Spanish penalty interest - the gift that keeps on giving...

Judgment on the conjoined appeals of Nicholls v Mapfre and Woodward v Mapfre was handed down on 04 May 2023 and has firmly altered the course of claims for interest brought in England and Wales under a foreign regime, the result has for now given clarity but there is still a split in views between Claimant’s and foreign-domiciled insurers.

For several years, the issue of whether claims for interest brought in Rome II actions were procedural in nature (and thus governed by the lex fori in accordance with Article 1 (3)) or were substantive rights have created significant friction amongst claimants, insurers and practitioners alike. Whilst the writer is glad that this issue is being considered by appellate Courts, one feels that this is not quite the last word on the subject.

Whilst an appellate Court has attempted to take a firm hand on the issue, the friction, unfortunately, remains. Whilst relevant to any claim brought under Rome II, where the law applicable to the assessment of liability and quantum inter alia is not the law of England and Wales, one of the most contentious disputes arises when Spanish law is concerned, as was the case in these two conjoined appeals. 

Overview

Mr Justice Martin Spencer handed down judgment on the conjoined appeals of Nicholls v Mapfre and Woodward v Mapfre on 04 May 2023. In both cases, the judges at first instance held that the issue of interest was a matter of procedure and therefore determined by reference to the law of the lex fori (English law). However, each judge, considering the facts of the cases at hand, decided to exercise their discretion under s69 County Courts Act 1984 and s35A Senior Courts Act 1981 to make awards for interest that would mirror what the claimants would have received had their cases been litigated in Spain.

Mr Justice Martin Spencer dismissed Mapfre’s appeal and held that: 

i.    The Judges at first instance were wrong to exercise their discretion to award Spanish penalty interest rates pursuant to s69; and

ii.    Article 20 of the Spanish Insurance Contract Act 50/1980 is a substantive right, rather than procedural, and was thus under the umbrella of Article 15 Rome II, meaning the Court must award interest pursuant to those Spanish provisions. 

Following an appeal from the County Court in Troke v Anor v Amgen Seguros Generales Compania De Seguros Y Reaseguros SAU [2020] EWHC 2976 (QB), it was held that interest was procedural. Mr Justice Griffiths stated: “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 [the first instance judge] was entitled to award interest at English and not Spanish rates accordingly.”

Two further cases were considered in the wake of Troke, Woodward v Mapfre (unreported, 14 October 2022) and Sedgwick v Mapfre [2022] EWHC 2704 (KB). In the latter case, Lambert J held that interest was not substantive but rather “a procedural sanction to give teeth to a procedural regime aimed at early disposal of cases.” In Sedgwick, Lambert J carefully considered the actions of the defendant insurer, specifically the failure to make any payments within three months of the accident and there being no justifiable reason for withholding it and thusly concluded that had the claim been litigated in Spain, penalty interest would apply. 
And so the scene is set for the cases of Nicholls and Woodward.

Background

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 s69 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 reflect the Spanish penalty interest.

HHJ Waldren-Smith gave judgment in the sum of £112,620, comprising damages of £54,205.63 and interest of £58,414.37.

In Nicholls, HHJ Bloom awarded interest in line with Spanish penalty rates, utilising the inherent discretion under s69 County Courts Act 1984. This followed expert evidence from two Spanish lawyers, both of whom agreed that Article 20 provided specific rules for calculating ‘Default Interest’ and that ‘Default Interest’ could be disapplied where there was, for example, an indemnity issue or genuine liability dispute. 

In the index appeals, Mr Justice Martin Spencer overturned these first instance decisions ruling that interest is a substantive right and that the awards made by the Courts in Nicholls and Woodward  at first instance “were the right rewards but were made for the wrong reasons.” This overturning of a decision within the lower judges’ discretion, is highly unusual and indicative of the polarising views on this topic.

Commentary

The issue of whether interest was a procedural or substantive right under the lex causae has vexed participants in litigation of this nature and is often the focal point of consternation in most cases. It is the writer’s experience that in cross-border claims where Spanish Law applies, often the sole issue standing between the parties and going to trial is interest. 

In jurisdictions like Spain, 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. Article 20 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, however, the exceptions to Article 20 in practice are incredibly narrow.

To add insult to injury, for Spanish-domiciled insurers being sued in England and Wales, not only will interest be decided as if the claim were brought in the Spanish jurisdiction, which is a matter of economic distinction, the heavy burden of English legal costs along with the possibility of devastating Part 36 rewards remains. 

Spanish procedure has penalty interest as its incentive for insurers to settle early and ‘rewards’ for claimants who have to go through the gruelling litigation process and succeed. The English civil procedure has Part 36, which is a powerful tool that can be used by any party to put significant pressure on opposing parties placing their costs at risk. Each system, whether it be penalty interest or Part 36, is well-suited to the jurisdiction in which it is normally tried. Where the writer believes that Nicholls & Woodward goes too far is by failing to consider the effect of penalty interest on top of the English litigation system. 

