Spanish Penalty Interest: A conclusion or segue to The Supreme Court?

The drama surrounding Spanish penalty interest has reached a new peak with the Court of Appeal's final judgments recently handed down. The initial rulings that caused such a stir were just the tip of the iceberg. These final judgments have added more complexity to an already intricate issue, cementing the significance of penalty interest in cross-border casualty cases.

Our team has been following this hot issue since the first round of appeals on 04 May 2023 were heard and one of our members was lucky enough to be present at the Court of Appeal hearing on 22 May 2024 to witness the very top barristers in International & Travel making their submissions for both sides. Partner Craig Evans and Associate Thomas Byrne explore the latest instalment and consider the wide-reaching applications.

Background

Avid followers of these cases need no introduction or background; however, for those who are coming to this now, these appeals concern three separate cases, with the appellant in each case being the first defendant at first instance, Mapfre, a Spanish insurer. Mapfre had been sued in a direct action under Spanish law, available under the Odenbreit¹  jurisdiction that complimented the Brussels Recast I Regulations² prior to Brexit.

Spanish law applied to the assessment of liability and damage despite the claims being litigated in England and Wales. As for Nicholls and Woodward, the issues surrounding the appeal concerned the application of Spanish penalty interest. Here is a brief rundown of decisions for these cases:

1. Heard separately at first instance and conjoined on appeal, both claimants were awarded interest on damages assessed in accordance with Spanish law. Unlike the usual awards of interest we see in England and Wales, interest awarded under Article 20  Spanish Insurance Contract Act 50/1980 provides interest on damages at a penalty rate, to incentivise insurers to engage with claims and make prompt payments. If compensation is not paid within three months of being notified of a claim, penalty interest will apply.
2. Article 20 provides that, for the first two years after interest begins to run, it will continue to accrue at the current legal interest rate (which is 4.5%) plus 50%. After two years, it will accrue at a rate of 20% per annum. The exceptions for non-payment are extremely limited and claims for interest at the penalty rates are often significant awards, sometimes eclipsing main heads of loss such as PSLA, loss of earnings etc.
3. The question on many cross-border lawyers’ minds at this time was whether the application of interest was a substantive remedy, and so governed by the law of the lex causae, or a procedural remedy, governed under the law of the lex fori.
4. At first instance in Nicolls and Woodward, with HHJ Walden-Smith in Woodward outright rejecting the claimant’s submission that interest should be awarded in accordance with Spanish law, the trial judges awarded interest under their procedural discretion pursuant to s69 County Courts Act 1984 but enhancing the rates to reflect what would have been awarded under Article 20 Spanish Insurance Contract Act 50/1980.
5. Mapfre appealed these decisions jointly heard by Martin Spencer J on 04 May 2023 and held that award of interest was a matter of substantive law (and so governed by Spanish law).

A third case was joined to the roster on appeal to the Court of Appeal, Sedgwick v Mapfre³, where Lambert J, mirroring the decisions at first instance by the trial judges in Nicholls and Woodward, awarded interest at the Spanish penalty rates using the wide discretion under s35A Senior Courts Act 1981 and, in tandem with HHJ Walden-Smith in Woodward, rejected the primary submission that the award of interest was a substantive right and thus determined following Article 15 Rome II Regulations⁴. A secondary issue raised by Mapfre in relation to Sedgwick was whether the claimant had standing to bring a subrogated claim for the benefit of a third-party insurer. Mapfre argued at first instance and on appeal that as a matter of substantive Spanish law, only the insurer, either as an additional claimant to the action or within its own action, may bring a claim to recover what it had paid out under the terms of its policy with the claimant.

Mapfre, however, was not going down without a fight and appealed Martin Spencer J judgment, the hearing for which was heard before Lords Justice Coulson, Dingemans and Stuart-Smith on 22 May 2024.

The Issues and decisions

The panel were in agreement that Mapfre’s appeals on all fronts ought to be dismissed.

Issue one

Issue one raised the question of whether interest ought to be payable under Article 20 of the Spanish Insurance Contract Act 50/1980 in accordance with Article 15 Rome II or whether it is a matter of procedure and so payable under Article 1 (3) Rome II.

The Court determined that the issue of Spanish penalty interest, which was so intertwined with how damages are assessed under the Spanish Baremo system and is “effectively part of the nature and the assessment of damage or remedy claimed” [59] that it is squarely within the scope of Article 15 Rome II and was thus not a matter of procedure under Article 1(3) Rome II.

Issue two

If interest is a matter of procedure, does an English judge have the procedural discretion to award interest under s35A Senior Courts Act 1981/s69 County Courts Act 1984 at the same rates as those provided for under Article 20 Spanish Insurance Contract Act 50/1980?

