Contractual interest on damages does contribute to capped sum, rules High Court

The ruling means that statutory interest can push payments above a contract's agreed liability limit. It also means, though, that contractual interest on late payments can take up part of a liability cap, which would reduce the total non-interest sum payable.

The Court was ruling on preliminary issues in a £14 million insurance dispute between Markerstudy Insurance Group and Endsleigh Insurance Services. Markerstudy claims it is owed £14m because of the behaviour of Endsleigh over a seven year agreement running until 2008.

Endsleigh provided administration and claims handling services to Markerstudy, which claimed that it made losses because of Endsleigh's payment of unnecessary sums on claims, delays in passing on claims documentation and other factors.

The two companies agreed that there was a liability cap in relation to the most recent contract between them of £3.9m, but the Court had to decide whether or not that capped sum would include interest on damages or whether interest could push the figure even higher.

The contract governing the relationship between the two companies set a "total liability in contract", which was the disputed cap on liability.

Markerstudy said that if the interest Endsleigh was to pay was included in the cap then it effectively would be being penalised for any lateness in those damages being paid.

Endsleigh said that the deal between the companies stipulated a "total liability in contract", which would include liability for interest as well as the figure for damages.

The Court agreed in part with Endsleigh, saying that contractual interest should be included as forming the figure which was capped.

It disagreed, though, when it came to statutory interest.

"Statutory interest is of a different character. It is not a 'liability in contract' but a discrete statutory liability arising from the exercise of the Court's discretion," said Mr Justice David Steel in his ruling. "Accordingly, in my judgment, it is excluded from the cap."

The fact that contractual interest contributes towards the sum counted as being capped might reduce the amount of damages that companies can claim under a contract. Late payment and the incurring of interest for one breach of contract might reduce the total available for payment for future breaches, under this ruling.