“The current system of awarding interest is muddled and out-of-date. It is difficult to justify to litigants, and gives the impression that the legal system is living in the past.”
So wrote the Law Commission in 2004 (Law Com no. 287 at paragraph 1.15). The decision of the Court of Appeal in Al Jaber v. Al Ibrahim [2018] EWCA Civ 1690 [2019] 1 W.L.R. 885, in which the Court concluded that it should apply the law as it existed in England in 1812 – and was not aware that Scottish law is the reverse and had been applied by the House of Lords in 1991 – does not necessarily improve the impression.
– – –
The (alleged) facts and the relevant issue arising
The claimants wanted to sue on an alleged oral agreement for a loan to the two defendants of US$30 million, and there was an issue as to permission for service out of the jurisdiction on the second defendant. The alleged oral agreement did not contain an express provision for the payment of interest. The relevant question was whether the claimants had shown a sufficiently arguable (“serious”) case that there was an implied term for payment of interest: as the Court put it (at paragraph 21) “the question that arises on this part of the appeal is the extent to which the court will imply a term that interest will be paid on a loan, prior to demand, absent express agreement.” On this question the Court of Appeal decided, by considering two distinct sub-issues, that in the particular case it did not.
A legitimate question for commentators is whether, in modern conditions, in a non-Sharia business context, there is much expectation of being able to borrow $30 million without paying interest. (The answer to this question may be more nuanced than the question so put suggests. At the time of writing, negative interest rates are applicable to the debt of a number of major States: according to Money Morning on 1 July 2019 there is currently more than $13trn. of debt on negative yields; according to Kleinwort Hambros on 2 July the German 20-year Government bond yield was standing at 0.03% p.a., with every bond shorter-dated than that having a negative yield. However, the loan in the Al Jaber case was alleged to have been made at the turn of 2001 and 2002.)
The Court of Appeal, division of the issue, and consideration of the two sub-issues
The Court of Appeal reached its conclusion after examination of two matters.
(1) The state of English law on implication of an obligation to pay interest
The Court noted English cases from the early nineteenth century. At paragraph 24 it was noted that it was:
“clear that as the law stood in 1812, interest on a loan could not be recovered unless there was express provision, or the obligation could be inferred from a trade usage, custom or special circumstances.”
Nothing through to and including the Sempra Metals case [2007] UKHL 34 [2008] A.C. 561 was thought to affect that, so at paragraph 27 the Court concluded that:
“It is clear that from at least 1812 the making of a loan does not imply an obligation to pay interest as a matter of law.[1] However, it is necessary to consider the extent to which the position may have changed as a result of the development of the law in relation to the implication of contractual terms as a matter of fact.” [Emphasis supplied]
(2) The position in the light of the modern approach to implication
The Court therefore considered “the extent to which the position may have changed as a result of the development of the law in relation to the implication of contractual terms as a matter of fact.”
Its approach to that was set out in paragraphs 29 and 30:
“29. The question that arises on this issue is whether there is a serious question to be tried that the obligation to pay interest was either necessary in order to give business efficacy to the loan agreement or such that the obligation would have been obvious to the parties, although unstated, at the time the agreement was made.
“30. [Counsel] argued that it was a matter of commercial commonsense that a large loan would bear interest. However, in my judgment this question must be looked at in the light of the evidence. …”
Examination of the evidence led the Court to conclude that there was not an implied term. Critically, the first claimant’s evidence showed that, whereas he would have expected some return on (as well as of) the claimants’ money, interest was not the only possible means of provision of a return. In particular, he was well disposed to the idea of the return being received in the form of equity participation in the business venture which the defendants had been establishing and for the purposes of which they had obtained the money from the claimants. As it was explained in paragraph 35:
“The loan could have operated in a number of ways to the parties’ mutual benefit without provision for interest in favour of the claimants. In short, an implied term for the payment of interest was (a) not necessary to give business effect to the agreement, nor (b) so obvious that it went without saying, nor (c) such that the loan would lack commercial or practical consequence[2] without the term, per Lord Sumption’s coda referred to by Lord Neuberger in the Marks & Spencer case at [21].”
