Calculation of interest in damages claims: compound answers to a (not so) simple question for national courts
The different approaches adopted by national courts when dealing with similar issues are often highlighted, in particular when considering the most apt jurisdiction in which to bring a certain claim. It is, however, also interesting to look at such differences comparatively, instead of as opposites, as that process can provide valuable insights into the courts’ legal treatment of cross-border economic principles.
Recently, the French and English courts both dealt with the question of calculation of compound interest and it is instructive to review in tandem the approach taken. As was stated in the House of Lords in the English case of Sempra Metals Limited v Inland Revenue Commissioners  UKHL 34, "We live in a world where interest payments for the use of money are calculated on a compound basis. Money is not available commercially on simple interest terms."
The Digicel saga
In 2009, the French Competition Authority imposed a €63 million fine on Orange Caraïbes, a telecom operator in overseas French territory, and its mother company, France Telecom (Orange). This fine was for violating Article 102 TFEU between 2000 and 2005 through exclusivity agreements with independent distributors and the only approved repair center for handsets in the French Caribbean. The decision became final in 2015 following a ruling by the French Supreme Court.
Digicel, a competitor that had been ousted as a result of Orange’s anti-competitive practices, filed a damages claim in 2009 against Orange, alleging that the practices sanctioned by the ADLC decision had abnormally blocked Digicel’s development in the mobile telephony market in the French West Indies and Guyana. Fourteen years later, Digicel’s claim has given rise to a ’saga’ of judgments from the French courts, with the latest – but not the last – judgment handed down on 1 March 2023. The question of calculation of interest has in particular been a heated debate, showing that it is a significant challenge that requires a careful balancing of both economic and legal considerations.
In a first instance judgment in December 2017 (the proceedings had been stayed pending determination of Orange’s appeal to the Supreme Court), the Paris Commercial Court granted Digicel the record sum of €179.64 million in damages. It was stated in the judgment that interest should be added and calculated based on the Weighted Average Cost of Capital (WACC).
Further to an appeal brought by Orange, the Paris Court of Appeal broadly confirmed the first instance judgment in June 2020 and granted Digicel €173.64 million, excluding interest. Interestingly, the Court of Appeal rejected the WACC method put forward by the claimants. This was on the basis that the claimants had not been able to prove that the money they had been deprived of had forced them to restrict their operations or abandon planned investments that would have generated returns equivalent to the amount sought in interest. As a result, the Court of Appeal found that:
- from 1 April 2003 to 31 December 2005 Digicel would have used the amount of money they had been deprived of to reduce debt. The Court accordingly applied the compound interest rate of 5.3%, corresponding to the average rate paid by Digicel to fund its debt at the time, and
- from 1 January 2006 to 31 December 2018 Digicel had not proved that the sum they had been deprived of would have been used to reduce debt. In these circumstances the statutory rate should be applied on a compound basis, consistent with French case law.
Both Orange and Digicel then appealed the decision before the French Supreme Court, which handed down its judgment on 1 March 2023. In summary, the Supreme Court upheld the judgment from the Court of Appeal almost entirely, confirming the findings of the Court of Appeal in relation to interest.
The French Supreme Court confirmed that the burden of proof to obtain compound interest based on the WACC lies with the claimants and that, in this particular instance, Digicel had failed to provide sufficient evidence.
The Supreme Court highlighted that Digicel “did not produce any documents to justify that it had used the sums it had been deprived of for intra-group loans whilst profits generated by Digicel had been distributed over the same period". In light of this the Supreme Court agreed with the Court of Appeal that the claimants would have needed to demonstrate the impossibility of financing the said projects from 2006 onwards in order to obtain a higher compound interest rate. Accordingly, the Supreme Court confirmed that only statutory compounded interest rates should apply from 2006 onwards.
However, the Supreme Court sided with the defendants when it came to consider the start date for the calculation of interest. The Court of Appeal indeed took a shortcut and ruled that interest should start to be compounded from 2003, whilst, according to the Supreme Court, most of the damages were sustained after this date, as exclusionary conducts often have long-lasting effects on the structure of the market.
