Interest on Judgment Debts and Section 17 of the Judgment Debts Act 1838 amid rising interest rates

The link as originally posted:

The post as per the link above was amended ever so slightly to remove a little chuckle of mine. For the benefit of eagle-eyed fans of Yes Minister I set out the full unredacted and resplendent version below –

Interest on a sum awarded in litigation as below may be levied according to various legislative provisions: rules of court, case law, and contract. The rules depend on the type of damages claimed or whether a contract exists between the parties and are different for calculating interest on the judgment debt pre-judgment and post-judgment.

Sequencing a Judgment Debt:

  1. A cause of action for damages arises
  2. Proceedings are issued
  3. Judgment is obtained
  4. The judgment debt is paid

For the pre-judgment debt, the common law was traditionally reluctant to apply interest where there was no contractual entitlement to it. In 1893, in the case of London, Chatham and Dover Railway v South Eastern Railway Co, the House of Lords determined that the courts would not grant pre-judgment interest on a judgment debt if there was not any contractual or trade usage entitlement to it.

For pre-judgment interest today, statute and the rules of court (the Civil Procedure Rules) have stepped in. By Section 69 of the County Courts Act 1984 and Section 35A of the Senior Courts Act 1981 (different Acts of Parliament for different levels of court, but twin statutory provisions), the court has a discretion to apply a rate of interest from the date a cause of action arose until the date of judgment.

For post-judgment interest today (indeed, since 1838), interest is due on the debt until it is paid, pursuant to Section 17 of the Judgments Act 1838, or (in the county courts) pursuant to Section 74 of the County Courts Act 1984 and Article 2(1) of the County Courts (Interest on Judgment Debts) Order 1991. This states, “subject to the following provisions of this Order, every judgment debt under a relevant judgment shall, to the extent that it remains unsatisfied, carry interest under this Order from the date on which the relevant judgment was given”. In addition, Article 5 brings us back to Section 17: “Where a judgment debt carries interest, the rate of interest shall be the rate for the time being specified in section 17 of the Judgments Act 1838”. These requirements (for they are requirements) are, however, subject to the rules of court and CPR rule 40.8 makes it clear that this Section 17 rate (currently 8%) may be applied from any moment the court should order – i.e. not just from the judgment date.

The Section 17 rate is currently 8%. Although it is clear that this applies to post-judgment interest, it is often argued by claimants that it should apply to pre-judgment interest as well. It has always seemed high to me – at a time of historically low interest rates, it seems that an investor could hardly have made a better investment than to have somebody owe him money, successfully sue him for it, and get 8% interest on the sum! (That is not investment advice by the way).

Why is the rate so high? Is it deliberately high to penalise a non-paying Defendant? I have heard it argued that a failure to apply the 8% rate before the date of judgment (relying on the discretion in rule 40.8) would be akin to the end of civilisation – the thin end of the wedge leading inexorably to a collapse of society, capitalism, and the abolition of the monarchy itself. However, judgments from the senior courts and government white papers suggest a desire to penalise is not the objective of the courts.

Courts typically do not apply the rate of 8% to a pre-judgment debt. Indeed, when they have done so previously, Justice Ramsey in the High Court in Persimmon Homes v Hall Aggregate CILL (2012) has noted that there was not much difference, at those times, between the Section 17 rate and the interest rate. He considered it inappropriate in 2012 to apply the Section 17 rate to a pre-judgment debt when there was such a stark contrast between that rate and the interest rate. He quoted Lord Justice Bingham in Pinnock v Wilkins:

“Since the award of interest on damages is intended to compensate a plaintiff for being kept out of money lawfully due to him, there is much to be said for applying a rate of interest which reflects the cost or value of money over the relevant period rather than a flat rate under the Judgments Act 1838 which has remained fixed over a number of years despite fluctuations in interest rate during that time”.

These courts have hereby deemed it inappropriate to diverge too drastically from the relevant interest rate when applying a rate to a pre-judgment debt. This applies to rates imposed whether pursuant to Section 69 of the County Courts Act 1984, Section 35A of the Senior Courts Act 1981, or by exercising the discretion under CPR r. 40.8. In the Court of Appeal in Reed Executive plc v Reed Business Information Ltd (2008), Lord Justice Jacobs, with whom Lord Justices Auld and Rix agreed, said:

“I think the appropriate rate is the commercial rate. The judgment rate is purely artificial. I can see no reason for an artificial rate being imposed by the court save in those cases where it must, i.e. where there has been judgment for a sum”.

The use of the commercial rate is an important point. This is not the same as the Bank of England base rate but is typically considered by the courts to be 1% above the base rate (Shearson Lehman Hutton v Maclaine Watson (No. 2) (1990)).

So, for a pre-judgment debt, the commercial rate is typically to be applied. But for a post-judgment debt, it is the Section 17 rate that applies.

Is it appropriate that the post-judgment rate is so much higher than the base rate as to make the courts baulk at the prospect of using it in any circumstances where they have literally any other choice? Perhaps interest on an unpaid judgment debt should be more punitive in nature. However, even if we can rationalise it today in this way, a study of the historical record shows that a motivation to penalise has not been the objective for post-judgment interest either. The historical record rather suggests that the Government has forgotten about the Section 17 rate for the past 20 years.

