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Background to the Bill
6. In November 2003 the then Minister for Justice made a reference to the SLC asking them to carry out a review of the law on interest on debt and damages:
"To examine the law of Scotland relating to interest on claims for payment of money arising from contractual and other obligations, including claims within the jurisdiction of tribunals and courts or submitted for decision to arbitration, adjudication or some other form of dispute resolution, and to make recommendations as to possible reform of the law."
7. As part of that work the SLC published their ' Discussion Paper on Interest on Debt and Damages' (Discussion Paper No. 127) in January 2005 1. The paper provided an in-depth look at the law in Scotland regarding interest on debt and damages. The paper put forward proposals for reform and invited comments from interested parties. Ten organisations and individuals responded to the discussion paper.
8. This led to the SLC publishing their Report in September 2006 as mentioned above. The SLC found five main areas of concern in the existing law on interest on claims for payment of money:
- the treatment of interest is inconsistent between claims arising from debt and claims arising from damages and this is unjustified;
- in debt claims, interest is not payable unless the sum has been "wrongfully withheld". For contractual debts this means that interest does not begin to run from the date payment fell due but rather from the date on which court proceedings were commenced;
- uncertainty of when interest starts to run on particular heads of claims for damages;
- the law is unclear in relation to interest in other circumstances; and
- the current judicial rate of interest (8%) is changed infrequently so does not represent commercial rates of interest and is not truly compensatory.
9. Accordingly, the SLC set out their 'guiding principles' for the law reform in relation to interest on debt and damages:
- so far as practicable, interest should run on pecuniary claims during the same period and at the same rate regardless of whether the claim takes the form of a claim for payment of a contractual debt, a non-contractual debt or damages;
- the primary goal of an award for interest should be the realistic compensation, in commercial terms, of the creditor for loss of the use of money or property. Interest should not, as a general rule, be payable at a punitive rate; and
- an award of interest should compensate the creditor for loss of the use of money or property for the period during which that loss has subsisted. 2
10. The SLC made 38 recommendations to reform the law on interest on obligations to pay in its Report and also published a draft Bill to implement those recommendations.
11. In summary, the main SLC recommendations were:
- to provide consistency in treatment, interest should run on different types of claims for money during the same period and at the same rate regardless of whether the claim is for payment of a contractual debt, a non-contractual debt or damages. This period should commence on the date on which the person lost the use of his money. In general terms, in cases of contractual debt, entitlement to interest will arise from the date on which payment fell due and in damages claims from the date on which the loss in question was sustained;
- the current judicial rate of interest should be abolished and replaced by a statutory rate which would fluctuate in line with the Bank of England rate. Running at 1.5% above that rate, it would reflect the rate at which businesses and consumers can borrow money and so would provide adequate compensation to the claimant without being punitive to the debtor;
- the court's discretionary power in damages cases (and its duty in personal injury cases) to award interest should be replaced by an entitlement to interest on each head of loss; and
- in respect of all claims, there should be a judicial discretion to refuse, or reduce an award of interest by reason of the conduct of the claimant. The conduct of the debtor would not be a relevant factor.
12. On 5 September 2007, the First Minister announced the intention to put forward legislation to Parliament:
"We will also introduce legislation later in the Parliamentary year to develop fair and consistent rules for the application of interest to payments of debt and damages in Scotland. This follows from recommendations made by the Scottish Law Commission and will reform an area of law that currently dates back to the 19 th Century." 3
13. This consultation is the next step in the development of the proposals.
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