category. He had not had to borrow to replace the funds due to him, but was a sophisticated investor who would not have left funds on deposit. He provided evidence of the returns generated on his personal investment portfolio, and the rate at which he could have borrowed in 2018 (approximately 4% to 6%). On this basis he argued that 3% over base represented an appropriate middle ground. He pointed to a number of English decisions which have confirmed such a rate as appropriate for people in his position, including Carrasco v Johnson6.
The Master agreed that the plaintiff was a sophisticated investor, and therefore 1% over base would not provide fair compensation. He further agreed that 3% was not too high because the plaintiff was “not receiving any windfall or return based on speculation or a high-risk strategy which would not be appropriate or justifiable. The rate he seeks is also less than available rates set out in the evidence before me in terms of applicable borrowing rates.”
Conclusion
The sharp decline in interest rates following the financial crisis left the previous default rate of 1% over base looking extremely meagre. It also widened the gap between the rates available to borrowers and savers. In turn this created a category of plaintiffs who did not qualify for the borrowing rate (category (a) cases), but for whom 1% over base (category (b)) did not represent fair compensation.
In a world of historically low interest rates, this judgment is good news for plaintiffs. However, the Master was swift to caution that such cases are an exception, and that in most cases involving an addition to the assets of a plaintiff, the appropriate rate will be the deposit rate7. It follows that those looking to establish financial sophistication must provide good evidence to support their claim.
The approach which has now been adopted in Jersey acknowledges the flexibility (provided by the Law) for the courts to award a fair rate of pre judgment interest while, at the same time, promoting a consistency of approach and preventing, as far as possible, the creation of another expensive litigation battleground.
William Redgrave, Charlie Sorensen and Phillip Brown act for the plaintiff in the above proceedings.
1 [2021] JRC 186
2 [2007] JRC 155A
3 [2013] EWCH 620 (Ch)
4 Ibid at paras 32 to 34
5 Ibid at para 42
6 2018 EWCA Civ 87
7 See para 48