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I have to confess that one of the areas of law that I find quite loopy is awarding interest. Having decided (as adjudicator or arbitrator or judge) that X owes Y a lump of cash, what's to be done about also compensating Y for the time X held on to that lump of cash? The truth is that the rules are not soundly based. Not, at least, until the House of Lords got to grips with it in a case called Sempra Metals Limited vs Inland Revenue. This case was explained in a talk given to the Society of Construction Law by Judge Anthony Thornton. The judge calls the case The Sempra Metals Revolution.

Why loopy? Look, English law as a general law provides that you can recover damages for losses caused by a breach of contract or a general wrong caused by the other bloke. But, and this is where I blink, English law does not generally provide for damages for loss of the use of the money represented by the award in damages. So, you can claim for breach of contract and get damages but the bottom line is that claiming for loss of use of the money now awarded is a no-no.

Credit: Simone Lia

You would call this interest. And, over umpteen years we have wrestled with ideas on how to overcome all this. I well tell you how in a moment; but Sempra has blown the cobwebs away. At the front of the judgment Lord Nicholls says, 鈥淭o a significant extent the law remains out of step with everyday life in the 21st century. The common law adopted a restrictive rule: unpaid debts do not carry interest, either compound or simple. This was an exception to the ordinary common law principles applicable to recovery of damages for breach of contract.鈥� He added: 鈥淲e live in a world where interest payments for the use of money are calculated on a compound basis. Money is not available commercially on simple interest terms. This is the daily experience of everyone, whether they borrow money on overdrafts or credit cards or mortgages or shop around for the best rates when depositing savings with banks or building societies. If the law is to achieve a fair and just outcome when assessing financial loss it must recognise and give effect to this reality.鈥�

Over all these years the unease felt about the basic rule has been tackled by legislation. A variety of acts gave courts, arbitrators and adjudicators the power to award interest. But these provisions are hedged with ifs and buts. For example, an arbitrator (or court) cannot award interest on money paid late before the action is begun. Yet the delayed payment may have hurt. The Late Payment of Commercial Debts Act 1998 hits a late payer with a penal rate (currently 13.5% per annum) but it doesn鈥檛 apply in all cases.

None of these acts are swept away. But what the Sempra Metals case has done is brought the 鈥渓oss of use of money鈥� up to date into the real world. Common law and common sense match right now. It was a test case, nothing, and everything, to do with construction industry payments.

What the Sempra Metals case does is bring the 鈥榣oss of use of money鈥� smack up to date into the real world. Common law and common sense match right now

Sempra had paid advance corporation tax. It was too much. That was discovered years later. The tax itself was credited back to Sempra. Then Sempra held its hand out for compensation for loss of use of the money. On the one hand Sempra might have borrowed the money to pay the taxman, or lost the opportunity to invest that money. It even went so far as to claim the benefit that the taxman had enjoyed by having all that money in his coffers. It鈥檚 called 鈥渦njust enrichment鈥�.

Do you see what is happening here? An ordinary debt paid late on a building contract will attract the penal interest rate under the Late Payment of Commercial Debts Act 1998. But English general law will now ask 鈥淚s that enough?鈥� And if compounding interest is appropriate so be it. Then, go much further. This Lords case has recognised what the lawyers call restitutionary rights.

If the other fellow has got, or had, your money when he ought not to have, he has been unjustly enriched at your expense. It is not difficult to show how, and, if that can be compensated by compound interest, that鈥檚 your claim.