Penalty interest, as a mechanism to incentivise settlement and engagement, does not sit well with how English cases are run procedurally (and even culturally), as parties obtain expert medical evidence separately and in some cases in multiple disciplines, and do not disclose those reports until they are ready or very late into proceedings. The parties’ final schedules of loss are one of the final few case management directions, by which point penalty interest could be calculated to be worth more than the actual tortious damages claimed.  

In Spain, however, the civil procedure is far more prescriptive and it is, generally, possible to settle earlier. It is far easier, for example, for insurers to make those Article 20 payments to claimants within three months. What we have been seeing, and will no doubt continue to see post-Nicholls & Woodward,  are claimants utilising the benefit of the English procedure to maximise their claim (and obtain legal costs at amounts unheard of in Spain) but also getting the Spanish mechanism for penalty interest, when the court is not differentiating between which party has elongated the claim. 

The strict provisions of Article 20, as they are interpreted across Spain, make the writer believe that a claimant who delays in bringing proceedings, obtaining evidence and failing to engage in ADR, would likely result in a modest costs sanction from an English perspective, but this would not disapply the penalty interest provision of Article 20. Whilst we can expect satellite litigation on any contentious issue following a firm decision from an appellate Court, the writer believes that where these claims were previously settled, we may see a significant increase in Claimant’s claiming penalty interest as an automatic right which may perversely result in an extended dispute that may result in the matter having to be heard before a court. Penalty interest should be just that, a penalty, and not a right in a claim where a Defendant has engaged and cooperated from the onset of a claim.

The situations where penalty interest will not apply, and Article 20 disapplied, are extremely restrictive. This is to give Spanish insurers pause to seriously consider the claim at an early stage, lest they be ordered to pay substantial amounts in interest at a later date. Of course, there are many scenarios where Article 20 should not be imposed, however, there does not appear to be a set of criteria for when it should and should not apply, leaving us once again at the mercy of the judiciary’s discretion. There are some examples of cases, tried in Spain, where penalty interest was not imposed: 

i.    Judgement of the Supreme Court of 12 February 2020 where the claimant brought two separate actions for negligence maxillofacial surgery which caused the loss of vision in the right eye. One action was against the hospital responsible for the treatment, and another claim was issued against the Spanish public health system. In the first claim, the claimant succeeded and Article 20 was applied, however, in the second action the claimant failed and the Supreme Court held that it as the insurer had serious and reasonable grounds to oppose the claim, due to the claimant’s first action, and that a judicial decision was necessary. 

ii.    In the Judgement of the Supreme Court of 07 February 2019, penalty interest was not applied because the Court believed serious and legitimate concerns were raised about the claim’s validity, such that a judicial decision was justified and even necessary. 

The restrictiveness of Article 20, whilst not codified in the wording of the article itself, rather Spanish Supreme Court judgements, extends also to issues with coverage and liability disputes. Cavanagh J considered the issue relating to liability disputes in Scales v MIB [2020] EWHC 1747 (QB), where both Spanish law experts agreed that where a defendant insurer seeks to defend the claim and believes that it has a good defence, penalty interest will still apply and does not justify the delay in payment. 

Where this leaves us in terms of dealing with cases moving forward, and the potential impact that this decision could have on fraudulent or dishonest claims or inadequate policy cover, is uncertain. Whilst fraudulent claims remain a constant thorn in the side of any insurer, regardless of jurisdiction, one of the bigger issues to plague those same insurers is the exaggeration of injury symptoms. Will insurers now be forced to make substantial payments for injuries that have been misrepresented or exaggerated and faced with the prospect of incurring significant sums in expert evidence to prove the true severity of the injuries and to recover any overpayment?
 
Whilst all insurers will underwrite the risk of penalty interest being imposed, for insured parties that receive a lot of traffic from British tourists, the almost unavoidable imposition of penalty interest on any claim is cause for concern. 

From a practical point, It is more important than ever from the onset of a claim for reserves to be accurately set, in addition, the legal team has to have an appropriate case strategy for each matter and consider interim payments at an early stage. A proactive legal team that can quickly obtain core expert evidence to value the claim will be key. 

Foreseen issues in these cases will be where there is a genuine liability fight, given that there are contradictory views from the Spanish law experts on the applicability of penalty interest in these instances,  this will remain an area that requires interpretation if these claims do subsequently settle. There is the possibility that a Claimant with a well-made Part 36 offer will have the dual benefit of a Part 36 uplift and penalty interest on a claim a Defendant had a genuine belief it could defend. 

For claims where Spanish law applies, this decision is a stark reminder that just because the claimant is a British national and any potential claim will be brought in England and Wales, until we have more guidance from the Court of Appeal and/or the Supreme Court, Article 20 has to be complied with as much as feasible. Having a legal team who is well-versed in the issues will be paramount.