When does interest on unpaid legal costs start to run?

At a time when ?interest rates are so low, receiving interest on unpaid legal costs at 8 per ?cent – the rate set down in section 17 of the Judgments Act 1838 (JA) – can make a significant difference. ?The important question, therefore, is whether interest ?at this higher rate runs from ?the date that the costs order ?is made, or some later date.

The issue was addressed in October 2015 by Mr Justice Leggatt in Involnert Management Inc v Aprilgrange Ltd and others [2015] EWHC 2834 (Comm).

In Thomas v Bunn [1991] 1 AC 362, the House of Lords held that, where a defendant is ordered to pay ‘damages to be assessed’, interest on the damages under the JA only ran from the date of the judgment ?or order assessing the damages payable, and not from the date of the order establishing liability.

However, two years earlier, in Hunt v RM Douglas (Roofing) Ltd [1990] 1 AC 398, the House of Lords adopted the opposite approach to an order for the payment of costs to be assessed. Lord Ackner gave the lead judgment in both cases, and ?said in Thomas that treating such a costs order as a judgment debt for the purpose of section 17 was ‘an anomaly’ but justified on the balance of justice. 

This was because, at the ?time, the court could not award interest on costs for any period before the date of judgment, a position remedied by the Civil Procedure Rules (CPR) 44.2(6)(g).

Leggatt J noted: ‘Now that such orders can be made, it is hard to see that the balance of justice still favours continuing – anomalously – to treat an order for payment of costs to be assessed as a judgment for the purpose of section 17 of the Judgments Act 1838.’

Further, under the CPR, the court has the power to order interest under the JA to run from a later date than the date of the costs order.

Involnert conclusions

The unsuccessful claimants before him asked the judge to exercise his power under CPR 40.8 to order that the interest payable under the JA should run from six months after the costs order. The defendants said that it should run from the date that judgment was given – meaning, in light of Hunt, the date when the order for costs was made.

Having looked at the issue on the basis of principle and in the light of the relevant case law, Leggatt J drew several conclusions:

• The date when an order for costs is made is ‘the date that judgment is given’ for the purpose of CPR 40.8(1), even though the amount of the costs payable has still to be assessed;

• There is nothing in the JA ?or CPR which expressly or impliedly restricts the power of the court under CPR 40.8(1) to order the interest payable under the JA to run from a different date, or which requires exceptional circumstances to be shown before that power is exercised. The power to ‘order otherwise’ is to be exercised in accordance with the overriding objective of dealing with cases justly;

• The date from which JA interest runs should not be deferred simply because it is at a considerably higher rate than commercial rates;

• There is nothing to prevent the court from ordering that JA interest should run from the date when the amount ?of costs payable is assessed, if that is what justice requires; and

• It is not just to make an order under which interest begins to run at the rate appropriate for unpaid judgment debts before the paying party could reasonably be expected to pay the debt; this goes for the balance of the debt where an interim payment on account of costs is ordered.

Translating this last principle ?into practice, Leggatt J said it was desirable to use an ‘objective benchmark’ for the date from which JA interest would run – ‘the period prescribed by the rules of court for commencing detailed assessment proceedings’ (i.e. three months).

By then the paying party will have received the bill of costs ?and ensured it has ‘received the information needed to make ?a realistic assessment of the amount of its liability before it begins to incur interest at the rate applicable to judgment debts for failing to pay that amount’.

This seems a sensible approach, and provides welcome clarity – and should the receiving party begin detailed assessment proceedings later than three months, any injustice which may arise can be corrected by CPR 47.8(3). 

In the alternative, what if the bill of costs is served within three months? Why should a receiving party be deprived of interest on costs that have been paid, are payable by the paying party, and can be protected as appropriate by a voluntary of court-ordered payment on account?

Francis Kendall is a council member of the Association of Costs Lawyers @CostsLawyers associationofcostslawyers.co.uk