Court of Appeal upholds award of penal interest on tort damages under applicable foreign law

The Court of Appeal has held that, where an English court was determining tort claims governed by Spanish law, the relevant Spanish statutory interest provisions were a matter of substantive law rather than procedure and therefore part of the applicable law – despite providing for interest at penal rates. Even if the provisions were procedural, and therefore not directly applicable, the English court could award interest at an equivalent rate in exercising its discretion to award interest under the relevant English statutory provisions: Nicholls v Mapfre Espana Compania de Seguros y Reaseguros SA [2024] EWCA Civ 718.

While this case concerned damages for personal injury, the court's reasoning will be relevant to claims for interest on damages in non-contractual claims more generally.

The judgment indicates that the English court will apply foreign interest rules, as part of the applicable foreign law, where those rules are so “intertwined” with the rules governing the assessment of damages that they should be seen as integral to, or "part and parcel of", the compensation regime in the relevant jurisdiction. That may be the case even if the foreign interest rules are penal, and even if they serve a procedural purpose such as the encouragement of early settlement.

Even where the foreign interest provisions are seen as procedural, and therefore not part of the applicable foreign law, the decision shows that an English court can nevertheless apply a similar rate in exercising its statutory discretion to award interest under English law – again, even at penal rates.  

More broadly, the judgment adds to the case law demonstrating how the English courts will assess whether a particular issue is a matter of substantive law (governed by the law applicable to the tort) or a matter of evidence or procedure (governed by the law of the forum) under the Rome II Regulation (EC 864/2007). Although the events in question in this case occurred before Brexit, Rome II has been incorporated into UK law subject to only minor amendments, so it continues to apply to determine the law applicable to non-contractual obligations.
 

Background

The claimants in the cases under appeal were domiciled in the UK but suffered personal injuries from accidents in Spain. They brought claims in the English courts against the same Spanish insurer. In each case, liability was admitted and damages were assessed under Spanish law as the law of the tort pursuant to Rome II.

The appeal concerned whether the claimants were entitled to interest on their damages at high rates provided for in Spanish legislation.

Interest in personal injury actions in Spain is awarded by reference to a basic legal interest rate (historically around 3%) (the "Basic Rate"). However, in claims brought directly against insurers, Article 20 of the Spanish Insurance Contract Act 50/1980 ("Article 20") applies. Broadly, Article 20 provides that, if an insurer "is in default of performance" by failing to pay a claim within three months without justification, then "the compensation for damages" will follow the rules in that Article. Under those rules, interest is recoverable on any damages awarded at (i) initially, the Basic Rate plus 50%; and (ii) after two years, 20%.

It was common ground in the appeal that interest under Article 20 is generally regarded as "penalty interest" and is aimed at discouraging insurers from deliberately delaying payments properly due under a policy.

The courts below had awarded interest at the Article 20 rates on one or both of the following bases:

1. For the purposes of Rome II, interest under Article 20 is not procedural but a matter of substantive law, and therefore  the award of interest was governed by the applicable law of the tort (ie Spanish law).
    
2. If interest under Article 20 is properly categorised as a matter of procedure, and therefore not governed by Spanish law, it was nevertheless open to an English judge exercising the statutory discretion to award interest at an equivalent rate under s.35A of the Senior Courts Act 1981 (or s.69 of the County Courts Act 1984).

The insurer appealed against each lower court finding to the above effect.
 

Decision

The Court of Appeal dismissed the appeals. Lord Justice Dingemans gave the lead judgment, with which Lord Justice Stuart-Smith (with a short additional observation) and Lord Justice Coulson agreed.
 

Procedural or substantive law?

The insurer accepted that the Basic Rate was part of the substantive law, but argued that  Article 20 interest was different because it was penal and designed to serve the procedural aim of encouraging the early resolution of insurance disputes, rather than to compensate a claimant.

The court rejected the claimants' submission that the exclusion of matters of "evidence and procedure" under Rome II should be given a strict or narrow interpretation.