On this basis the Court held that there was no implied term for payment of interest.
The difference between England and Wales and Scotland
On the first question, it appears that English and Scottish law have, probably not consciously, long diverged. It can, of course, be argued that as the system of law of England and Wales and that of Scotland are different it is both understandable and acceptable that they should have different approaches to the question. Acceptable to a lawyer perhaps, but a commercially minded person is likely to be surprised and baffled that they do, and it would be good if a Court at appropriate level would examine both lines of cases.[3]
The Scottish Law Commission explained, in its September 2006 Report on Interest on Debt and Damages (Scot Law Com no. 203 at paragraph 2.4[4]), that in Scotland:
“Interest due by implication at common law: the circumstances in which entitlement to interest is implied at common law can be broadly grouped into three categories:
“Loans: a rebuttable presumption on the right to interest exists from the date on which a loan of money is advanced until the date of repayment. Where no rate is stipulated, the judicial rate will normally be awarded by the court. …”
The authority for this is especially notable. Although it goes back well into the nineteenth century, one obtains it from the House of Lords decision in Neilson v. Stewart (1991) S.C. (H.L.) 22[5]. The case was about whether an alleged agreement was void for uncertainty and/or unenforceable because it left essential matters to be agreed by the parties. One of the missing matters said to be essential was interest.
There is some symmetry with Al Jaber: although there was citation of authorities familiar to English contract lawyers, such as Scammell & Nephew Ltd v. H.C. & J.C. Ouston [1941] A.C. 251, there was no citation in the House of Lords, either in the printed cases or in oral argument, of English authorities on interest.[6]
In the Court of Session Lord Hope, then Lord President, set out the history in Scotland. The Court of Session was upheld by the House of Lords.
Lord Hope said this:
“It was contended for the defender that the absence of an express agreement about the period of the loan, the rate of interest and security meant that details had been left open which must be regarded as being essential to a binding contract of loan. These matters could not be left simply to implication, especially as an appropriate rate of interest could not reasonably be determined in the absence of agreement about security or about the period for which the loan was to exist. In our opinion, however, these are all matters which can be settled without difficulty by reference to the ordinary principles of law. In Thomson v. Geekie (1861) 23 D. 693, Lord Justice-Clerk Inglis said, at p. 701, that an acknowledgment for money generally presumes that the money was advanced on loan, “and it follows that there is, first, an obligation on the party granting it instantly to repay the sum; and, secondly, another obligation that so long as the sum remains unpaid, the party shall pay legal interest. The acknowledgment itself does not express these obligations; but these are the obligations which result in law from the loan.” So it is implied in every contract of loan that the lender is entitled to repayment of the money. It is not essential that the parties should agree about the period of the loan because, in the absence of agreement to the contrary, a loan is repayable at any time on demand. If, as in this case, there is agreement that repayment shall be deferred for a period of one year, it becomes repayable on demand at the end of that period unless otherwise agreed. Agreement about security has never been regarded as essential to a valid contract of loan, so if the lender wishes to have security this must be a matter of express provision in the contract as has been done in this case. As for the question of interest on a loan, the law implies that interest shall be paid although this is a presumption which is capable of being displaced by the circumstances and, of course, by agreement to the contrary: Bell, Commentaries, Vol. 1, p. 693: Gloag on Contract, 2nd edn., p. 681; Smellie’s Executrix v. Smellie 1933 S.C. 725 per Lord Justice-Clerk Alness at p. 727. So express agreement on this matter is not essential to the validity of the contract. With regard to the rate of interest, there is no need for agreement about this to enable interest to be recovered. The court will normally award interest on a debt of any period for which interest is due at the judicial rate for the time being, unless there is a contractual rate to which it can give effect. …” [Emphasis supplied]
Thomson v. Geekie does not appear to the present writer to have been seen as making particularly new law. Bell’s Commentaries noted the trend to this approach, and away from the restrictions of canon law, as being seen at least as early as 1820, in Garthland’s Trustees v. M’Dowal 20 Fac. Coll. 140.[7]
The main reasoned speech in the House of Lords was that of one of the Scottish Law Lords, Lord Jauncey of Tullichettle; there was a very short supplementary speech from the other, Lord Keith of Kinkel, who expressly agreed with Lord Jauncey. Both regarded the question whether interest is payable under a loan contract which does not mention interest as one of construction. As Lord Jauncey put it:
“If nothing is said about interest it becomes a question of construction whether the parties intended that none should be payable or that the rule of law referred to by the Lord Justice-Clerk in Thomson v. Geekie should apply.” [Emphasis supplied]
The other three members of the Appeal Committee were Lords Brandon, Ackner and Oliver. They all agreed with Lord Jauncey.
