In damages claims, interest is usually applied on a damages amount to the date of judgment. In the Federal Court, this pre- judgment interest is usually calculated with regard to Practice Note CM 16. However, there are times where judgment is required to derive the correct amount of interest.
In this edition of Damages Matters , James Hyden, Associate Director in our Melbourne office, discusses a recent decision of the Federal Court in Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 6)  FCA 144. This case discusses whether pre-judgment interest should be awarded and, if so, at what rate?
In these proceedings Local Government Financial Services Pty Ltd ('LGFS') purchased $45 million of structured financial products known as constant proportion debt obligations ('CPDOs') from ABN Amro Bank NV ('ABN'), and then on sold these instruments to Bathurst Regional Council ('Bathurst') and a group of other local Councils (the 'Councils').
The proceedings arose from the rating, sale and purchase of the CPDOs, which were described during evidence as 'grotesquely complicated' instruments. At the time of acquisition, in 2006 and 2007 the relevant CPDOs had AAA credit ratings, issued by Standard & Poors ('S&P'). The ratings were downgraded by S&P in February 2008 to BBB+. The local Councils, including Bathurst, sold their CPDOs for approximately 10 cents in the dollar in October 2008.
In the Judgment handed down on 5 November 2012, Justice Jagot f ound that the Councils were entitled to damages being the difference between the principal amount paid and the funds they received on subsequent sale of the notes. The Respondents, LGFS, ABN and S&P were each proportionally liable for one third of the damages awarded to the Councils.
In the orders declared on 1 March 2013, Justice Jagot considered whether the Councils were entitled to pre-judgment interest on the damages award and, if so, at what rate.
Practice Note CM 16 sets out interest as a rate of 4% above the cash rate last published by the Reserve Bank of Australia for each six monthly period beginning 1 January and 1 July each year. The issue was whether it was appropriate in this case to apply this rate of interest.
In addressing whether the Councils were entitled to pre-judgment interest, the Court also considered the date from which court interest would accrue.
The Court's findings on the applicable interest rate
S&P argued that the Councils should not be awarded pre-judgment interest as they had not proved any loss they might have made by reason of being kept out of their money . In other words, it was submitted that entitlement to an award of court interest arises only if an alternative use of funds can be demonstrated.
In addition, S&P argued that it is " not the case that 'good reason' must be shown before an award of interest is declined," citing Johnson Tiles Pty Ltd v Esso Australia Pty Ltd  VSC at . Justice Jagot disagreed with this argument, citing Gillard J:
ABN also argued that pre-judgment interest should not be awarded at the prescribed rates set out in the Practice Note. This argument was predicated on the assumption that the Councils would have been more likely than not to invest the funds used to acquire the CPDOs in term deposits of fering a lower rate of return. Further, it was also noted that the CPDOs themselves only entitled the holders to 1.9% over the bank bill swap rate, compared to the 4% over the bank bill swap rate under Practice Note CM 16 .
Justice Jagot quoted from Management 3 Group Pty Ltd (in liq) v Lenny's Commercial Kitchens Pty Ltd (No 2) (2012) 289 ALR 275;  FCAFC 92, as follows:
In relation to the appropriate interest rate to apply, Justice Jagot stated:
The Court's findings on the date for calculating pre-judgment interest
Justice Jagot determined that the relevant date for the calculation of pre-judgment interest was the date the investments were cashed out, rather than the date of the initial investment:
The judgment emphasises that, in the first instance, pre-judgment interest is likely to be awarded at the court's prescribed rates, 'unless good cause is shown to the contrary'. The decision also demonstrates that judges have significant latitude in determining the date from which pre-judgment interest should begin accruing. In this case, it was held that court interest at prescribed rates should accrue from the date the Councils crystallised their loss, and not from the time of the initial investment.
The timing and choice of applicable court interest rates can have a material impact on the quantum of a damages claim especially where a significant period has lapsed between the cause of action and judgment date.
Although the question of whether the interest awarded in these proceedings should be calculated on a simple or compound basis was not discussed in this decision, cl aimants in similar circumstances may need to consider the impact of these alternative approaches. For example, in instances where 'Hungerfords damages' are applicable, interest is generally assessed on a compounding basis, in contrast, where penalty interest is awarded, simple interest usually applies.
When faced with these issues, a consideration of the merits of a claim for court interest is best made with advice from instructing solicitors and accounting experts with experience in the quantification of economic loss.
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.