If the wintery weather has got you dreaming not of a White Christmas, but of warmer climes, then fly away with Peter Hale to sunny Tenerife, as he explores the ‘hot topic’ of penalty interest under Spanish law in the context of two recent decisions:
- Woodward v Mapfre Espana (unreported, HHJ Walden-Smith, Norwich County Court, 14 October 2022) and
- Sedgwick v Mapfre Espana  EWHC 2704 (Lambert J, 26 October 2022)
As travel practitioners will recall, Article 20 of the Spanish Insurance Contract Act of 8 October 1980 requires insurers to compensate victims within strict timescales or else pay a punitive rate of interest on damages, unless there has been a “justified delay” for non-payment. The effect of this provision can be of considerable importance to personal injury claims brought under Spanish law, adding hundreds of thousands of pounds to claims of even relatively modest value.
Previous articles on this blog have dealt with the application of penalty interest in a claim against the MIB (here) and the question of whether the provision is to be classified as substantive or procedural under Rome II (here).
By way of a recap, in Scales the central issue was whether there had been a ‘justified delay’ in paying damages. Cavanagh J held that the delay was not justified and awarded interest at the penalty rates (a whopping €180,000 on top of damages of €374,000). Cavanagh J did not consider it to be of any importance whether that award was made pursuant to Spanish law, as imported into the English proceedings by Rome II, or as an exercise of the discretion of the English court pursuant to s35A of the Senior Courts Act 1981:
“257. It does not matter in practice whether, in theory, I do so because these rules are part of the substantive law that I must apply, or because I exercise my discretion to do so in accordance with section 35A of the Supreme Court Act 1981.”
In Troke the latter issue took centre stage. The extent of the Claimants’ entitlement to interest had been the sole issue at trial before Mr Recorder McLoughlin, who had awarded interest at 0.5% on special damages and 2% on general damages, pursuant to s69 of the County Courts Act 1984.
On appeal, Griffiths J held that the Recorder had been correct to characterise the claim for interest as procedural rather than substantive, observing that Article 20 penalty interest was discretionary rather than mandatory and “was not, therefore, properly classified as a substantive right.” Accordingly, interest had correctly been awarded pursuant to English law as the lex fori. Whilst the Recorder could have awarded any rate (including the rates contemplated by Article 20), there had been no suggestion at trial that he should award any rate other than the standard English rates.
Woodward and Sedgwick
Each of these cases concerned the application of the Spanish Baremo to the assessment of damages in personal injury claims arising out of road traffic accidents in Tenerife. Both judgments deal with a list of similar issues and are worth reading in full for the useful guidance they provide, in particular, as to the quantification of general damages for temporary incapacity and permanent disability under the Baremo. The judgments also, interestingly, reach opposite conclusions on the issue of whether the claimants can bring subrogated claims on behalf of their insurers. However the focus of this blog post’s consideration of the judgments is confined to the final section of each: the issue of penalty interest.
The Claimant in Woodward argued that, as ‘tentatively suggested’ by Dicey, “the rate of interest on damages in respect of tortious obligations is governed by the lex causae.” In the alternative, it was argued that if interest is discretionary pursuant to s69 of the County Courts Act 1984, then the court ought to exercise that discretion by awarding interest in the same manner as a Spanish court would award it, ie in line with the penalty interest provisions of Article 20.
Counsel for the Claimant drew support for his primary position from the cases of Maher v Groupama  EWCA Civ 1191 and Hyde v Sara Assicurazioni SpA  EWHC 2881 (QB), each of which allude to the English court’s discretion to award interest pursuant to the lex fori as distinct from any substantive right to interest which exists, in those cases, under French and Italian law respectively. The Claimant also relied on the concession by the Defendant’s Spanish law expert that, whilst Article 20 is not automatically applied in every case, the exceptions to it are to be interpreted restrictively.
The Defendant’s expert, however, also referred to “numerous cases” in which the Spanish courts had applied the exception to Article 20 and the Defendant therefore contended that the penalty interest provisions were clearly not a substantive right. The Defendant relied heavily on the reasoning of Griffiths J in Troke in categorising the claim for penalty interest as procedural in nature.
Having considered the authorities, notably Troke, HHJ Walden-Smith concludes in short order that “72. […] the right to penalty interest is not a substantive right” before setting out brief reasons for exercising her discretion to award s69 interest at the same rates as Article 20 provides for:
“74 […] I do not accept that the circumstances are such that penalty interest is not appropriately applied as a matter of discretion. […] I am not satisfied that the defendant’s situation in this case is exceptional. […] The defendant, in my judgment, through its officers made a decision not to resolve this issue at an early stage and, while it is clear that accidents of this nature are designed to be resolved at a much earlier time in the courts of Spain than in the courts of England and Wales, that does not mean that the defendant could not have brought this to an end at an earlier stage.”
