3.1 The question of recovery of interest on contract debts where payment is made before action is brought was examined by the Law Commission in England in a report presented to the United Kingdom Parliament in June 1978.¹ In that report consideration was given to the power conferred by the United Kingdom Act of 1934 to make a discretionary award of interest. That power may only be exercised in "proceedings tried in any court of record", and the United Kingdom Act of 1934² provides that interest maybe “included in the sum for which judgment is given". Limitations on the discretionary power were noted by the Law Commission. These arose from the requirement of a trial in the proceedings, and the necessity of a “sum” for which judgment is given, before any order for interest can be made.³ The Law Commission also noted that it is doubtful whether interest can be recovered where the debtor does not contest liability,⁴ or where the debtor tenders payment before action⁵ and further, that interest is not recoverable where the debtor pays the debt before judgment.⁶

A Statutory Entitlement to Interest on Debts, and Wider judicial Powers?

3.2 Two possible solutions to the problem were examined by the Law Commission. One was to amend the United Kingdom Act of 1934⁷ so as to allow the courts wider discretionary powers. The other was to provide creditors with a statutory entitlement to interest in respect of unpaid contract debts. The Law Commission concluded that the latter approach was "appropriate and necessary", and that in addition there should be a widening of judicial discretionary powers.⁸

3.3 Commentators in favour of the creation of a wider discretion said that it could empower the courts to award (or refuse) interest at whatever rate and over whatever period might appear just. As well, it could allow a distinction to be drawn between the wilful defaulter who makes a deliberate policy of withholding payment as long as possible, and the debtor who desires to make payment but does not have the means.⁹

3.4 Arguments in favour of a statutory entitlement to interest are that it would be simple to administer, quick, and cheap in terms of legal costs.¹⁰ In cases where the debt is undisputed, statutory interest could be recoverable by the default procedure without any need for a court hearing of the kind which would be involved if the matter were left to the exercise of the court’s discretion. The Law Commission commented that the creditor’s loss was the same in the case of a poor debtor as in the case of a rich debtor, and "urged" that the creditor’s right of redress should not depend upon the debtor’s ability to provide it.¹¹ Finally, it was suggested¹² that a statutory entitlement to interest would make for greater certainty. The debtor would know what he or she was required to pay, and the creditor would know what he or she was entitled to receive. There would be less room for dispute than there would be under a system of discretionary awards and there would be a likely saving in costs.

3.5 The recommendations of the Law Commission were confined to contract debts and were subject to exceptions for rent (and other sums payable by a tenant to a landlord)¹³, foreign money liabilities,¹⁴ quasi - contract,¹⁵ interest payable under contract,¹⁶ and sums payable under an obligation to indemnify against loss.¹⁷ The view was expressed that debts incurred in the course of a business should be treated similarly to non- business debts, and that there was no reason for excluding small debts or imposing an arbitrary lower limit.¹⁸

3.6 The essence of the scheme was that it should provide for payment of interest at a rate which is commercially realistic, and from a date by which, in a commercial setting, persons acting honestly and reasonably would be expected to have paid the debt.¹⁹ Where a date for payment is agreed, whether expressly or by implication interest should run from that date; in other cases it should begin to accrue 28 days after service upon the debtor of a written demand for payment.²⁰ The interest recoverable would be simple interest at a rate calculated and declared in advance for every quarter, being based on the average minimum lending rate plus a margin and rounded up to the nearest half per cent the intention being to compensate the creditor for having to borrow money rather than for losing investment income.²¹ It was proposed that a discretion be reserved to the court to suspend or stop the running of statutory interest.²²

3.7 The scheme would not prevent the parties from agreeing on their own special terms for ,interest or from contracting out of the liability to statutory interest.²³ In addition it was not intended to alter the equitable jurisdiction to award interest,²⁴ although it might well in certain cases supplant that jurisdiction as being more attractive to creditors. The scope and exercise of other rights and remedies under a contract were to be preserved.²⁵

3.8 The Law Commission also proposed a widening of the discretions under the United Kingdom Act of 1934²⁶ so as to empower the courts to award interest in cases excepted from the scheme for statutory interest.²⁷ It did not, however, recommend extension of the jurisdiction beyond the power to award interest on debts the subject matter of proceedings.²⁸ The Commission concluded that the best way of implementing its recommendations was not to amend the relevant provisions of the 1934 Act but to repeal them and start again by including the necessary provision in the Act creating the entitlement to statutory interest.²⁹

Legislative Implementation of the Law Commission's Recommendations

3.9 By way of postscript to the Law Commission’s report on interest we set out some of the provisions of the Administration of Justice Bill 1981 introduced into the English Parliament in February 1982. We also set out some of the comment made upon that Bill in the New Law Journal. The Bill provides, inter alia, for a new section 35A(1) to be inserted in the Supreme Court Act 1981:³⁰

Subject to rules of court in proceedings (whenever instituted) before the High Court for the recovery of a debtor damages there maybe included in any sum for which judgment is given simple interest, at such rate as the court thinks fit or as rules of court may provide, on all or any part of the debt or damages in respect of which judgment is given, or payment is made before judgment for all or any part of the period between the date when the cause of action arose and -

(a) in the case of any sum paid before judgment the date of the payment; and

(b) in the case of the sum for which judgment is given, the date of the judgment.

