LM-2024-000252 - [2025] EWHC 2704 (Comm)

RSA’s claim for compound interest rests on the decisions of the House of Lords in Sempra Metals Ltd v Inland Revenue Commissioners [2007] UKHL 34, [2008] 1 AC 561, and of Males J in Equitas Ltd v Walsham Brothers & Co. Ltd [2013] EWHC 3264 (Comm), [2014] Lloyd’s Rep IR 398.

In Sempra Metals the taxpayer claimant sought what amounted in effect to compensation for having been unlawfully required to make payments to the Inland Revenue prematurely. One of the forms of relief claimed was damages for tort. The House of Lords held that a claimant was in principle entitled to plead and prove its actual interest losses caused by late payment of a debt and that recovery would be subject to the normal principles in damages claims, including remoteness. Lord Nicholls of Birkenhead said:

“94.

… [I]f your Lordships agree, the House should now hold that, in principle, it is always open to a claimant to plead and prove his actual interest losses caused by late payment of a debt. These losses will be recoverable, subject to the principles governing all claims for damages for breach of contract, such as remoteness, failure to mitigate and so forth.

95.

In the nature of things, the proof required to establish a claimed interest loss will depend on the nature of the loss and the circumstances of the case. The loss may be the cost of borrowing money. That cost may include an element of compound interest. Or the loss may be loss of an opportunity to invest the promised money. Here again, where the circumstances require, the investment loss may need to include a compound element if it is to be a fair measure of what the plaintiff lost by the late payment. Or the loss flowing from the late payment may take some other form. Whatever form the loss takes the court will, here as elsewhere, draw from the approved or admitted facts such inferences as are appropriate. That is a matter for the trial judge. There are no special rules for the proof of facts in this area of the law.

96.

But an unparticularised and unproved claim simply for ‘damages’ will not suffice. General damages are not recoverable. The common law does not assume that delay in payment of a debt would of itself cause damage. Loss must be proved.”

Lord Hope of Craighead said:

“17.

I also agree with Lord Nicholls that the loss on the late payment of a debt may include an element of compound interest. But the claimant must claim and prove his actual interest losses if he wishes to recover compound interest, as is the case where the claim is for a sum which includes interest charges. The claimant would have to show, if his claim is for ancillary interest, that his actual losses were more than he would recover by way of interest under the statute. In practice, especially where the period over which interest is sought is short or where the claimant does not have to borrow money to replace the debt, simple interest under section 35A of the Supreme Court Act 1981 is likely to be the more convenient remedy.”

In Equitas Ltd v Walsham Brothers, Equitas, as successor to certain syndicates, sued to recover funds held by brokers, Walsham Brothers, and received by them from reinsurers. Males J held that the brokers were under a continuing duty to remit the funds. Having cited extensively relevant passages in Sempra Metals, he discussed Equitas’s claim for compound interest in an instructive passage at [123]-[126]:

“123.

… In the light of the judgments in Sempra Metals I would summarise the position as follows.

(i)

First, it is clear that damages are in principle recoverable, subject to ordinary principles of remoteness and mitigation, for breach of an obligation to remit money, where the failure to remit has caused a loss.

(ii)

Secondly, unless there is some positive reason to do otherwise, the law will proceed on the basis, at any rate in the commercial context, that a claimant kept out of its money has suffered loss as a result. That represents commercial reality and everyday experience. Specific evidence to that effect is not required and, even if adduced, may well be somewhat hypothetical and thus of little assistance. For example, a businessman may well be unable to say precisely what he would have done differently if a particular payment had been made to him when it ought to have been, especially if (as apparently in this case) he was unaware that the money was being withheld. Extensive disclosure, which would no doubt be demanded by the defendant, is unlikely to assist. But that does not mean that no loss has been suffered. In the present case the general evidence of the importance attached in the market to prompt remittance of funds is more than sufficient to justify the conclusion that the syndicates did suffer a loss by being kept out of their money. Accordingly the question in such a case is not whether a loss has been suffered, but how best that loss should be measured.