HHJ Walden-Smith refers to this outcome as the result which was suggested by Maher (supra) and encouraged by Whipple J in XP v Compensa Towarzystwo SA  EWHC 1728 (QB) (a case which concerned the assessment of damages following a road traffic accident in Poland).
The Claimant in Sedgwick argued similarly that Article 20 was a substantive provision, based on its generally mandatory language as well as Dicey’s by now oft-cited ‘tentative suggestion’. In addition, the Claimant relied on the case of AS Latvijas Krajbanka v Antonov  EWHC 1679 where Leggatt J commented as follows:
“10. […] the authors of Dicey point out that it might be argued that the rate of interest recoverable on damages goes to, or is intrinsically linked with, the assessment of the overall amount which the claimant can recover and thus falls within scope. I find this suggestion and the argument on which it is based persuasive. Indeed it seems to me that the broad working of article 15 requires the court to exercise any power conferred by its procedural law to award interest as compensation to a claimant for being kept out of money as a result of the defendant’s wrong only when and in the way that a remedy would be granted under the applicable foreign law to provide such compensation.”
Counsel for the Claimant also noted a “volte-face” in the Defendant’s expert evidence in that Professor Carreras (who was also the Defendant’s expert in Scales) had conceded in that case that Article 20 was a provision of “substantive legal effect”. In response, Professor Carreras referred to Article 576 of the Spanish Civil Procedural Law, not considered in Scales (which did not address the point in any great detail), as giving support to the contention that an award of interest was in fact a procedural remedy.
Counsel for the Defendant pointed to Article 20’s nature as a punitive, rather than restitutionary provision, more akin to Part 36 in the CPR than to a substantive legal remedy. The Defendant again relied heavily on Troke which, unless plainly wrong, was said to be binding on Lambert J in deciding the present case, given that itconcerned a prior determination of the same issue. The Defendant’s alternative argument was that, even if Article 20 applied, the claim was excluded by Article 20(8) since the Defendant could not pay out the value of the claim in the absence of a fully particularised Schedule of Loss, which had not been served until around 3 months before trial.
In determining the issue, Lambert J deferred heavily to the reasoning of Griffiths J in Troke:
“97. Whether binding or not, the judgment of Griffiths J in Troke is a powerful authority in this context. […]
“101. Whether the decision in Troke is binding upon me or not, I agree with its conclusion and the underlying reasoning which I endorse and follow.”
In rejecting the Claimant’s attempt to distance herself from the judgment of Troke, Lambert J said:
“100. […] [Counsel for the Claimant] urges me to treat Troke with a degree of caution. It is “at odds” with the decision in AS. However he does not submit that it is wrong, let alone “plainly wrong.” Nor does he convincingly argue that the case can be satisfactorily distinguished. I find it difficult to see how the case can be distinguished. The issue before Griffiths J is the same as that before me. Its ratio is clear.”
Lambert J therefore categorises Article 20 penalty interest as a procedural remedy excluded from the English proceedings by Rome II. However, despite this, and in line with the earlier decision of Woodward (and Scales, though Cavanagh J is more equivocal on the point), Lambert J considered it appropriate to award interest under s35A of the Senior Courts Act 1981 at the rate(s) that would have been applied by a Spanish court, if Article 20 had applied (ie if the claim had been brought in Spain).
Of particular note, the Defendant’s contention that the discretion to award penalty interest on top of any interest penalties applicable under CPR Part 36 created an unfair double jeopardy for the Defendant was not considered by Lambert J to be a good reason not to apply the Spanish rate of interest (). Instead, Lambert J noted that those Part 36 sanctions were themselves also discretionary and could be displaced if necessary and if there was a good reason to do so.
Despite elaborate arguments on either side and fairly detailed consideration in the judgments, the recent cases of Woodward and Sedgwick do not therefore make any advance on the position reached by the combination of Scales and Troke back in 2020. Both judgments defer heavily to the reasoning of Griffiths J in determining that Article 20 penalty interest is a procedural rather than substantive provision, meaning that under the prevailing lex fori, the English court will always have a discretion over whether to award interest at Spanish penalty rates. As a result, until there is any higher judicial authority on the issue, it may be that parties would be well-advised to focus their submissions on how the court should exercise such a discretion in the given circumstances of their particular case.
The authors and editors of this blog are grateful to Philip Mead, who appeared for the Defendant in Sedgwick v Mapfre, for the indication that permission to appeal has been sought in that case.
Watch this space.