Our "Islamic" Legal System

As someone who spent my earlier adult years working for a bank, the attitude of lawyers to the question of interest has always bemused me.They have an almost Islamic repugnance for it.(I may offer you my sociological, vocational and other explanations for this on another occasion).

Where a contract e.g. a loan agreement provides for interest to be charged, the law generally regards it as fair enough, and this logic carries into allowing claims for interest charges incurred as special (=consequential) damages for breaches of other types of contract and for torts. Thus, a claimant who incurs extra interest charges can expect to be awarded them.

However, the courts remain reluctant to recognise in a general sense the time value of money, even for those without borrowings.Those interfering rabble-rousing busy-bodies up in Kildare Street The democratically elected representatives of the sovereign People i.e. the Legislature have had to intervene serially to decree that ordinary debts, then judgment debts and arbitration awards, may carry interest both after judgment is given and for the period before judgment. Even then, claims for interest have to be framed carefully to avoid the many traps for the unwary, and one often (maybe that should read "usually") finds that compound interest - "interest on interest" ? Quel horreur! - will be dis-allowed. For example, interest on judgment debts, i.e. any sum of money ordered by a court to be paid, can be charged at 8% p.a. (a rate set when inflation and market interest levels were much higher,and which now has to be seen as extortionate), but because the language in the statute is not specific, creditors cannot compound the interest.

This is, I submit, an anomalous situation which must eventually be entirely dissipated. Signs of another crack in the anomaly have just (on the 18th July last) emerged in an English House of Lords decision, Sempra Metals Ltd (formerly Metallgesellschaft Ltd) v Inland Revenue Commissioners and another [2007] UKHL 34.

The case concerned a claim in restitution and I quote from the speech of Lord Nicholls:

...there could only be one answer. Nobody had suggested a good reason why, in a case like the present, an award of compound interest should be denied to a claimant. An award of compound interest was necessary to achieve full restitution and, hence, a just result.

Well, some of his colleagues clearly thought that other answers were available, because the decision was not unanimous, and be in no doubt at all that lawyers will argue in other cases that this decision is of limited application.

Still, it is welcome progress as far as I am concerned.

Comments

[Eoin]

Hear, hear! If you might permit me a little self-publicity here, I made exactly these points in <i>Sempra</i>'s restitutionary context, in “Interesting Times. Overpaid Taxes, Restitution and Compound Interest” (2005) 27 <i>Dublin University Law Journal</i> (<i>ns</i>) 343-363.