Consultation on the inflation index for the calculation of the personal injury discount rate and the methodology for calculating the judicial rate of interest

Chapter Three – Judicial Rate of Interest

3.1 The Judicial Rate of Interest has remained unchanged for over 30 years now. Commercial rates of interest vary according to a variety of circumstances, including the rate of inflation, the risk of non-payment, etc. The Judicial Rate of Interest, on the other hand, is a “one size fits all” rate that applies universally regardless of the circumstances of a case. The issue that this consultation seeks views about is how the rate of judicial interest should be determined going forward.

Scottish Law Commission

3.2 The SLC’s Report on Interest on Debt and Damages (“the Report”) was wide ranging and made a number of recommendations for reform of the law relating to interest on claims for payment of money arising from contractual and other obligations, including claims within the jurisdiction of tribunals and courts or submitted for decision to arbitration, adjudication or some other form of dispute resolution.

3.3 Not all of the topics examined by the SLC in the Report are touched on in this consultation exercise. Instead, views are sought on the specific issue of the Judicial Rate of Interest. This is discussed in Chapter 7 of the Report.

3.4 The SLC recognised that there is at present no statutory mechanism which would apply a rate of interest similar to that which is available commercially and that the rate does not fluctuate automatically in line with changes in the BoE base rate. Consequently, it often may not reflect the real cost of money to the creditor or the debtor. The result is often an award of interest which is not truly compensatory because the debtor may be paying interest at a rate higher than the creditor could have obtained in the market. The SLC eloquently set out the underlying principle for their recommendations on the Judicial Rate of Interest as interest to –

“compensate the creditor rather than penalise the debtor. Interest should be applied at a rate which best expresses the creditor's loss”.

3.5 Their recommendation was that there should be a prescribed rate of interest which would fluctuate according to the Band of England (“BoE”) base rate (recommendation 27). The SLC considered other possible indexes against which to peg the rate but concluded that the BoE rate was most appropriate as it was stable and widely publicised.

3.6 The SLC further recommended that the rate prescribed by statute would be a specified percentage, 1.5%, above the official dealing rate of the BoE. The resulting rate of interest would be comparable to the rate which a prudent individual might obtain for a secured loan, or the average company might pay on its borrowing.

3.7 The SLC recognised that circumstances may change in future, rendering it fairer to increase or decrease the figure added to base and so their recommendation made provision to amend the percentage applied either upwards or downwards by regulation made by the Scottish Ministers.

Scottish Government

3.8 In 2019, the Scottish Government invited views on whether the judicial rate of interest should be amended.^[12] A significant majority of respondents (76%) took the view that the current rate of judicial interest is not set at the correct level and should be reduced. However, there was less consensus on what the rate should be – although the majority of respondents were in favour of the proposal in the consultation to link it in some way to the Bank of England (BoE) base rate.

3.9 Of the respondents who gave a view: 33% thought it should be the unmodified BoE base rate; 8% thought it should be the BoE base rate plus 1%; 37% took the view that the appropriate Judicial Rate of Interest should be the BoE base rate plus 2%; and the remaining 22% of respondents thought it should be some other percentage amount.

Options for reform

3.10 In recognition that it has been almost 20 years since the SLC’s recommendation was published and 6 years since the Scottish Government last consulted on this matter, we seek to establish:

• Whether the landscape around this aspect of the law has changed since the recommendation was published and the Scottish Government last consulted, and if so whether the changes are material to the recommendation;
• That the consultation views received by the SLC and the Scottish Government are still broadly held.

Question Eight: Are you aware of any subsequent case law or legislation which impacts the SLC’s recommendation on determining the judicial rate of interest? If yes, please provide details.

Question Nine: Are you aware of change in practice which impacts the SLC’s recommendation on determining the judicial rate of interest? If yes, please provide details.

Question Ten: Do you agree that the Bank of England base rate should be used to establish the Judicial Rate of Interest? Please provide reasons for your answer.

Question Eleven: If the Judicial Rate of Interest is to be pegged to the BoE base rate what should the percentage increase on the base rate be? Please provide reasons for your answer.

Question Twelve: Is there suitable, published and accessible data which would inform what the percentage increase to the base rate should be? Please provide reasons for your answer.

Question Thirteen: Should the Scottish Ministers have power to amend by regulation the percentage modification of the base rate, either upwards or downwards? If not, please provide reasons for your answer.

Question Fourteen: Do you have an alternative option for determining the Judicial Rate of Interest? Please fully describe the alternative option and provide reasons for your answer.