Spanish penalty interest – the saga continues!

On 4 May 2023, judgment on the conjoined appeals of Nicholls v Mapfre and Woodward v Mapfre was handed down. Whilst the decision provides much needed clarity in respect of claims for interest brought in England and Wales under a foreign regime, we do not expect that this will be the final case to dispute the proper approach to interest under Rome II.

Background

For years, the issue of whether claims for interest brought under Rome II should be determined by reference to the law of the lex fori (English) law, has created a tension between defendants and claimants, particularly where the law applicable to the assessment of liability and quantum is not the law of England and Wales.

In Nicholls v Mapfre and Woodward v Mapfre, the judges at first instance held that interest was a matter of procedure. In Nicholls v Mapfre, Her Honour Judge Bloom exercised her discretion under Section 69 of the County Courts Act (CCA) 1984 to award rates of interest matching the rates that would have been applied under Spanish law, had the claim been litigated in Spain. Similarly, in Woodward v Mapfre,  Her Honour Judge Walden-Smith held that the right to penalty interest is not a substantive right, rather a matter of procedure governed by the lex fori. By exercising her inherent discretion under the CCA, the award for interest was made in line with the same rate as the penalty rate of the Spanish law, as the defendant had failed to take steps to resolve the case or make an interim payment.

Decision

Mr Justice Martin Spencer overturned these decisions concluding that despite the judges at first instance awarding the correct amounts, the reasoning behind the awards was incorrect. In his view, interest was a substantive rather than procedural and it was not legitimate for the judges at first instance to give effect to Spanish law provisions intended to operate in a different procedural environment for the purpose of awarding penal rates as part of their discretion in English law. English law has its own tools to encourage early settlement such as the Civil Procedure Rules Part 36. The correct approach was instead to recognise that the award of such interest arises as a matter of substantive law and therefore penalty interest under the Spanish law should have been applied for this reason.

Comment

This is a fascinating decision for those dealing with cross-border litigation Indeed the Spanish  law provision under Article 20 of the Spanish Insurance Contract Act 50/1980, provides for interest on damages at a penalty rate to  encourage insurers to settle claims early. It is therefore clearly advantageous for claimants as if compensation is not paid within the first three months of the date of the accident, interest will continue to accrue at whatever the current legal interest rate is, plus 50% for the first two years, thereafter accruing at a rate of 20% per annum.

Spanish civil procedure, particularly the short three month period prescribed under Article 20, does not align well with English procedure, as the Civil Procedure Rules provide directions for expert witness evidence and schedules of loss to be disclosed at a relatively late stage in proceedings, when a substantial amount of Spanish interest would have accrued by this point. These documents are often key to reaching a decision on liability and quantum and therefore, it is questionable whether penalty interest should apply in these cases before a defendant has been able to fully grapple with all issues in the claim, which can often be multifactorial and complex in the field of personal injury.

Whilst this decision provides some clarity for the time being, we expect that the divisive issue of claims for interest will continue to be the subject of litigation in the near future and possibly be hashed out in the Court of Appeal or Supreme Court. From a practical perspective, these cases demonstrate that it is vital for insurers and solicitors to proactively manage cases by setting accurate reserves and making early interim payments with a view to achieving settlement at an early stage.