(iii)

A solvent claimant who seeks to recover damages which exceed the cost of borrowing to replace the money of which it has been deprived is likely to be met with the defence that the claim is too remote or that it has failed to mitigate by borrowing in order to replace the money lost, in which case its recovery may be limited to that borrowing cost, which will include the need to pay compound interest, that being the only basis on which money can be borrowed commercially. The position may, however, be different if there is a good reason why the claimant should not have gone into the market to borrow the missing money, for example if it did not know and should not reasonably have known that the money was missing. …

(iv)

In other cases I consider that it is not necessary for the claimant to produce specific evidence of what it would have done with the money or what steps if any it took to borrow or otherwise to replace the money of which it was deprived. As noted above, it may often be impossible or at any rate extremely difficult to produce such evidence, especially if that would mean attempting to disentangle a claimant’s overall business operations in an artificial attempt to attribute specific activity such as borrowing to the non-remittance of specific funds. Instead, at any rate in commercial cases and unless there is some positive reason to do otherwise, the law will proceed on the basis that the measure of the claimant’s loss is the cost of borrowing to replace the money of which the claimant has been deprived regardless of whether that is what the claimant actually did. A conventional rate will be used which represents the cost to commercial entities such as the claimant and is not necessarily the rate at which the claimant itself could have borrowed or did in fact borrow. This avoids the need for protracted investigation of the particular claimant’s financial affairs. As with other conventional measures (for example, the assessment of damages by reference to a market price in sale of goods cases) this approach has the advantage of certainty and predictability which is always important in the commercial context, as well as being broadly fair in the great majority of cases and avoiding expensive and often ultimately unproductive litigation.

(v)

If a conventional borrowing cost is to be adopted in this way, the question whether interest should be simple or compound answers itself. While simple interest has the virtue of simplicity as Lord Hope observed, it also has the certainty of error and injustice. As their Lordships noted, it is impossible to borrow commercially on simple interest terms. I respectfully agree with Lord Nicholls that the law must recognise and give effect to this reality if it is to achieve a fair and just outcome when assessing financial loss. To conclude that, at least in a typical commercial case, the normal and conventional measure of damages for breach of an obligation to remit funds consists of compound interest at a conventional rate is therefore both principled and predictable, as well as being in accordance with what was actually awarded in Sempra Metals.

124.

I referred above to the possibility that in some cases there may be a positive reason not to approach the assessment of damages in the manner suggested. I would not wish to exclude that possibility and in any event the assessment of damages should not be fettered by unduly rigid rules. But there is no reason in this case (and none was suggested) to think that this approach would result in an unfair result so far as losses in the period before 1 September 1996 are concerned.

125.

Accordingly I conclude that losses suffered by the syndicates in the period before September 1996 are to be measured by reference to the cost of borrowing in the market, and that Equitas is in principle entitled (subject to the limitation issues yet to be considered in this judgment and those to be determined at the next stage of this action) to recover damages in respect of losses in this period at the rate of LIBOR plus a margin of 1 per cent, compounded with appropriate rests.

126.

The question of what rests are appropriate is for decision at a later stage if the parties cannot agree. It will depend on evidence as to what borrowing terms were available in the market at the relevant time. As already noted, Equitas’s calculation of its claim has used monthly rests and, if necessary, that may need to be revised. I would add, however, that at least in my experience the usual practice of London arbitrators (who have had power to award compound interest under section 49 of the Arbitration Act 1996 since 31 January 1997) is to award compound interest with three-monthly rests. I add also that the parties will need to agree which of the various LIBOR rates is appropriate to be used.”

The availability of compound interest as damages has recently been considered by Foxton J in 4VVV Ltd and others v Spence and others [2024] EWHC 2434 (Comm). He noted that, although the principles stated by Males J in Equitas Ltd v Walsham Brothers have been cited with approval in several first-instance decisions where compound interest has been awarded, it had not become routine for claims for compound interest to be advanced. Foxton J referred to the judgment of the Judicial Board of the Privy Council in Sagicor Bank Jamaica Ltd v YPSeaton and others [2022] UKPC 48. There the Board said:

“31.

