Member Article

The High Court has ruled that contractual interest will form part of any agreed liability cap, but that statutory interest arising from the exercise of the court's discretion will not.

In Markerstudy Insurance Co Ltd and others v Endsleigh Insurance Services Ltd, the claimants alleged widespread breaches by the defendant of a number of agreements, causing the claimant to suffer loss of approximately £14m.

A preliminary issue for the court to consider was whether the claimants were entitled to recover interest on damages in so far as interest increased the figure above the agreed liability cap.

The relevant contractual provision stated that the defendant's 'total liability in contract, tort (including negligence or breach of statutory duty), misrepresentation, restitution or otherwise, arising in connection with the performance or contemplated performance of the Agreement shall be limited to the aggregate amount of fees received pursuant to clause 6.1 above'.

The claimants submitted that interest should not form part of the liability cap, arguing that there was no example of previous cases where such a 'cap' had been held to include interest, and to do so would prejudice the claimants in the event of delay caused by the defendant.

Amongst other things, the defendant argued that the cap applied to the 'total liability in contract'. This clearly covered any contractual claim for interest, and the parties could not have intended to treat statutory interest any differently.

The court agreed with the defendant's point of view in so far as it related to contractual interest.

However, the court held that statutory interest is 'of a different character...not a "liability in contract" but a discrete statutory liability arising from the exercise of the court's discretion. Accordingly...[statutory interest] is excluded from the cap'.

What does this mean?
Interest paid in relation to the Late Payment of Commercial Debts (Interest) Act 1998 is of course 'statutory interest', albeit not at the court's discretion, but the Act provides that: 'Interest carried under that implied term (in this Act referred to as 'statutory interest') shall be treated, for the purposes of any rule of law or enactment (other than this Act) relating to interest on debts, in the same way as interest carried under an express contract term.'

So it is treated as contractual interest.
The fact that contractual interest is included in any sum agreed by way of a liability cap may reduce the amount of damages that can be claimed under the contract.

The impact of this will of course depend on the level of the cap and any damages claimed, but any interest paid on late payments will effectively reduce the amount of damages that may later be claimed.

What should you do?
If you want to exclude contractual interest from the liability cap, whether such interest is express or implied under the Late Payment of Commercial Debts (Interest) Act or otherwise, this will need to be specifically provided for in the contract.