Spanish penalty interest – procedural or substantive?

The recent cases of Woodward v Mapfre and Sedgwick v Mapfre considered Spanish penalty interest in personal injury claims. The judges in both cases independently came to the same conclusion; the incidence of Spanish penalty interest is a matter of procedural law, and as a matter of discretion in each case, the claimant was awarded a significant sum in respect of it.

Spanish law

Under Spanish law, courts are able to award interest on damages at a penalty rate, the aim being that this will discourage insurers from not making payments on time. Article 20 of the Spanish 50/1980 Insurance Contract Act states that the insurer is to pay compensation to the claimant within three months from the date of the accident. If compensation is not paid within this period then interest will accrue. The current Spanish penalty interest rate can be calculated by reference to Article 20. This outlines that, for the first two years after interest starts running, interest accrues at the current legal interest rate plus 50% (which is currently 4.5%). After two years interest accrues at a rate of 20% per annum. Penalty interest will not accrue if the delay in payment is justified.

Mr Justice Griffiths considered the issue of applying Spanish penalty interest in Troke & Anor v Amgen Seguros Generales Compania De Seguros Y Reaseguros SAU [2020] EWHC 2976 (QB). He concluded that the award of interest was a procedural matter but did not find that the claimant should be awarded Spanish penalty interest, instead finding that the English rate was appropriate.

He found: “there was no substantive right to interest at Spanish rates to be awarded to the claimants under the lex causae; that interest could be awarded under section 69 of the County Courts Act 1984 as a procedural matter in accordance with the law of England and Wales as the lex fori; and that he was entitled to award interest at English and not Spanish rates accordingly.”

In Woodward and Sedgwick the claimants submitted that the right to interest was substantive and not procedural. Both judges disagreed, finding that it is a matter of procedural law, but the courts’ discretion allowed the Spanish rates to be awarded.

Woodward v Mapfre, unreported

In Woodward HHJ Walden-Smith found that “the right to penalty interest is not a substantive right. It is acknowledged that it will not always apply, albeit that is in restricted circumstances, and as such is a matter of procedure to be determined by the lex fori (the law of England and Wales).” She continued that “penalty interest is not automatic, and is, therefore, a matter of procedure rather than substance”. However, in this case she held that in line with the court’s discretion to award interest pursuant to the provisions of section 69 of the County Courts Act 1984, it was her judgment that as the defendant had not taken steps to resolve the case or make an interim payment the interest to be applied should be in accordance with the Spanish penalty interest.

Sedgwick v Mapfre [2022] EWHC 2704 (KB)

Sedgwick considered whether interest on a damages award should be applied per the Spanish Insurance Contract Act or under s35A of the Senior Courts Act 1981. The claimant argued Spanish law provisions concerning penalty interest are substantive and the judge was bound to apply them. Mrs Justice Lambert did not agree. She held penalty interest is not a substantive right – stating it is “a procedural sanction to give teeth to a procedural regime aimed at early disposal of cases”. Therefore, the interest rates were those of the lex fori, which was under s35A of the Senior Courts Act 1981.

Given the court’s discretionary power to award interest under s35A, Lambert J then had to consider whether the interest awarded should be in line with the Spanish penalty interest. She decided that, in this case, it was “reasonable and fair” to apply penalty interest; if the case had been issued and tried in Spain penalty rates of interest would have been applied. The defendant had notice of the accident from the date it happened and there was no obstacle to the defendant making an interim payment.

Whilst she accepted the defendant’s argument that applying Spanish penalty interest may “expose the defendant to a double jeopardy of Spanish penalty interest and costs and interest penalties under CPR Part 36.17”, she did not find that this was a good reason to not apply the Spanish rate of interest.

Future cases

The further findings that penalty interest is not a substantive right is a positive for defendants and their insurers. However, defendants will need to ensure that interim payments are considered early on, and made where appropriate and claims are dealt with expeditiously without delays from the defendant side.

When claims are brought in England and Wales and a foreign law applies, it is the position that under Rome II the courts should be applying English procedural law. A feature of English procedure is that claims can be settled by way of Part 36 offers. CPR Part 36 outlines sanctions for failure to do so, including additional interest. When parties are looking to settle a case in the context of English litigation, the English procedural framework should be used and the parties’ conduct should be judged accordingly, with the appropriate sanctions being applied from within that framework. Adding another punitive measure of Spanish procedure to take place in an English setting by the back door would appear an overly harsh approach. The often argued point of Spanish penalty interest will remain an ongoing area of disagreement and negotiation between the parties until the higher courts finally give a definitive view.

Where cases proceed to trial defendant insurers will need to ensure that they take the opportunity to convince the court that they have acted as promptly as possible to settle the case and thus the court has the discretion to not award penalty interest.