Is an award of penalty interest under foreign law an issue of substance or procedure pursuant to Rome II? Where the governing law is Spanish law, the answer to that question could be the difference between an annual interest rate of 2% or 20% for a defendant. This has been a matter of great concern for foreign insurers. In Nicholls & Anr v Mapfre Espana Compania de Seguros y Reaseguros SA [2024] EWCA Civ 718, the Court of Appeal has held that:
1) penalty interest under Act 50/1980 (Spain) is a matter of substance;
2) even if it was a matter of procedure, it would be open to judges to award interest at an equivalent rate under their statutory discretion; and
3) Ms Sedgwick was entitled to bring a subrogated claim in her own name.
In Spain, the assessment of damages for personal injuries is carried out under the Baremo tariff, which leads to much lower awards for personal injury than in England and Wales. This is accompanied by onerous penalty interest provisions for insurers, designed to limit litigation and encourage early settlement.
Article 20 of the Spanish Insurance Contract Act 50/1980 requires the insurer to pay compensation to the claimant within three months of the accident, failing which interest will start to accrue: for the first two years, at the current legal interest rate plus 50% (currently 4.5%); after two years, at 20% per annum (unless the delay is justifiable or not attributable to the insurer). In both cases in the conjoined Woodward appeal the award of interest exceeded or almost exceeded the damages.
Nicholls was a conjoined appeal of two High Court decisions.
In the Sedgwick case, Lambert J held that penalty interest is not a substantive right, but a procedural sanction, and therefore a matter for the lex fori. She nevertheless exercised her discretion under section 35A of the Senior Courts Act 1981 to award the equivalent rate of interest.
In Mapfre’s conjoined appeals in Woodward and Nicholls, Martin Spencer J held that the recovery of penalty interest was a substantive matter. If it was a procedural matter, it was inappropriate for the court simply to exercise its statutory discretion to get to the same result.
On the first issue, Dingemans LJ held that the interest payable under Act 50/1980 is not a matter of procedure and is governed by Spanish law for the following reasons:
1. ‘The existence, the nature and the assessment of damage or the remedy claimed’ are matters of substantive law under article 15(c) of Rome II. The payment of interest under the Spanish legal interest rate is intertwined with the assessment of damages.
2. Article 20 interest is part of the assessment of interest on damages in Spain; article 20 is therefore also intertwined with matters governed by the substantive law (it having been accepted by the parties that the Spanish legal interest rate was part of the substantive law), and that Act 50/1980 is part of the substantive law of the assessment of damages.
3. The fact that article 20 interest can increase to a penal rate of 20% per annum does not alter this conclusion, because the approach to the assessment of damages in Spain is very different than in England and Wales. Baremo awards can be substantially increased by penalty interest, and that is part of the assessment.
On the second issue of discretion, even if it was a procedural matter, courts would be entitled to make a discretionary award equivalent to the Act 50/1980 rate because:
1. Judges exercising their statutory discretion to award interest have long considered that relevant provisions of the overseas law relating to the recovery of interest may be taken into account.
2. The penal interest rate is an integral part of the assessment of damages. If that does not make it a substantive matter, it is sufficient to justify the exercise of discretion.
The third issue was standalone and irrelevant to the question of interest. In brief, Ms Sedgwick was entitled to bring a subrogated claim for her insurers in her own name because of article 19 of Rome II.
The judgment of Dingemans LJ will be a welcome development for those bringing claims in England and Wales for personal injuries that occurred in Spain (or other comparable jurisdictions). The Baremo is notorious for its low awards. It appears that all that was needed was for the courts of England and Wales to wrap their heads around the Spanish interest system.
In an article for 3 Hare Court’s Travel & Aviation Law Bulletin, Katherine Deal KC asked if there is a conflict to the point of injustice between Part 36 sanctions and penalty interest under article 20. Could it lead to a ‘double penalty’?
Nicholls makes clear that the Part 36 discretion is separate, but it remains a regime that does not sit neatly alongside Spanish penalty interest – naturally, because they were not designed to coexist. First-instance judges will have to put aside their ‘Anglo/Welsh prism’, to use the words of Stuart-Smith LJ, while still complying with English and Welsh procedure.
Does Dingemans LJ anticipate a further appeal? Perhaps. The second issue of discretion did not strictly arise, but he nevertheless dealt with it comprehensively. Quite sensible, given that the Supreme Court would otherwise be left with only the contradictory judgments of Lambert J and Martin Spencer J on the point. Of course, if any appeal is unsuccessful on the first issue, the discretion point will remain in the land of obiter dicta.
Finally, it is noted that in all these cases, jurisdiction was established under the EU Judgments Regulation. This is no longer available post-Brexit. Claims against foreign insurers will in such cases have to be based on CPR Practice Direction 6B, paragraph 3.1(9). This should not present a problem for claimants provided they can prove some continuing damage sustained within the jurisdiction and that the English courts are an appropriate forum for the claim.
James Hawkins and Tabitha Hutchison are barristers at 3 Hare Court, London
No comments yet