46.21 Under Roman law the starting point was that there was no general obligation to pay interest on sums payable to the other party.57 Rather, the question whether the obligor had to pay interest ultimately depended on the action taken by the obligee. Where the obligee brought an action for a liquidated sum (certa pecunia) based on stipulatio or a last will, interest was not available to the obligee58 unless agreed upon by stipulatio.59 Only actions arising from contracts founded on good faith (bona fides), which included sales contracts, gave the obligee a right to interest in case of delay.60 Thus, most importantly, interest was available to the seller under the actio venditi.61 However, the seller could not claim interest after it had received the purchase price, albeit with delay.62
46.22 The interest rates applicable under Roman law increased from 4 per cent to 6 per cent in the first three centuries ad.63 The interest rates primarily depended on the capital market; however, there were a number of legislative interferences to fix an upper limit to interest rates where the market failed.64
(p. 684) 46.23 Typically following Roman law in this regard, the starting point for civil law legal systems is straightforward. Despite the influence of canon law which had objected to the concept of interest,65 civil law legal systems typically envisage a general obligation to pay interest,66 at least with regard to late payments.67
46.24 As alluded to earlier,68 however, it is not always the case that legal systems embrace the concept of establishing a general obligation to pay interest. Yet, it is not only legal systems where the Islamic Shari’a is the main applicable law69 that the obligation to pay interest initially was met with scepticism. The development of interest in English common law and hence those systems following the English model require closer examination.
46.25 Indeed, in traditional common law,70 the Roman law position regarding claims for ascertained amounts of money was prevalent.71 This meant first of all that there was no interest available on ascertained sums in actions for debt, unless intended by the contract or trade usage.72 This rule was subsequently interpreted to broadly cover all claims for money at common law73 and thus that the general loss of use of money could not be recovered as damages in case of late payment.74 Rather, interest was only available where the parties had included an express or implied term to that effect into their contract.75 The situation was different where, due to late payment, the aggrieved party had to take a loan and pay interest.76 These charges could then be recovered as special damages.77 The result of this approach was that interest losses could only be (p. 685) recovered if contemplated by the parties as envisaged by the second limb of Hadley v Baxendale.78 Yet, interest losses were thought not to be generally foreseeable losses in the context of a debt, and thus could not be recovered as general damages under the first limb of Hadley v Baxendale.79 The underlying presumption was that interest losses were not generally in the contemplation of the parties.80
46.26 However, in the early nineteenth century and then more significantly throughout the twentieth century the English legislature has at various points statutorily reformed the traditional common law position. In 1833 the Civil Procedure Act (Lord Tenterden’s Act) in its section 28 stated that interest was payable on debts or sums payable at a certain time or if there was a written demand for payment from the obligee to the obligor giving notice that interest will be claimed.81 However, the courts were granted broad discretion as they did not have to award interest in all cases but only ‘if they shall think fit’.82 Yet, the sum in question had to be certain which constituted a severe restriction of the obligation to pay interest.83 The very narrow limits on claims for interest were subsequently criticized by the House of Lords.84
46.27 In 1934 the Law Reform (Miscellaneous Provisions) Act enabled courts to award interests on sums ‘for the whole or any part of the period between the date when the cause of action arose and the date of judgment’.85 This reform has found its way into nearly all common law jurisdictions which follow the English model.86 However, a further 1982 reform in England and Wales, to the effect that courts could award interest also on sums that were paid after commencement of the proceedings but before the judgment,87 appears to have only been adopted by Singapore88 and Hong Kong.89 Indeed, reform in Singapore goes further and permits interest on those sums which were paid late but before proceedings were commenced.
46.28 Since the broad discretion of the judges was retained through all legislative actions in the field of interest, the English law in the words of Lord Goff ‘had developed in a fragmentary and (p. 686) unsatisfactory way’.90A significant change was brought about by the Late Payment for Commercial Debts (Interest) Act 1998 which established a general obligation to pay interest on late payments in commercial transactions.91 This Act was clearly the result of the growing dissatisfaction at the European level with the problems created by late payments.92 It upholds the traditional common law position insofar as it states that ‘It is an implied term in a contract … that any qualifying debt created by the contract carries simple interest … ’93 Finally, the UK has also transposed the above-mentioned94 EC Late Payment Directive. For these purposes the Late Payment for Commercial Debts (Interest) Act 1998 was amended to the effect that small businesses are now also able to claim statutory interest from other small businesses and that all businesses, including public sector organizations, are now able to claim interest from any other business, including small businesses or organizations.95
46.29 In contrast, the USA does not seem to have witnessed similar struggles with the concept of interest.96 As early as 1896 the United States Supreme Court stated that ‘[i]t is a dictate of natural justice and the law of every civilized country’ that the obligor of a payment ‘must pay the established rate of interest as damages for his non-performance’ in case of failure to meet the required time for payment.97 The USA Supreme Court, however, also stated that ‘Hence it may correctly be said that such is the implied contract of the parties.’98 Therefore, the position of the USA Supreme Court is built on the same premise as the traditional English position,99 yet an implied agreement appears to always be assumed.100 Today there is no federal law on interest in the USA. Rather, the matter is one of state law and states have created statutes establishing claims for interest in actions for breach of contract.101 In California and Louisiana the obligation to pay interest is contained in the respective civil codes.102
46.30 The situation in Australia and Canada is similar to that in the USA. Interest on late payments is a matter for the individual Australian and Canadian states and territories. Today all of them have enacted statutes providing for the obligation to pay interest.103 In Québec the issue did not raise particular difficulties. Being of civil law background the Québec Civil Code contains a provision establishing the general obligation to pay interest.104
(p. 687) 46.31 At the international level the general obligation to pay interest is universally acknowledged. Both uniform law and projects contain provisions establishing such an obligation.105 It has been suggested that in international commercial arbitration interest has gained such acceptance so as to amount to trade usage of international commerce.106