It is clear from the judgments of the House of Lords in Sempra Metals that to claim compound interest as damages for a breach of contract which has deprived the plaintiff of money it is necessary to plead and prove that the plaintiff has suffered the relevant loss. For example, the plaintiff may plead and prove that it has had to borrow money on which it has incurred interest charges as a borrower or that it has lost the opportunity to invest the promised money or that, in the absence of the money of which it has been wrongfully deprived, the plaintiff has had to use funds that otherwise would have earned such interest: Lord Hope at paras 16 and 17, Lord Nicholls at para 95, Lord Scott at para 132, and Lord Mance at para 216. If these strictures in Sempra Metals are good authority, Mr Seaton’s third and fourth claims must fail.”

The Board referred to Males J’s judgment in Equitas Ltd v Walsham Brothers and, after setting out his statement of principles, continued:

“33.

The Board agrees with Males J that, in assessing a claim for financial loss caused by the failure to pay money that is contractually due, the law does not require a detailed examination of a plaintiff’s financial affairs and that an extensive process of disclosure by the plaintiff to make or verify that assessment is likely to be unhelpful and is in any event disproportionate. The question of what evidence is required from which a court can infer that a plaintiff has suffered financial loss in the form of the incurring of borrowing costs will depend upon the circumstances of the particular case, as Lord Nicholls recognised in para 95 of his speech in Sempra Metals (para 25 above). The Board also does not question the judge’s view that in the EquitasLtd case the state of the insurance market at the relevant time and the evidence which was available of the importance in that market of prompt cash flow supported the inference that the claimant had suffered financial loss in the form of incurring borrowing costs to replace the withheld money. But the Board does not agree with Males J’s conclusion that the common law has gone so far as to recognise that a claimant or plaintiff kept out of his or her money in a commercial context is as a norm entitled to claim and receive as damages for breach of contract interest on the withheld sums that is calculated by reference to the cost of borrowing such sums at a conventional rate without evidence from which such a loss can be inferred. As the Board stated in its discussion of Sempra Metals in National Housing Trust v Y P Seaton &Associates Co Ltd [2015] UKPC 43; [2016] BLR 215, para 31, it is open to a plaintiff to plead and prove an actual loss of interest caused by late payment of a debt: ‘[s]uch claims are for actual or real damages, not theoretical and non-existent loss.’

34.

The Board has reached this view for the following four reasons. First, the existence of such a general rule is inconsistent with the speeches of the House of Lords in Sempra Metals. See Lord Hope at para 17 of his speech which is quoted in para 24 above and Lord Nicholls at paras 95 and 97 of his speech which is quoted in para 25 above. The Board notes that in JSC BTA Bank v Ablyazov [2013] EWHC 867 (Comm), in a judgment handed down several months before the EquitasLtd judgment, Teare J correctly and clearly stated the effect of the Sempra Metals judgment on this matter: see paras 12-13 and 18-19 of his judgment. Secondly, while such a norm might promote legal certainty in relation to such claims, there is no principle on which it is based. Thirdly, one cannot now pray in aid, as Males J did, the outcome in Sempra Metals, which was to award compound interest as part of a claim for unjust enrichment. The United Kingdom Supreme Court overruled that element of the decision in Sempra Metals in its judgment in Prudential Assurance Co Ltd v Revenue and Customs Commissioners [2018] UKSC 39; [2019] AC 929, a ruling that post-dated Males J’s judgment by several years. Fourthly, so far as the Board can ascertain, the approach of Males J has not been followed in the practice of the commercial court in England and Wales. It was adopted by Stuart-Smith J in Peacock v Imagine Property Developments Ltd [2018] EWHC 1113 (TCC), para 143, as Mr Salter points out. But there is no general practice that follows the approach in Equitas Ltd, which is not consistent with principle or with the speeches of the House of Lords in Sempra Metals. The Board is therefore satisfied that the case of Equitas Ltd does not assist Mr Seaton’s claim.”

