When a sum of money is being claimed in a court, it is usual to claim interest on that sum. But not everyone who has a claim for an amount of money, be it for compensation, restitution or a debt, is entitled as of right to claim interest. Understanding this will help you understand what you can do to increase the amount of interest that you may recover if you are making a claim or to minimise the amount of interest you may have to pay if a claim against you succeeds.
To understand why there is no automatic right to claim interest at a fixed rate or for a definite period, it helps to look at why courts usually award interest. Generally, there are two alternative reasons to award interest:
- to compensate claimants for the loss of the use of the money awarded to them in a decision by a court or tribunal, from the date when, according to that decision, they were deprived of the use of that money, to the date when that money is paid to them; or
- because the liability to pay interest was voluntarily assumed under a contract.
Whilst the end result might be the same – an order that one party pay an amount in interest in addition to the principal amount claimed – these are two very different grounds for awarding interest. And as you would expect, where the basis for making an award is different in each case, what is actually awarded on each basis will usually be different as well.
The starting point for any calculation of interest is the interest rate. Parties to a contract can specify the circumstances in which interest is payable, who is liable to pay interest in such circumstances and the rate of interest payable. Until 1 July 2010, there was a law in WA (subsection 31(1) of the Supreme Court Act 1935) that prevented the courts from reviewing or interfering with any agreement as to the rate of interest payable under a contract.
This provision was repealed within a few months of the introduction of new competition and consumer laws around Australia that may now make it possible for courts in WA to change the rate of interest payable under certain contracts where the contractual rate is considered "unfair" or "unconscionable". In addition, the repeal of this law against reviewing interest rates may open the way for courts to strike down interest payment clauses altogether on the basis that they are a penalty, that is, that they are meant as a punishment for breaches of contract rather than as compensation to the party who suffers loss because of a breach.
This takes us back to the purpose of interest awards, which is to compensate for the loss of the use of money. The use of money has a certain value which is prescribed by law (in WA, see subsection 31(2) of the Supreme Court Act 1935). That prescribed value is 6% per annum and that is the rate of interest payable on awards of money where no other rate is specified in a (legally enforceable) contract.
However, the rate is not the only difference between interest payable under contract (contractual interest) and interest payable as compensation for the loss of the use of money (compensatory interest). Like any obligation under a contract, the obligation to pay contractual interest is strict. In other words, the only conditions on one's liability to pay interest under a contract are those conditions imposed by the contract itself. By contrast, one's entitlement to compensatory interest may be subject to the obligation which all claimants have to mitigate their losses.
To explain, if you have suffered loss or damage because of someone else's wrongdoing, then in order to be fully compensated for your losses, you must show that you have done all things reasonably within your power to minimise those losses. This is known as the obligation to mitigate. Where the loss which you seek to be compensated for is the loss of the use of money, unreasonable delay in taking action to recover that money may be seen as a failure to mitigate your losses.
If you intend to take legal action to recover a sum of money then the best way to preserve your claim for interest is by taking legal advice about your rights, and then taking action to enforce them, as soon as you have the time and the means to do so.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.