The Section 17 rate has not always been at 8%. It has been higher and it has been lower. A Section 17 rate of 4% was established for almost 133 years from 1 October 1838 until 20 April 1971. At the time, in 1838, the Bank of England’s Base Rate (or historical equivalent) was also 4%, and for the previous 144 years since the Bank’s founding in 1694 the base rate had fluctuated only in the narrow range between 3% and 6%, averaging at 4.46% in that time. It was clearly held then, as now, that fairness required interest earned to be roughly the same as that which a successful litigant would have received had the judgment debt been sitting in his own bank account, or had the successful claimant lent the money to the unsuccessful defendant commercially – damages to put the claimant in the position he should have been in, and not to penalise the defendant. Parliament applied a Section 17 rate similar to the average base rate, which had applied for almost a century and a half.

And so, for the next 133 years, the interest on judgment debts sat at 4%. It is true that in the increasingly globalising world of the 19th and early 20th centuries the base rate experienced some swings which were somewhat punchier than in the past, but while the range peaked and troughed between 2% and 10%, on the whole the historical average only shifted slightly. In fact, the mean average for those 133 years was still 4.4%. The Panics of 1847, 1857, the American Civil War of 1861, the Panics of 1866, 1873, 1907, the First World War, the Great Depression of 1929, the Second World War, and the economic slump of the 1950s and 60s, were relative blips on the horizon of the base rate. The most extended period outside the historical range began in the Second World War when interest rates held fast at 2% for 12 years. All this while, the base rate was never too far from the 4% Section 17 rate.

It was not until the 1970s that the historical range was really tested to breaking point over an extended period. The base rate rose from 6% in 1971 to 12% in 1974, and even further to 15% in 1976. In 1979, it reached 17% and failed to reduce towards its historical range until as late as 1992. From the end of 1972 until the middle of 1981, the average was 10.5%, and from then until 1992 the average was 11.5%. This is 20 years of a high interest economy. Earning 4% on a judgment debt would no longer have been fair. And so, the Government updated the Section 17 rate – with some frequency it has to be said. I set out in the table below all the updates to the Section 17 rate from 1838 to 1993, with the corresponding Bank of England base rate alongside for comparison.

1 Oct 18384%4%s17 Judgments Act 1838
20 Apr 19715.5%7.5%Judgment Debts (Rate of Interest) Order 1971
1 Mar 197711%10%Judgment Debts (Rate of Interest) Order 1977
3 Dec 197913%12.5%Judgment Debts (Rate of Interest) Order 1979
9 June 198014%15%Judgment Debts (Rate of Interest) Order 1980
8 June 198212.5%14%Judgment Debts (Rate of Interest) Order 1982
10 Nov 198210%12%Judgment Debts (Rate of Interest) (No. 2) Order 1982
16 Apr 198511-12%15%Judgment Debts (Rate of Interest) Order 1985
1 Apr 19936%8%Judgment Debts (Rate of Interest) Order 1993

From 1993 to the end of 2008, the base rate was pretty much back to its historical range of 3-6%, with a couple of blips. But the judgment rate was not 4% anymore, it was 8%. And with the financial collapse in 2008 it dropped to 2%, then 1.5%, then 1%, then o.5%. From March 2009 until March 2022, the base rate has averaged 0.4%. And, the judgment debt rate has stayed at 8%.

Is this fair? As a statutory penalty clause it may have a justification, but the historical record does not demonstrate that such a justification is sought, and the courts (as we have seen) have mostly baulked at the suggestion. For nearly 200 years, the Section 17 rate was fairly consistently comparable to the base rate. However, for the past 15 years, the two have been significantly out of sync.

It is interesting that rather than the Government proactively altering the Section 17 rate as it did in the 1970s and 80s, it has been left to the Bank of England to close the gap, although of course that has not been its purpose. At a time of rising base rates, one collateral effect is that we are finally moving in a direction where the Section 17 rate may begin to look somewhat fairer after nearly two decades of being beyond the pale. It is small comfort at this time of high inflation and increasing interest rates, but perhaps we will soon get to a point where the courts consider the Section 17 rate to be applicable again by choice to pre-judgment debts. We’re not there yet, but with the economic climate as it is who knows how long it will take. And, should the time come I am sure that claimants, the senior courts – and perhaps even the Government – will pay attention. If the base rate is 4, 5 or 6%, how long before a claimant persuades a court that an 8% interest rate does not look so extortionate after all?

About the author: Daniel Bacon is a housing solicitor at Duncan Lewis. He acts for both landlords and tenants, privately and publically funded, in a range of matters, including possession proceedings, matters of succession, and property ownership disputes. Contact him for advice via email at or via telephone on 020 7275 2593.
Daniel works under housing director Manjinder Kaur Atwal who has more than 13 years’ experience in housing and property litigation law, tackling possession claims and eviction matters, landlord and tenant disputes, homelessness, housing disrepair, bringing judicial review matters, review/appeals relating to local authority housing decisions, property nuisance/negligence claims, and much more.


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