By Jeremiah Lau
A creditor bringing an action will want interest too. Interest compensates for late payment. For the last 200 years, relief came from statutes. The common law did not recognize a right to pre-judgment interest. That position was relaxed in Sempra Metals v IRC [2008] 1 AC 561. Interest on debts and other claims for breach of contract were legitimised. Plaintiffs can now present claims for compound interest at common law, whereas statutory interest is always simple. Where the interval between cause of action and judgment is long and the sum is large, this is a superior option. In a recent Privy Council decision (Sagicor Bank Jamaica v YP Seaton[2022] UKPC 48), interest calculated on a compound basis was roughly 52 times greater than simple, and roughly 368 times the principal sum.
Why did this take 200 years? And now that Sempra Metals has lifted the old prohibition, what else remains to be done? As my paper (‘Pre-judgment Interest on Liquidated and Unliquidated Sums’ [2024] Lloyd’s Maritime and Commercial Law Quarterly 136) explains, this sad episode in the common law’s history was not the product of negligence. It was a deliberate turn in the early 19th century, engineered by two successive Chief Justices of the King’s Bench – Edward Law, Lord Ellenborough, and Charles Abbott, Lord Tenterden. Sempra Metals has returned the law to its pre-19th century position. How does the court decide when to exercise the reborn common law power? The answer lies in the lost pre-19th century learning.
Prior to Ellenborough, interest was awarded on liquidated sums but denied on unliquidated sums (‘the liquidation distinction’) This distinction is crucial to our understanding of how pre-judgment interest should be awarded today. The development of the liquidation distinction in England was prematurely cut short. The Americans never took that turn. The liquidation distinction was developed in the superior courts of New York, Pennsylvania and California in the 19th century. Focusing on the contractual context, the paper draws on these materials in order to make sense of the liquidation distinction and situate it within the larger context of the law on remedies.
Five points emerge from the analysis. First, the American cases show that the concept of a liquidated sum has two vectors – quantum and time of payment. A debt owed can be uncertain in quantum but certain in time of payment, such as when a merchant agrees to pay his supplier a reasonable price for goods by Monday. Conversely, a debt owed can be certain in quantum but uncertain in time of payment, as when a friendly loan is made. If either vector is missing the court is slow to award interest.
Second, the liquidation distinction is not clean. Liquidation is presented on a spectrum in the case law. In Courteney v Standard Box Co (1911) 16 Cal App 600, the California Court of Appeal (Third District) held that a sum that could be rendered certain arithmetically was liquidated ‘within legal contemplation’. In Van Rensselaer’s Executors v Jewett (1848) 5 Denio 135, the New York Supreme Court went a step further and allowed interest upon a demand, the amount of which could be made certain by arithmetic computation in combination with a reference to well established market values. The idea is that the value of certain goods is sufficiently stable and well known that the defendant must be taken to know with some precision the extent of the damage he has caused by his breach. Therefore, it is permissible for interest to run on the damages owed.
Third, there are two distinct but related reasons behind the distinction. The first is a reason of justice. A debtor who does not know what sum he owes cannot be held responsible for not paying it. The conceptual reason is that there can be no breach of a duty to pay an unliquidated sum, and therefore no initial starting point at which to fix the starting of interest.
Fourth, the distinction is less useful for drawing a clear line between awarding pre-judgment interest on debts versus damages. It is true that the common law does not award damages on damages, and thus one might think that pre-judgment interest as damages cannot be awarded on damages. However, the practical scope of that ‘no damages on damages’ rule has been significantly reduced by developments in the case law. The chief development is the recognition of Hungerfords interest, developed in Hungerfords v Walker (1989) 171 CLR 125. That said, damages on demurrage and insurance payouts (both of which are traditionally thought of as damages claims in themselves) are still illegitimate.
Fifth, a sum can be considered liquidated for one purpose but unliquidated for another. There is no universally applicable standard of liquidation in private law. A sum considered liquidated for the purpose of civil procedure rules on summary judgment can simultaneously be unliquidated for the purposes of pre-judgment interest.
An examination of the seemingly arid and technical rules on interest reveals that questions central to remedial justice and the law’s view of the time value of money lurk right beneath the surface.
Keywords: Interest, Pre-judgment Interest, Liquidation
AUTHOR INFORMATION
Jeremiah Lau is a Sheridan Fellow at NUS, Faculty of Law.
Email: jeremiahlau@nus.edu.sg