The decision from the Court of Appeal was accordingly overturned and the parties will need to have a separate hearing to determine the exact start date(s) for the purpose of calculating interest on the overall damages. The saga therefore continues…
Of broader interest, the French Supreme Court's decision highlights:
- the importance of claimants providing the relevant evidence to support their claim when it comes to the calculation of interest, and
- the relevant date to take into account when calculating compound interest is the date when the damage was actually suffered by the claimants and not before or after that date.
Perspectives from UK courts
The award of compound interest has been endorsed by the UK courts more than 15 years ago in Sempra Metals and again very recently by the Competition Appeal Tribunal in its judgment of February 2023 in Royal Mail v DAF Trucks . The question of the applicable interest rate for financing losses however raises similar issues, which is not surprising as this is also a question of economic theory.
Royal Mail claimed (in addition to the overcharge caused by the Trucks cartel) compensation for its financing losses by way of compound interest based on its WACC or, in the alternative, based on its cost of debt and its foregone returns on short-term investments. Royal Mail did provide disclosure of contemporaneous documents relating to their financing decisions, supplemented with factual witness evidence from Royal Mail’s CFO and expert evidence.
First, the CAT confirmed the application of compound interest, to reflect the “real world” and the economic and commercial reality of businesses. The CAT however rejected the use of the WACC as the appropriate measure of Royal Mail’s financing losses. The CAT considered that the legal test (first set out in Sempra Metals) is that “the “actual losses” suffered by Royal Mail must be based on “actual costs” incurred or paid by Royal Mail in financing the Overcharge. Using retained earnings [in the calculation of the WACC] may cause loss to its shareholder but Royal Mail itself has not suffered any loss therefrom. Even though the WACC may have been used by Royal Mail to evaluate investments, that only rather emphasises the point that the WACC is a tool for investors to assess investment opportunities.”
The CAT therefore ordered the calculation of compound interest based on a combination of Royal Mail’s cost of debt finance and its returns on short term investments made between 1997 – when the Trucks cartel started and the overcharges started being incurred - and 2022, which was the date of the trial. The question of the start date for interest was not in issue, as the case related to overcharges made on specific purchases at identifiable points in time.
Royal Mail’s expert had set out a proposed approach on interest rate based on cost of debt finance and its returns on short term investments. This was described by the CAT as “a very binary approach”, in which for the period from 1997 to 2007/08 the rate was wholly based on Royal Mail’s actual returns achieved on various short-term investments – as at that time Royal Mail was a net investor. For the period 2008/09 to the present, the rate was wholly based on Royal Mail’s cost of debt - as from 2007 Royal Mail became a net borrower. The CAT endorsed this approach, considering it was “based on how a rational business such as Royal Mail would have used extra funds that it had at the relevant time.” Importantly, the CAT considered it was “credible on the evidence and it would therefore be more likely that Royal Mail would use the funds in one direction rather than two.”
The resulting award of interest was very significant, as the defendants were ordered to pay Royal Mail over £15.7 million in damages and more than £19 million in interest . It was therefore well worth the effort of adducing the required evidence, given the sums at stake, especially given the age of this cartel.
Interestingly, the CAT’s findings confirm that, before the UK courts, claimants should not have to prove exactly how they would have used the unavailable money, but instead should provide sufficient evidence allowing inferences to be drawn. That is to say the claimants need to convince a court that the hypothetical decisions on which their interest calculations are based would be more likely than not.
Putting these two UK and French judgments into perspective shows that national courts’ approach to the award and calculation of interest is a highly relevant, and sometimes even crucial, consideration for claimants seeking to recover damages stemming from anti-competitive practices. Both decisions also highlight that the key issue in maximising recovery of interest remains adducing appropriate evidence. Whilst this is a commonly accepted principle in English litigation, with the rules of disclosure forcing parties to disclose documents relevant to the issues in the claim, this burdensome exercise may still face psychological barriers on the continent where document production tends to be much more limited in scope.