Supreme Court and Parliament ease restrictions on awards of interest on court claims (published on 7 April 2015)

Introduction

An award of interest by the court on top of a proved sum of damages or debt owed can be a significant sum of money, especially if the case has taken a long time to get to final trial.

Such awards may therefore assume important strategic value in their own right in certain cases and can become a stumbling block to settlement where there is uncertainty about the entitlement to interest or its quantum. A party potentially offering payment in mediation or settlement discussions will tend to discount or ignore the value of interest on the payment sum; while the plaintiff or party contemplating taking that offer has to weigh up the amount of interest forgone and the likelihood that it has a clear right to be awarded interest if it proceeds onwards to court hearing.

In New Zealand, awards of interest remain a highly discretionary item for the court in each case, although that may be set to change.

In 2014 the New Zealand Supreme Court released a decision(FN1) that somewhat relaxed the restrictions on awards of interest, making it more likely that interest will definitely be available in a wider range of cases. Separately, Parliament is soon expected to extend and reinforce this approach via statutory changes to the Judicature Modernisation Bill, which will remove much judicial discretion and confirm the likely entitlement to interest in most civil cases.

One important rule that will change is that compound interest awards will be available in most situations, which better reflects a commercial claimant's realistic time value of money.

Supreme Court clarifies approach to awards of interest

In a case where joint venture partners were in dispute and deadlocked over the appropriate valuation of shares to buy one partner out, the Supreme Court took a broad and purposive interpretation to the existing (but elderly) provision in the Judicature Act 1908 that governs situations where an award of interest can be made.

The dispute involved Worldwide NZ LLC and NZ Venue and Event Management Ltd. They were parties to a joint venture to construct and operate Auckland's largest indoor concert and entertainment stadium, the Vector Arena.

The joint venture was formed under a deed of trust, with another entity – Quay Park Arena Management Ltd (QPAM) – as corporate trustee. Worldwide held a 25% stake (holding 'B' units and shares) in the joint venture and in QPAM. NZ Venue and an associated company held the other 75% ('A' units and shares).

On January 18 2006 a receiver was appointed to the parent company of Worldwide, triggering a pre-emptive right (under commonplace clauses allowing pre-emptive purchase) enabling the other joint venture partner to purchase its B units and shares. NZ Venue wrote a letter on April 26 2006 exercising the buy-out rights. However, the trust deed did not set a mechanism to fix satisfactorily the price of the B units and shares; when the parties could not agree, court proceedings began.

The court proceedings eventually determined that the buy-out transaction under the trust deed should occur at a "fair market value", which the High Court eventually fixed – after hearing expert evidence – at NZ$2.69 million in a November 24 2011 decision.(FN2)  The court ordered payment to be made by NZ Venue within 28 days and ordered interest under Section 87(1) of the Judicature Act payable from April 26 2006 up to the time of payment. The interest was applied to the fair market value that had been determined by the court.

What does a claim "for the recovery of any debt or damages" mean?

The crucial phrase in Section 87(1) of the Judicature Act permits the court (if it sees fit, and at such rate as it sees fit up to a prescribed limit) to award interest "in any proceedings… for the recovery of any debt or damages". This can be done over the whole or any part of the period between the date on which the cause of action arose and the date of the court judgment.

On first appeal, the Court of Appeal took a narrow approach and held that no interest was payable for three reasons:

  • A 'debt' under Section 87(1) must be an ascertained or readily ascertainable sum and the market value of the B shares and units was neither.
  • No cause of action arose on the date that the pre-emptive rights were exercised by letter in April 2006.
  • Worldwide's proceeding was not one "for the recovery of debt or damages" and was merely a proceeding for a declaratory judgment.

The Supreme Court unanimously took a more liberal approach and held that the High Court judge was entitled to award interest on the market value fixed for the units and shares. The Supreme Court arrived at this view after close analysis of the legislative history, policy rationale, case law and wording of Section 87(1), a provision which had been adopted from the UK Law Reform (Miscellaneous Provisions) Act 1934. The Supreme Court concluded that the phrase 'debt or damages' should be fairly seen as a composite expression covering all proceedings where a claim for money is made, and not limited to ascertained or readily ascertainable sums.

