Interest rates

High interest(s): arbitration, litigation and rising interest rates

Following the US Federal Reserve’s interest rate hike of 0.75% on September 20, 2022, the prime rate for JPMorgan Chase & Co, Citigroup Inc and Wells Fargo & Co reached its highest level since 2008. What does this have to do with English law? Simple. If you are contracting in currencies other than sterling, it is likely that a court or tribunal adjudicating a dispute under English law will find that the rate applicable to that currency will apply when determining the applicable interest. Thus, if a party contracts in US dollars, then when assessing interest (express provision absent), it will potentially be treated by reference to the US prime rate, which as of September 22, 2022 is 6.25%.

The Bank of England on September 22 raised its key rate by 0.5%, its highest level since the 2008 financial crisis, which means that it has been raised by 2% since the start of 2022. The rate Fed rate is now in the 3-range of 3.25%, having increased in May for the first time since 2000 and again on September 20. Where the parties do not actually provide for an applicable interest rate in their contract, they risk that interest on the sum which is or has been the subject of the dispute will be subject to centrally controlled interest rates. As these appear to be on an upward trajectory, the potential liability could be significant. This is a particular risk where the principal sum is substantial or the claim is not commenced or concluded for several years from the date the cause of action arose.

Prejudgment interest

Section 35A of the Superior Courts Act gives the court a wide discretion to award interest, but not for a period to which interest is already attached, meaning that where an interest rate is validly provided for in the contract, the court will award interest at this rate. assess.

Where the contract does not or does not validly provide for a rate of interest, the Commercial Court has followed the principle of awarding interest at 1% above the base rate of the Bank of England, although this is not a presumption and can be moved (Kitcatt and others v MMS UK Holdings Ltd and others [2017] EWHC 786 (Comm)). Any volatility in the base rate will have ramifications for what that rate would represent when a dispute arises. The parties should therefore be mindful of the trends affecting the base rate at the agreement stage, particularly in the future in the current climate.

For claims for late payment relating to the sale of goods or services, the Late Payment of Trade Debts (Interest) Act 1988 will imply terms in the contract for interest on the unpaid debt to run from the payment due date. This will be at a rate of 8% above the Bank of England base rate. Parties should be wary of the potential effects of base rate increases; currently, the interest rate in case of application of the law on late payments would be around 10% and could increase further.

It is possible to get out of the law by contract, but under Article 8(1), the contract must provide a “substantial contractual remedy for late payments and otherwise, the late payment law exclusion will be void and the full statutory interest rate will apply. Nevertheless, a carefully drafted alternative that satisfies the requirements of subsection 8(1), while unlikely to succeed in excluding the provisions of the Act in favor of a significantly reduced interest rate, should provide greater certainty about potential liabilities.

Interest after judgment

The underlying principle of a judgment debt is that once the judgment is rendered, the debt arises from the judgment itself rather than from the contract, and the prevailing party becomes a creditor under the judgment. The statutory rate of interest on High Court judgment debts has been 8% since April 1993. The parties may agree by express provision that an interest payment clause shall not merge with the judgment debt and that the creditor will then retain the right to contractual interest. The courts now have the power to award statutory interest on a judgment debt and have clarified that the existence of an express provision for post-judgment interest will not have the effect of depriving a creditor of its right, in under a judgment debt, to receive statutory interest (Standard Chartered Bank v Ceylon Petroleum Corp [2011] EWHC 2094 (Comm)).

The practical effect of this is that, if the contractual interest rate is less than the 8% judgment rate, the judgment debt creditor is likely to be entitled to the difference. It is therefore difficult to avoid at least one judgment rate as a paying party, even if it remains open to the parties to agree that a contractual rate will apply after judgment. As described above, a contract rate of less than 8% is likely to be overcome by a creditor’s legal right, while if a contract rate is higher than the judgment rate, the parties potentially risk becoming involved in costly arguments during litigation that it is a penalty. assess.

The currency effect

Where a contract does not expressly provide a relevant rate of interest, the appropriate matter for the court to identify the rate has been established as a “borrowing rate”. In Tate and Lyle Food and Distribution Ltd v Greater London Council [1982] 1 WLR 149¸, the court held that the appropriate rate in trade receivables is the interest applicable if the plaintiff had borrowed the withheld funds during the relevant period. The court will look at the rate at which plaintiffs, in general, borrow money rather than considering that particular plaintiff’s circumstances and the specific borrowing rate they might attract.

The court in Tate and Lyle ruled that the “borrowing rate” in this case was 1% above the minimum lending rate, or Bank of England base rate. According to this principle, sums in currencies other than sterling will attract an interest rate corresponding to that currency rather than being based on the Bank of England rate, as explained at the beginning of this article. In Kuwait Airways Corp v Kuwait Insurance Co [2000] Lloyds Reps 678, the court found that the closest commercial “borrowing rate” equivalent of the base rate plus 1% to the US dollar was the US prime rate.

Under section 44A of the Administration of Justice Act 1970, the court has discretion as to the rate of interest it awards on judgment debts in other currencies. As demonstrated Standard charter, even where the contract provides for English jurisdiction, that alone would not be sufficient to grant the applicable statutory judgment rate of 8%. In this case, the court rejected the contractual interest rate after judgment and followed the principle in Miliangos v George Frank (Textiles) Ltd [1977] QC 489, [1976] 5 WLUK 45 to accord the US prime rate to this judgment debt. This resulted, at the time, in a post-judgment interest rate significantly lower than the 8% that would have been expected for a sterling claim.

Some additional thoughts

Uncertainty about applicable interest rates may expose parties to unforeseen liabilities at the end of the dispute resolution process. In the current inflationary environment and where rates look likely to continue to climb, it is worth considering now, as many will have forgotten the days of higher rates and the impact these can have.

While considering these questions, also take the time to consider whether the dispute resolution clause you are using is appropriate for the particular transaction or trade. As part of this process, it will be useful to consider the cost of any dispute resolution proceedings, the enforcement landscape and, of course, the position of the bilateral treaty, if you are investing outside of your jurisdiction of origin.

There may be trouble ahead, but taking steps to mitigate future risk should allow you to face the unknown with more confidence.