In order to determine whether the interest rules under Article 20 were a matter of procedure, it was necessary to examine those provisions - but the purpose of doing so was not to discover whether such interest is considered substantive or procedural under Spanish law, or under the laws of England and Wales. What is a matter of procedure for the purposes of Rome II is an autonomous concept under that regulation. The question was:

"… whether the issue of interest under Article 20 is so intertwined with the assessment of damages, which is a matter of substantive law under Rome II, that the interest should also be considered a matter of substantive law".

The court concluded that, for the purposes of Rome II, interest payable under Article 20 is not a matter of procedure but is part of the substantive law applicable to the tort. The court's reasoning was as follows:

• Under Rome II, matters of substantive law include "the existence, the nature and the assessment of damage or the remedy claimed”. The court agreed with the parties that the Spanish Basic Rate was part of the nature and the assessment of damage or the remedy claimed, because it was "intertwined with the assessment of damages in Spain – in the sense that it would be difficult to separate from the assessment of damages".
   
• Article 20 operated alongside the Basic Rate as part of the process by which interest on personal injury damages is assessed in Spain. Where Article 20 applies, the Basic Rate is increased to the specified penal rates. Where it does not apply, the Basic Rate is adjusted upward only to a lesser extent, by reference to Spanish pension levels. That suggested that Article 20 is so intertwined with matters governed by the substantive law as to mean that it is also part of the substantive law of the assessment of damages.
   
• That conclusion was not altered by the fact that Article 20 interest is at a penal rate, to encourage prompt resolution of disputes. Spanish law approaches the issue of compensation in a very different way from English law. An English personal injury lawyer might regard the amounts recoverable as damages in Spain as very low, and the interest under Article 20 to be penal and very substantial. However, that was not to the point when determining whether the interest was a matter of procedure or substantive law under Rome II. The amounts awarded as damages in Spain can be substantially increased by the penal interest provisions, and they are an integral part of the Spanish law approach to assessing the sums payable by an insurer to an injured party. This demonstrated the difficulty of disconnecting the assessment of damages and the payment of basic interest, on the one hand, from Article 20 interest on the other.

In his short concurring judgment, Stuart-Smith LJ commented that, while his initial reaction was that penal interest could not be an integral part of an award of compensation, he had been persuaded that "this was to see the question through an overly-Anglo/Welsh prism" and that the better approach was as set out by Dingemans LJ.
 

An alternative approach: the English statutory discretion

The insurer submitted that, if Article 20 was a matter of procedure and therefore not part of the applicable law, it was not appropriate to allow a claimant the benefit of this foreign procedural rule "by the back door", when they had elected to subject themselves to the English rules of procedure. 

The insurer highlighted that defendant insurers in English litigation could be encouraged to settle by the use of Part 36 offers. Allowing recovery of interest by reference to Article 20 would expose defendants to the risk of having penal interest awarded against them twice if they were also then liable to pay interest under the Part 36 regime (as had in fact happened to the insurer in one of the claims here).

The court rejected those arguments. It held that an English court exercising its discretion under s.35A or s.69 was entitled to award interest at the rate that would be payable under Article 20:

• Judges exercising their statutory discretion to award interest have long considered that a relevant factor to be taken into account may well include provisions of foreign law relating to the recovery of interest (referring to Maher v Groupama Grand Est [2009] EWCA Civ 1191).
   
• Although interest under Article 20 is at penal rates, it is an integral part of how damages for personal injuries paid by insurers are assessed in Spain, and an important component of the sums assessed. Even if that did not mean Article 20 interest was a matter of substantive law, it was sufficient to justify a judge awarding such interest in the exercise of their discretion.

As to the interaction with Part 36, the court considered that the question of whether Part 36 interest should be awarded in a case where penal interest had been awarded under Article 20 involved a separate exercise of discretion. That was likely to depend on various factors and was not an issue to determined by the court here.