Further, from the date on which the pre-emptive right was exercised by letter in April 2006, NZ Venue was under an obligation to pay the proper market value to Worldwide. The cause of action therefore arose at that point. Further, Worldwide's proceeding was for the "recovery of debt or damages". Worldwide was not merely seeking from the court some abstract ascertainment of the fair market value of the shares, but also payment for them, as well as interest to compensate for delays. Worldwide was thus seeking a judgment to recover those sums.

Finally, the Supreme Court rejected NZ Venue's suggestion that the High Court judge should not have exercised her discretion to award interest as compensation for Worldwide being kept out of its money.

All in all, New Zealand's highest appellate court took a sensible and broad approach, focused on the substance – not precise form or characterisation – of the claim. This will influence and embolden parties in similar situations where the nature of the claim might not otherwise fit a narrow view of 'debt or damages'.

Parliamentary proposals to modernise approach to interest

The Judicature Modernisation Bill remains before Parliament, awaiting its final stages before becoming law. It has now had its second reading in Parliament on February 17 2015 and has one more stage to pass through. This will be an even more significant step forward in ensuring that claimants have greater certainty on whether their court claim is likely to benefit from an interest award and how it might be calculated.

The bill is a major legislative reform, seeking to modernise the court system in multiple ways and to provide greater transparency of court arrangements, accessibility to court legislation and efficiency of court processes, including electronic documentation. The bill will result in five new statutes, including the Interest on Money Claims Act.

That new act proposes a single statutory scheme for the court award of interest on money claims. Its stated purpose is to provide for the award of interest as compensation for delay in the payment of debts, damages and other money claims in civil proceedings. It contains four explicit principles to enable the court system to fulfil that purpose:

  • Interest is to be awarded on all money claims, unless expressly excluded by this act.
  • Interest is to be paid from the day on which the money claim is quantified until the day of payment.
  • The interest rate to be used is to reflect fairly and realistically the cost to a creditor of the delay in payment of a money claim by a debtor – in particular:
    • the rate can fluctuate in accordance with changes in the six-monthly retail term deposit rate published by the Reserve Bank of New Zealand;
    • interest is to be compounded at daily intervals; and
    • interest is to be calculated using a publicly available online calculator to be maintained by a government ministry.
  • In special circumstances, a court has the power to award any interest or compensatory lump sum that it may direct or may make no award.

Notably, the new system proposed will remove most of the discretion from judges in awarding interest on money claims, requiring that interest be awarded as of right except as expressly excluded. It also requires interest to be awarded on a compound rate – rather than a simple rate - which comes much closer to making a plaintiff whole, on a present value or time discounting economic approach. The Select Committee added to the bill a worked example to show, in admirably commercial terms, how the base rate of interest plus premium might be calculated as a daily compound rate.

These changes will provide greater certainty on when interest will be awarded and how much it will be. This will help potential litigants in assessing whether to litigate and will remove doubts when it comes to negotiating settlement figures. Compounding interest allows a successful plaintiff to be fairly compensated for its loss, consistent with the realities of modern business practice.

It is hoped that the third and final reading of the Judicature Modernisation Bill will happen by mid-2015. However, some of its other reforms have been controversial (eg, specialist panels of judges and controls on vexatious litigants), which could necessitate extended debate before the bill finally becomes law. When that does happen, litigants will be able to set even greater store on getting a clear, realistic award of interest to follow a successful claim.

(FN1)   Worldwide NZ LLC v NZ Venue and Event Management Ltd [2014]  
NZSC 108 (SC 50/2013).
(FN2)   Worldwide NZ LLC v QPAM Ltd HC, AK CIV-2006-404-1827.

A version of this article appeared in the International Law Office newsletter on 7 April 2015 by Gary Hughes