New Law Commission proposals may significantly increase awards to claimants. Joanna Page reports

New proposals from the Law Commission could mean increased interest awards for claimants. In July 2002, the Law Commission provisionally recommended that the courts should have the power to award compound interest (interest on interest) in all money judgments. The rate would be below the simple interest rate currently awarded.

Higher interest awards would inevitably place an increased burden on insurers and publicly funded compensation schemes. Making compound interest generally available would alter the balance in favour of successful claimants in long running cases where interest often forms a large part of the ultimate award. The Law Commission has, however, argued that the introduction of compound interest would be offset by a reduction in the rates of interest.

Currently compound interest is available only in very limited circumstances - for example, if the contract or trade usage provides for it and in certain trust and fraud cases.

The most compelling argument in favour of the courts awarding compound interest is that it reflects economic reality. If a claimant was entitled to the money earlier, he either missed an opportunity to invest it or had to borrow to cover its absence - in either case at compound interest. Simple interest will not compensate for the loss caused by the delay in payment. The theory is that awarding compound interest encourages early payment; there is an increased psychological incentive to settle because of the prospect of increased interest if it is compounded.

Since compound interest is interest upon interest, it is hard to think of any principled argument against compound interest that does not also attack interest as such. The main argument in favour of simple interest is one of convenience. It is easier to calculate.

However, in a computer age, where the public is accustomed to the operation of compound interest in their bank accounts and credit cards, the argument is increasingly weak.

Strong opposition to compound interest has been expressed by bodies representing insurers. They are concerned this would lead to increased awards and higher premiums.

Comments should be sent to the Law Commission before 6 January, 2003, by post to: Simon Tabbush, Law Commission, Conquest House, 37-38 John Street, Theobalds Road, London WC1N 2BQ, or by e-mail to: .

  • Allen & Overy partner Joanna Page heads the firm's insurance practice

  • Topics