PI Brief Update

Spanish Interest: Is an English court obliged to award 'penalty' interest? - Pierre Janusz & Anna Gatrell, 3 Hare Court

22/07/24. The recent decision of the Court of Appeal in Nicholls & Ors v. Mapfre [2024] EWCA Civ 718 provided the Court of Appeal with an opportunity to give a definite ruling on whether, in a case where the law applicable to the claim is Spanish law, an English court is obliged to award “penalty” interest pursuant to Article 20 of the Spanish Insurance Contract Act 50/1980 (“Article 20”). This article seeks to consider an issue which can arise in such cases, but in relation to which the Court of Appeal did not provide detailed guidance, namely what approach a court should take in a case where it is required by CPR r.36.17(4)(a), unless it considers it unjust to do so, to award interest on all or part of the damages awarded at a rate of up to 10% above base rate when it is required also to award interest pursuant to Article 20.

Article 20 provides that penalty interest will apply if compensation is not paid within 3 months of the insurer having been notified of the claim. For the first two years such interest accrues at the current legal interest rate (set by Article 1108 of the Spanish Civil Code (“Article 1108”)), increased by 50%. After that, it accrues at a rate of 20% per annum. The essential question for decision as to the applicability of Article 20 in a claim before the English courts was whether it was a substantive provision (in which case it applied by virtue of Article 15(c) of Rome II) or a procedural provision (in which case it was excluded from the scope of Rome II by Article 1(3)). It was accepted by the Defendant in Nicholls that Article 1108 was a provision of substantive law (see paragraph 56), but it was contended that Article 20 was procedural. The Court of Appeal ruled that Article 20 was substantive and therefore had to be applied by an English court.

Having so ruled, it was unnecessary for the court to rule on the other question before it concerning Article 20, namely whether, on the footing that Article 20 was procedural, some of the judges below had been wrong to award interest at the equivalent rate to that payable pursuant to Article 20 as a matter of discretion under either section 35A of the Senior Courts Act 1981 (“s.35A”) or section 69 of the County Courts Act 1984 (“s.69”). Nevertheless it went on to say, obiter, that an English court was entitled to exercise its discretion under s.35A or s.69 to award interest in line with what would be recoverable under Article 20 and that it would be an unusual case where such an important component of the the overall award which a Spanish court would make should be left out of account as a matter of discretion (see paragraphs 65 and 66).

Counsel for the Defendant had made submissions in relation to the potential for a Defendant in its position to be subjected to a judgment which included penalty interest under Article 20 and also enhanced interest under CPR r.36.17 (which is what happened in one of the cases before the Court of Appeal (Woodward v. Mapfre)). Nonetheless at paragraph 67 Dingemans LJ said that the question of whether enhanced interest under CPR r.36.17 should be awarded in a case where interest had been awarded under Article 20 was not an issue to be determined by the court. He merely said that in those circumstances the award of enhanced interest was “likely to depend on various factors”.

If a claimant obtains a judgment which is at least as advantageous in money terms as an offer they have made under Part 36, CPR r.36.17(4)(a) requires the court to award interest on all or part of the damages awarded (excluding interest) at up to 10% above the base rate. This is mandatory, save for when the court “considers it unjust” to make such an order. It should be noted however that the rate of interest to be awarded (i.e. the degree to which it is enhanced as compared to what would ordinarily be awarded under s.35A or s.69), the part of the damages attracting the enhanced interest rate and the period for which the enhanced interest is awarded are all matters of discretion. This distinction has been emphasised by the Court of Appeal in OMV Petrom SA v. Glencore International AG [2017] 1 WLR 3465 where it was said that the level of enhancement must be “proportionate to the circumstances of the case”. It follows from this that different considerations may apply to the question of whether it is unjust to make an award under CPR r.36.17(4)(a) at all on the one hand and how the discretion is to be exercised on the other.

When a court considers the factors which may make the imposition of interest under CPR r.36.17 unjust, it must have regard to CPR r.36.17(5). Factors outlined in this provision include the terms of the offer, the stage at which it was made, the information available at the time it was made, the conduct of the parties, and whether the offer was a genuine attempt to settle. The court is not, however, “constrained” by this list and there is “no limit to the type of circumstances which may… make it unjust” that Part 36 consequences should follow (Smith v. Trafford Housing Trust [2012] EWHC 3320 (Ch)).

Should no other relevant factors apply, insurers might submit that paying interest under both CPR r.36.17 and Article 20 is a factor which amounts to injustice, but they will face a heavy burden in doing so as the threshold is high. In Shah & Anor v. Shah & Anor [2021] EWHC 1668 (QB) Collins Rice J held at [18]:

“In Ayton v RSM Bentley Jennison & Ors [2018] EWHC 2851 (QB); a case in which the court considered whether it would be unjust to order the default Part 36 costs consequences after the claimant beat his Part 36 offer, Lewison LJ noted that “the cases are unanimous in stating that the test of injustice is a high hurdle…”. Elsewhere, Biggs J (as he then was) described the burden on a claimant in this regard as a “formidable obstacle”.”

In Downing v. Peterborough & Stamford Hospitals NHS Foundation Trust [2014] EWHC 4216 (QB), Sir David Eady observed, at [61], that:

“It is elementary that a judge who is asked to depart from the norm, on the ground that it would be ‘unjust’ not to do so, should not be tempted to make an exception merely because he or she thinks the regime itself harsh or unjust. There must be something about the particular circumstances of the case which takes it out of the norm.”

Can it be said that having to pay penalty interest under Article 20 because the insurer has not done what Spanish law requires of it takes the case “out of the norm”, or is the case simply to be seen as one where the insurer has fallen foul of the encouragement under English procedural law to settle claims and that as a result the consequences of CPR r.36.17 follow? Insurers will not be helped by the decision in Scales v. Motor Insurers’ Bureau [2020] EWHC 1749 (QB) where Cavanagh J held that there was “no injustice” in an insurer being liable to pay interest under Article 20 and Part 36.

Insurers may nonetheless submit, rather in line with the submissions in the Court of Appeal, that it is unjust effectively to be penalised twice. At paragraph 66 Dingemans LJ accepted that interest under Article 20 was “penal” and it is acknowledged that payment of interest under CPR r.36.17 is not intended to be compensatory. Insurers may also contend that, given Dingemans LJ left the question open, it is not conclusive that it will always be “just” to allow the imposition of interest under both Article 20 and CPR 36. Nevertheless, the situation is, realistically, likely to be rather gloomy for insurers wanting to say that it would be unjust to follow what CPR r.36.17(4)(a) mandates with regard to interest.

The outlook may, however, be a little brighter when it comes to the discretionary part of the exercise under CPR r.36.17(4)(a). A court could well find it persuasive that it would be inappropriate to exercise its discretion with regard to the rate of interest in the same way that it would if a claimant were not recovering penal interest under Article 20 as well, especially if, for example, because the claimant had not pursued the claim as quickly as they could have, interest had been running at 20% for a number of years. The same could also apply if the litigation process in England had been protracted for reasons which could not in substance be laid at the defendant's door. However, it should be remembered that, in line with the requirement that making an award of enhanced interest is mandatory unless the court considers it unjust to do so and the high threshold which the proviso sets, a court would be precluded from increasing the rate of interest by only a nominal amount. To do that would probably be seen as in effect by-passing the high threshold of the proviso.

Image: cc flickr.com/photos/aigle_dore/5237981315/