When a sum of money is being claimed in a court, it is usual to
claim interest on that sum. But not everyone who has a claim for an
amount of money, be it for compensation, restitution or a debt, is
entitled as of right to claim interest. Understanding this will
help you understand what you can do to increase the amount of
interest that you may recover if you are making a claim or to
minimise the amount of interest you may have to pay if a claim
against you succeeds.
To understand why there is no automatic right to claim interest
at a fixed rate or for a definite period, it helps to look at why
courts usually award interest. Generally, there are two alternative
reasons to award interest:
to compensate claimants for the loss of the use of the money
awarded to them in a decision by a court or tribunal, from the date
when, according to that decision, they were deprived of the use of
that money, to the date when that money is paid to them; or
because the liability to pay interest was voluntarily assumed
under a contract.
Whilst the end result might be the same – an order
that one party pay an amount in interest in addition to the
principal amount claimed – these are two very different
grounds for awarding interest. And as you would expect, where the
basis for making an award is different in each case, what is
actually awarded on each basis will usually be different as
The starting point for any calculation of interest is the
interest rate. Parties to a contract can specify the circumstances
in which interest is payable, who is liable to pay interest in such
circumstances and the rate of interest payable. Until 1 July 2010,
there was a law in WA (subsection 31(1) of the Supreme Court
Act 1935) that prevented the courts from reviewing or
interfering with any agreement as to the rate of interest payable
under a contract.
This provision was repealed within a few months of the
introduction of new competition and consumer laws around Australia
that may now make it possible for courts in WA to change the rate
of interest payable under certain contracts where the contractual
rate is considered "unfair" or
"unconscionable". In addition, the repeal of this law
against reviewing interest rates may open the way for courts to
strike down interest payment clauses altogether on the basis that
they are a penalty, that is, that they are meant as a punishment
for breaches of contract rather than as compensation to the party
who suffers loss because of a breach.
This takes us back to the purpose of interest awards, which is
to compensate for the loss of the use of money. The use of money
has a certain value which is prescribed by law (in WA, see
subsection 31(2) of the Supreme Court Act 1935). That
prescribed value is 6% per annum and that is the rate of interest
payable on awards of money where no other rate is specified in a
(legally enforceable) contract.
However, the rate is not the only difference between interest
payable under contract (contractual interest) and interest payable
as compensation for the loss of the use of money (compensatory
interest). Like any obligation under a contract, the obligation to
pay contractual interest is strict. In other words, the only
conditions on one's liability to pay interest under a contract
are those conditions imposed by the contract itself. By contrast,
one's entitlement to compensatory interest may be subject to
the obligation which all claimants have to mitigate their
To explain, if you have suffered loss or damage because of
someone else's wrongdoing, then in order to be fully
compensated for your losses, you must show that you have done all
things reasonably within your power to minimise those losses. This
is known as the obligation to mitigate. Where the loss which you
seek to be compensated for is the loss of the use of money,
unreasonable delay in taking action to recover that money may be
seen as a failure to mitigate your losses.
If you intend to take legal action to recover a sum of money
then the best way to preserve your claim for interest is by taking
legal advice about your rights, and then taking action to enforce
them, as soon as you have the time and the means to do so.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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