The comment in the New Law Journal, in April, 1982 was as follows:

... [T]here are only two further amendments of any controversy. The first concerns interest on contract debts. The Law Commission, it will be remembered, recommended in 1978 that contract debts (with some exceptions) should all automatically bear statutory interest after the due date. It also recommended that the courts should have wider powers to include interest in judgments. The Government has accepted the second of the proposals, but not the first. Under the Bill there will be rules of court which may provide for interest to be included both on a sum for which judgment is given and on any sum paid before judgment, and the interest may relate to the period since the cause of action arose. Although therefore debts will not formally by law carry interest before judgment, the net effect may well be similar. A creditor will be able to demand interest on an overdue debt by the threat of court proceedings (in which he would be awarded interest) ...³¹

Our Conclusions for New South Wales

3.10 We have given careful consideration to the report of the Law Commission, and to judicial criticisms of the current law. This has involved examination of the possibility of a general rule that contract debts should carry the right to interest at a statutory rate save where the parties have agreed otherwise. It is plain that the introduction of a scheme for statutory interest on contract debts would have a significant social impact, for example, on traders and consumers, and would seriously affect substantive rights. In our opinion wide consultation would be necessary and decisions would have to be taken as matters of policy, on the types of debt to which the scheme should apply, and on the extent to which, if any, contracting out should be allowed.

3.11 We have reached the conclusion that we should not further consider, or recommend, the introduction of a general scheme for statutory interest. The reason is that this reference is part of the Community Law Reform Program the object of which is to achieve the prompt examination and provision of solutions for deficiencies in discrete areas of the law. This Program is not intended to deal with issues of substantial social significance. Nevertheless our work leads us to believe that there is a strong argument for suggesting reform of the common law rule, and that there is a case to be made for the introduction of a scheme for statutory interest on contract debts. The subject is appropriate for further examination and consultation.

FOOTNOTES

1. Law of Contract Report on Interest (H.M.S.O., Cmnd.7229, 1978) (Law Corn. No.88).

2. See para.2.8 above and note 12, Chapter 2.

3. Law of Contract Report on Interest (H.M.S.O., Cmnd.7229, 1978) (Law Corn. No.88), paras 31 and 32.

4. Ibid., para.31.

5. Ibid., para 33.

6. Ibid., para-32.

7. See para-2.8 and note 12, Chapter 2.

8. Law of Contract Report on Interest (H.M.S.O Cmnd.7229, 1978) (Law Com. No.88), paras 43 and 44.

9. Ibid., paras 36 and 37.

10. Ibid., para.38.

11. Ibid.

12. Ibid., para.39.

13. Ibid., paras 53-61.

14. Ibid., paras 62-64.

15. Ibid., paras 65-66.

16. Ibid., para.67.

17. Ibid., paras 68-73.

18. Ibid., para.53.

19. Ibid, para.47.

20. Ibid., paras 47 and 74-82.

21. Ibid., paras 84-90.

22. Ibid., paras 47 and 91-94.

23. Ibid., paras 49 and 95-100.

24.Ibid., para.50.

25. Ibid., para.51.

26. See para.2.8 and note 12, Chapter 2.

27. Law of Contract Report on Interest (H. M. S.0. Cmnd.7229, 1978) (Law Corn. No.88). para.148.

28. Ibid.

29. Ibid., para.145.

30. See Administration of justice Bill 1981 (U.K.), Sch.l.

31. W. Merricks, "First the Damages Bill: Next the interest Bill”' (1982) New Law Journal 333.3.1 The question of recovery of interest on contract debts where payment is made before action is brought was examined by the Law Commission in England in a report presented to the United Kingdom Parliament in June 1978.' In that report consideration was given to the power conferred by the United Kingdom Act of 1934 to make a discretionary award of interest That power may only be exercised in "proceedings tried in any court of record, and the United Kingdom Act of 1934 2 provides that interest maybe “included in the sum for which judgment is given'. Limitations on the discretionary power were noted by the Law Commission These arose from the requirement of a trial in the proceedings, and the necessity of a “sum” for which judgment is given, before any order for interest can be made.' The Law Commission also noted that it is doubtful whether interest can be recovered where the debtor does not contest liability,4 or where the debtor tenders payment before action' and further, that interest is not recoverable where the debtor pays the debt before judgment'