Having referred to the dicta in the Sagicor Bank Jamaica case, Foxton J continued, with reference to the facts of the case before him:

“64.

The present case involves claimants who say that they disbursed cash as a result of a legal wrong which would otherwise have been available to them. The Claimants are not commercial entities operating in a commercial market like the insurance market, but mostly retail investors (although some of the claimants are special purpose vehicles set up to hold those investments). None of the Lead Claimants have alleged, still less established, that funds had to be borrowed as a result of the wrongs complained of. I am not persuaded in these circumstances that I can simply infer a loss in the form of the compound interest which would have been earned on the funds. For compound interest to be recovered as damages at common law, the relevant loss must be pleaded and the facts from which the loss can be inferred proved.”

The conclusion I draw from these cases is that there is no default rule that, in a commercial case, compensation for being kept out of one’s money will be awarded on the basis of the cost of commercial borrowing, i.e. by way of compound interest. The legal position is simply that compensation on that basis will be awarded if the facts pleaded and proved are sufficient to justify the inference that such an award does indeed reflect the claimant’s actual loss. It may be that the burden of proof will be easily discharged in some cases, where the inference can readily be drawn; and a detailed examination of the claimant’s financial affairs, with substantial disclosure in that regard, will generally be neither necessary nor appropriate. But still: “The question of what evidence is required from which a court can infer that a plaintiff has suffered financial loss in the form of the incurring of borrowing costs will depend upon the circumstances of the particular case”: Sagicor Bank Jamaica at [33]. If and insofar as Males J in the Equitas Ltd case was purporting to state a default rule in a commercial context, then for the reasons given by the Privy Council the statement was unnecessary to the actual decision, which was justified by the evidence adduced in the case, and was inconsistent with the speeches in Sempra Metals.

In the present case, the re-amended particulars of claim simply claim compound interest at common law or, alternatively, simple interest under section 35A of the Senior Courts Act 1981: paragraph 74. No particular facts are pleaded in support of the claim for compound interest, though the nature of the claimants as insurance and reinsurance companies is set out in paragraph 2 and is, of course, apparent from the statement of case as a whole. Miss Ananda’s submission was to the effect that RSA operates in the commercial insurance market, which was recognised by Foxton J as very different from the circumstances of the case before him, and that the inference properly drawn by Males J in the Equitas Ltd case is equally justified here and on the same grounds. She went so far as to submit that I was bound to follow the decision in that case to award compound interest.

For Equitas, Mr Scorey submitted that the Commercial Court remained generally reluctant to award compound interest, that RSA had neither pleaded nor proved that compound interest was in the reasonable contemplation of the parties when they entered into the Reinsurance Policies, and that RSA has made no attempt, as it could have done, to explain why compound interest would reflect the loss it has actually suffered.

In my judgment, the appropriate award in this case is of simple interest at 2% above base rate. I am prepared to accept that insurance markets are an area in which actual losses may more commonly be reflected by compound interest than is the case in other areas of activity. But I do not think that it suffices for a claimant simply to assert that it operates in the insurance market. In the Equitas Ltd case Males J noted at 417 that there was no evidence of the investment returns previously achieved by the syndicates, or of the rates at which they were able to borrow money, or that they had in fact borrowed money. But he also noted:

“It was, however, part of Walsham’s own evidence that as a broker it came under considerable pressure from syndicates to ensure the prompt collection of claims and to fund claims where payment had not yet been made by reinsurers, all because of the supreme importance of cash flow to those syndicates. This is not surprising, particularly in the market conditions which existed at the time.”

In the Sagicor Bank Jamaica case the Board referred at [33] to this passage as justifying the inference that compound interest reflected the syndicates’ actual losses in Equitas Ltd. The Board did not suggest or imply that it would suffice simply to be an insurer or reinsurer. In this case I have been referred to no evidence to justify departure from the general practice of awarding simple interest under section 35A of the Senior Courts Act 1981.