Given the decision of issue one, the Court’s determination of issue two made no real difference to the overall outcome of the appeal, however, it was nevertheless resolved in the respondent’s favour and Mapfre’s appeal was dismissed.

The Court of Appeal reiterated that “the payment of such interest is an integral part of the way in which damages for personal injuries paid by insurers are assessed in Spain” [67], meaning the judges at first instance were entitled to use their discretion to award interest at the same rates as those awarded in Spain. This brings us back to the position set out in Maher v Groupama⁵, which required restating given Maher was a pre-Rome II case and given that Mapfre’s submission was that Rome II Regulations had affected the discretion to award interest.

Dingemans LJ also made reference to an issue raised by many lawyers in how this interest interplays with interest awarded under the Part 36 regime. The Court was not directly tasked with determining whether separate interest under Part 36 ought to be awarded in addition to interest awarded under the Spanish Insurance Contract Act 50/1980, however, Dingemans LJ commented that this would likely depend on various factors.

Issue three

Regarding subrogation in Sedgwick, is a claimant permitted to bring a subrogated claim in their own name for the losses borne by a third-party insurer?

The Court rejected Mapfre’s appeal on this issue as well relying on Article 19 Rome II and, as the insurance contract between Ms Sedgwick and Insurefor.com was governed by English law, “…the laws of England and Wales will determine whether Ms Sedgwick can bring that part of the claim which has been paid by Insurefor.com in her own name. Under the laws of England and Wales Ms Sedgwick can bring the claim against Mapfre.” [76].

Commentary

It is unclear at present whether Mapfre intends to take this one step further by seeking permission to appeal to the Supreme Court. In the meantime, practitioners are, at least, rewarded with some clarity and certainty regarding an issue that has vexed lawyers on both sides of the playing field for some time.

As we in the cross-border casualty team here at Clyde & Co have mentioned a few times, this is a stark reminder for Spanish insurers to make a payment under Article 20 of the Spanish Insurance Contract Act 50/1980 at the earliest opportunity to stop the accrual of potentially devastating levels of interest.

Much to this writer’s chagrin, the Court of Appeal did not make any determination nor issue any guidance on the interplay between Spanish penalty interest and the Part 36 regime. Penalty interest, designed to encourage prompt settlement and engagement, appears to conflict with English cases' procedural (and even cultural) norms. In England, parties typically obtain separate expert medical evidence across multiple disciplines and do not disclose these reports until they are ready, often late in the proceedings. The final schedules of loss are among the last case management directions, by which time penalty interest can sometimes exceed the actual tortious damages claimed.

In contrast, Spain's civil procedure is more prescriptive, generally facilitating earlier settlements. For instance, insurers can more easily make Article 20 payments to claimants within three months. Following the Court of Appeal’s determinations, we do expect further litigation surrounding claimants leveraging the benefits of the English procedural system to maximise their claims (and secure substantial legal costs, which are uncommon in Spain) while also benefiting from the Spanish penalty interest mechanism.

Of course, the easiest solution moving forward is for Spanish insurers to make the payment necessary to stop the accrual of interest under Spanish Insurance Contract Act 50/1980, however, determining the amount of compensation to be made, when in most cases, details about the severity and long-term implications of injuries are revealed after the three-month window has passed, could be complete guesswork, resulting in over/underpayments. Additionally, due to the restrictions imposed by Article 20, albeit not specifically included within the wording of the act itself rather expanded upon through case law, insurers who have good prospects of successfully defending a claim must still make a payment, given the considerations of Cavanagh J in Scales v MIB⁶, where both Spanish law experts instructed by the parties agreed that where an insurer believes it has a good defence is not sufficient to disapply the provisions of the Spanish Insurance Contract Act 50/1980.

From a practice point of view Spanish Penalty interest is more suited to claims presented in Spain, rather than the protracted way litigation can occur in England & Wales. It may be possible that moving forward, English defendant practitioners should be more aware of the obligations of a claimant to trigger a claim for penalty interest; these include an obligation to mitigate the damage, an obligation to collaborate and allow medical examinations and to promptly disclose medical evidence that is available. Despite these apparently claimant-friendly judgements, penalty interest is not an automatic right in every claim.

It seems, at least to this writer, that if insurers wish to avoid the imposition of penalty interest, a payment must be made as swiftly as possible and where that payment concerns an English national, the instruction of a proactive legal team that is able to obtain expert medical evidence to set accurate reserves will be fundamental.

1. Case C463/06
2. Regulation (EU) No. 1215/2012
3. [2022] EWHC 2704 (KB)
4. Regulation (EC) No 864/2007
5. [2009] EWCA Civ 1191
6. [2020] EWHC 1747 (QB)