Not so common common law
We therefore have the position that the laws of England and Scotland are opposed. For the Scots, in such a situation interest is payable unless the circumstances negative the presumption. For the English and Welsh, interest is not payable unless the obligation to pay interest was either necessary in order to give business efficacy to the loan agreement or such that the obligation would have been obvious to the parties, although unstated, at the time the agreement was made. One may leave to academic study the case of a loan contract made on mobile telephones between passengers in different carriages of a train stationary just north of Berwick-upon-Tweed station, one carriage in Scotland, the other in England.
It is suggested that:
1) this divergence has no commercial justification: rather, it exists because the Judges of the different jurisdictions developed the law differently two centuries or so ago;
2) where it can legitimately do so, the common law should strive to attune the law of interest to contemporary conditions, perhaps bringing to mind Lord Atkin’s encouragement in a different context in United Australia Ltd v. Barclays Bank Ltd [1941] A.C. 1 at p.29:
“When these ghosts of the past stand in the path of justice clanking their mediæval chains the proper course for the judge is to pass through them undeterred.”
3) the Scottish approach to this particular point is much more attuned to contemporary conditions than is the English;
4) on questions of interest, Courts, particularly appellate Courts, may be helped by the formidable resources of the publications of the two Law Commissions. (The Law Commission’s Report on compound interest (LC207) does not refer to Neilson v. Stewart.) Legislatures may have been either slow or downright unwilling to implement the Commissions’ recommendations, but they are invaluable.
The limits of comparative law
Reference to “where it can legitimately do so” reminds one that Lord Brandon had given the leading speech in La Pintada [1985] A.C 104. That decision itself suggests that he would have been most unlikely to have had any willingness to go down the route of departure from Thomson v. Geekie, but there is also the important factor to consider that the case was a Scottish appeal. Lady Hale has recently spoken of this point to the Law Society of Scotland[8]:
“One thing is clear. The English Law Lords would no longer presume to differ from unanimous Scots on question of pure Scots law – the notorious example is Burnett’s Trustee v Grainger, 2004 SC (HL) 19, where Scots law obviously outraged the English members of the panel, but they declined to dissent. So the Anglicisation of Scots law is surely at an end. It is different, of course, if the two Scots lawyers on the panel disagree.”
Later in her speech she explored the extent to which decisions of the House of Lords or Supreme Court on appeals from one jurisdiction are to be treated as binding in another, or may be influential:
“But when the House departed from the English doctrine that it was so bound in 1966, the Practice Statement made no distinction made between English and Scottish cases, so I think that it would apply to both – normally we would follow a previous decision, wherever it came from, but not if justice required otherwise.
“If a case comes up from Scotland on a point of pure Scots law, or where it is acknowledged that Scots law is different from English law, then the decision can’t and won’t be binding in England – as happened with the Crown Privilege cases – although each may influence the other to find the same way.”
One can only speculate what that particular appeal committee would have made in 1991 of the English law had the identical point been before the House of Lords on an English appeal at the same time[9], but one can say with some confidence that a search for a principled reason, consistent with commercial expectations, to approve a state of affairs in which the laws of the two jurisdictions differ as to this point, would probably have been fruitless. It is suggested that in declaring the law for the late 20th and early 21st centuries the House is unlikely to have regarded the views of 1812 as carrying great weight, and also that there would have been good reason to adopt the Scottish approach.
