The way in which the courts award interest on debts and damages was "confused, arbitrary and outdated" and gave the impression that the legal system was "living in the past", according to a report published by the Law Commission last week.
The report by the government's law reform body found that the current system of awarding interest before judgment led to "widespread confusion". "Even when the rules are applied correctly, they bear little relationship to commercial reality," said Law Commissioner, Professor Hugh Beale QC. "In cases that are dealt with relatively quickly – say within a year or two – the defendant often pays too much, frequently paying 8 per cent at a time when the base rate is 4 per cent or less. In long-running cases the present ban on compound interest means that claimants may be under-compensated."
The Commission made three main recommendations. Firstly, that the courts should normally award a specified interest rate, set each year at 1 per cent above the Bank of England base rate. It called for a power for courts to award compound interest where appropriate, and argued that for cases involving payments of £15,000 or more, where claimants asked for compound interest, there should be a presumption that they should receive it. Finally, it recommended that the Court Service should make available computer programmes and tables to make interest calculations as straightforward as possible.