A matter of interest

In July 2007, the House of Lords handed down its decision in Sempra Metals Limited -v- Commissioners of Inland Revenue. This case concerned claims against the Inland Revenue for payment of Advance Corporation Tax (ACT), which was subsequently found to have been wrongly demanded.

You may be wondering what this has to do with the construction industry. In fact, it is very relevant to construction claims because Sempra Metals was not seeking the return of the ACT, which had already been repaid. It was claiming compound interest to recompense it for the time that the Inland Revenue had wrongfully retained its money.

Historically, the courts don't like claims for interest alone without any corresponding debt or claim for damages to which such an interest claim can be linked. In fact, there are a number of House of Lords decisions specifically preventing such claims from being brought other than in very limited circumstances. The basic position was that interest could only be claimed either:

● Under the relevant contract

● Under the Late Payment of Commercial Debts (Interest) Act 1998, or

● Once Court proceedings had been issued under the relevant statutory provisions allowing for an interest claim attached to a claim for damages or debt.

What Sempra Metals decided was that if it could be proven that a party had lost the use of its money for a period of time, it should be permitted to recover its full losses by way of an award of compound (or simple) interest. Accordingly, the House of Lords overruled no less than four of its own previous decisions and swept away the existing restrictions on recovery of interest as a claim in itself.

As a result of this decision, the position is now as follows:

● An interest claim does not now have to be 'tacked on' to a claim for a debt or damages. It can stand as a claim in its own right.

● Such interest claims can be made after the debt to which they refer has been repaid and can cover losses arising during any period in which the payment claimed was due but remained unpaid.

● The interest claim can be compound or simple depending upon the facts of the case.

● Compound interest can be awarded as damages where the loss has arisen as a result of a breach of contract or in tort (non-contractual duties) or as a result of a breach of statutory duty as well where the loss arises out of the non-payment or late payment of a debt.

● Compound interest can be claimed as part of a claim made where money has been paid out under a mistake (known as a claim in restitution).

● The intention is to compensate the claimant for the loss of the use of its money and not just to allow the claimant to recover the 'benefit' which the defendant may have derived from having the money in its account. Consequently, in a claim for restitution the claimant can now quantify a claim on the basis of payment of compound interest at commercial rates over the relevant period if that accurately reflects what they have lost.

There are obvious implications for claims made in the construction industry, which often include loss of the use of money and the cost of borrowing to finance further work.

For example, employers' defects claims have long been difficult to quantify, given that the remedial work is usually carried out long after the relevant breaches of contract occurred. Differences between the increase in the costs of repair and the prevailing interest rates have led to significant under-recovery, particularly as any interest awarded was usually simple interest, even if the cost of funding the repairs actually incurred compound interest.

Following the Sempra Metals case, however, it should now be possible to claim for the actual cost of the repairs and the cost of borrowing to fund those repairs in full. Similar principles would apply to repayment claims or claims arising out of professional negligence where financing charges had been incurred as a direct result of the breach of duty giving rise to the claim.

The law is at a relatively early stage in relation to exactly how these various claims will be calculated but the basic point is that following the Sempra Metals decision, there is no bar to seeking to recover the actual loss that has been incurred with a claim for compound or simple interest, which can now be pursued as a claim in its own right.

We are at the beginning of what may be a significant revolution in the way that claims can be prepared, a revolution which could affect every element of the construction industry.