On the second point: implication on the facts of a case
The Scottish authorities cited include an example of the Court holding that interest was not payable: Smellie’s Executrix v. Smellie 1933 S.C. 725. The most influential (but not the only) factor in the Court’s decision in that case that interest was not payable was that lender and borrower were brothers.
That said, the Court of Appeal in Al Jaber might have taken a different view of implication on the facts if it had considered Neilson v. Stewart. In Neilson v. Stewart the highest-level issue was whether there was an arrangement of sufficient clarity to be a binding agreement, a matter about which in general there seems to be no particular reason for difference between England and Wales and Scotland. Among other things, the parties had left open what would happen at the end of the initial loan period of a year. As the citation from Lord Hope above shows, the Courts had no difficulty in concluding that there was nonetheless a binding contract: the term “default position”, which comes readily to mind, is not ideal, given the use of the word “default” in relation to loans, but essentially the parties had a position, whether one terms it default, fall-back or back-stop, that the loan would be repayable on demand after a year unless otherwise agreed. An implied term in the Al Jaber case that the loan would be repaid with interest unless otherwise agreed – i.e. a position of that nature – would seem to cause no difficulty. In sales of goods where the price to be paid is a reasonable price the question what is a reasonable price is identified by s.8(3) of the Sale of Goods Act 1979 as a question of fact (and therefore to be proved by evidence). There is usually no difficulty in obtaining evidence of the interest rate likely to be appropriate to the particular circumstances of a particular loan. What is reasonable interest is surely a question of fact.
Nicholas Davidson Q.C.
4 New Square
July 2019
© Nicholas Davidson QC. The author assumes no responsibility to any party in respect of this article. Specific legal advice tailored to specific problems should always be obtained.
[1]This is the second type of implied term referred to by Lady Hale in Geys v. Société Générale [2012] UKSC 63 [2013] 1 A.C. 523 at paragraph 55, in a classification reiterated by Lord Neuberger in Marks and Spencer plc v. BNP Paribas Securities Services Co (Jersey) Ltd [2015] UKSC 72 [2016] A.C. 742 at paragraph 15. The suggested implied term that the Court of Appeal went on to consider in Al Jaber was of the first type.
[2]As another commentator on Al Jaber has pointed out, the word used by Lord Sumption was coherence, not consequence, and the meaning is significantly different: Craig Morrison “Implied terms in loan agreements: a matter of interest” (2018) B.J.I.B. & F.L. 682.
[3]A report by the Law Commission in 1978 mentioned the good sense of the law of this country being aligned with the laws of “western countries with which we have trading links”: Law of Contract: Report on Interest (Law Com no. 88 at paragraph 43).
[4]See also paragraph 2.20.
[5]Also [1991] B.C.C. 713, [1991] S.L.T. 523
[6]Neilson v. Stewart is not cited in either Chitty on Contracts or Halsbury’s Laws of England, both of which were cited by Burton J. in Al Jaber at first instance: [2016] EWHC 1989 at paragraphs 65-69.
[7]See paragraphs 2.4 and 2.5 of the Scottish Law Commission’s 2005 Discussion Paper (no. 127). The arguments for the creditors in Garthland’s Trustees v. M’Dowal have a resonance as we approach the 200th anniversary of the date of that decision (26 May 1820):
“The ancient notions relative to interest have yielded to more improved and rational views, as money now produces its fruits as well and certainly as lands and houses. … Our courts have gradually more and more recognised the doctrine, that the person who has the use of another man’s money must pay for it. Whether the party is a borrower, or, though not strictly a debtor, enjoys the use of money belonging to another, justice requires that a fair remuneration should be made.”
[8]The Contribution of Scottish Cases to Developing United Kingdom Law (26 October 2018).
[9]It is noteworthy that on the date of argument, 21 February 1991, the Bank of England’s base rate was 13.375% p.a.; on the date of judgment, 21 March 1991, it was 12.375%: https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp (the published table rounds to two decimal places).
