The Competition Bulletin is pleased to welcome the latest in our series of blogs by Oxera Consulting on key economic concepts for competition lawyers. In this blog, Enno Eilts, a Senior Consultant, discusses issues connected with the calculation of interest in damages actions.
Compensation for antitrust and commercial damages is often claimed after a significant delay, sometimes many years after the damage has been suffered. Interest is routinely added to such claims to account for the effects of money losing its value over time, as well as the lost opportunity to the injured party from having the capital at its disposal.
While the recently adopted European Directive on antitrust damages actions will help to iron out some cross-jurisdictional differences (for example, with regard to disclosure and limitation periods), this applies to a lesser extent to the question of applying interest. Here, member states are required to lay down the rules. This makes the application of interest an important consideration for claimants—and defendants—when choosing the forum in which to bring a claim.
So how should the interest component of a damages claim be calculated? And what difference does it make?
This blog post illustrates the importance of the interest component in damages claims, and compares how interest might be applied in the UK, Germany and the Netherlands—the three jurisdictions that currently seem to attract the largest number of antitrust follow-on claims. It then discusses some of the relevant economic considerations when applying interest.
What difference does it make?
The law on applying interest in damages cases is complex and varies between countries. Apart from the period over which interest is to be applied, the central questions relate to the rate that is used (i.e. a statutory or an economic rate) and the methodology applied (simple versus compound interest).
The table below illustrates the difference that using different rates and methodologies for calculating interest can make to the value of a claim in the UK, Germany and the Netherlands. In each example, the claimant incurred a damage of £10,000,000 spread equally over the years 1999 to 2003.
Calculating interest in the UK, Germany and the Netherlands—illustrative examples using typically applied interest rates
|Value of the claim before adding interest||£10,000,000||€10,000,000||€10,000,000|
|Interest rate used||Bank of England base rate +2%||Bundesbank base rate +5%||European Central Bank base rate +7%|
|Value of the claim in 2014 after adding interest||£16,600,000||€18,400,000||€31,900,000|
Note: The increase in the claim value is calculated on the basis of a damage that occurred between 1999 and 2003 (in equal proportions each year) and is claimed in 2014. The legal questions around calculating interest are complex. The purpose of the above table is to illustrate the effects of using different interest rates and methodologies on the value of a claim, rather than to make the case for or against the use of these rates and methodologies.
The table illustrates that, in the case of damages that occurred between 10 and 15 years ago, the interest component of a claim brought in the UK or Germany in 2014 could increase the value of the claim by 66% or 84%, respectively if simple interest is used. In contrast, applying interest on a compound basis in the Netherlands could more than triple the value of the claim.
Why add interest?
As victims of antitrust and commercial damages tend to be unaware of having been harmed, they often claim compensation only years after the harm was suffered. For example, in the case of the car glass cartel, about a decade elapsed between the start of the cartel period in 1998 and the time when potential victims are likely to have found out that they might have been harmed—i.e. when the European Commission published its decision in 2008.
From an economics perspective, adding interest to a damage amount that was incurred in the past is sensible. This is because £1 today has a greater value than £1 in ten years’ time. Damages awarded ten years ago would therefore have had a higher value to the victim at the time than if they had had to wait until today to be awarded the damage. This is partly because of the loss of value over time (due to inflation), but it is also due to the loss of opportunities (for actually using the money).
Consistent with economic principles, compensation rules in EU law mean that damages awards should include interest. The objective is to place the injured party in the position it would have been in had there been no infringement. This seems to imply not only that the direct damage from the competition law infringement should be reflected when determining the damages awarded to the claimant, but also that compensation for the loss of opportunities due to the deprival of funds should be considered.
However, legal rules and practices vary significantly across jurisdictions, and across cases within jurisdictions. Some approaches to applying interest are somewhat at odds with economic principles—if the objective is, indeed, adequate compensation. One specific issue is whether interest is calculated on a simple or a compound basis. Another is that various jurisdictions stipulate the use of statutory interest rates rather than commercial/market-based interest rates.
What interest rate should be applied?
If the objective is to place an injured party in the position it would have been in had there been no infringement, the relevant question in terms of adding interest is what the party would have done with the funds that it lost at the time. One metric that takes this aspect into account is the cost of capital.
The cost of capital reflects the ‘normal’ returns that a claimant can be expected to earn in the long run. Thus, damages uprated at the cost of capital would capture the expected returns that the claimant could have earned on the amounts lost had they been available for investment.
An alternative option is the risk-free rate. This is usually approximated by the rate on a virtually risk-free investment such as a government bond. The rationale for this is that the repayment of damages is certain once awarded (subject to the defendant’s inability to pay). Using the risk-free rate therefore only compensates the claimant for the time value of money, without a risk component.
As illustrated in the table above, national courts have tended to adopt a ‘middle way’ between the cost of capital and the risk-free rate by applying statutory or quasi-statutory rates of interest. These tend to be based on a central bank’s base rate plus a premium. Using a statutory interest rate is often seen as ‘likely to do rough justice in most cases’ while avoiding the complication of enquiring into the particular financial circumstances of an individual victim.
In principle, a company’s cost of capital can be higher or lower than the statutory interest rate applied by the court, depending on the relevant jurisdiction. Which rate results in a higher or lower value of claim therefore depends on the circumstances of the case and the jurisdiction in which the claim is brought. The risk-free rate, in contrast, is lower than the cost of capital and is also likely to be lower than the statutory interest rate, as the latter usually incorporates a mark-up in excess of the risk-free rate (e.g. defined as base rate + x%, as shown in the table).
Compound or simple?
Interest rates can be applied as simple and compound interest. When applying the simple methodology, interest is calculated solely as a percentage of the principal sum. When the interest is compounded, the calculation includes interest on accumulated interest from prior periods. As such, adding compound interest increases the claim value by a larger degree than adding simple interest.
From an economics perspective, compounding interest is the usual, and conceptually correct, approach. A savings bank, for example, pays interest on a whole balance, including past interest. Nonetheless, there are many instances where the legal framework requires simple interest to be applied. For example, certain provisions in German law explicitly states that interest should be calculated on a simple basis.
However, there does seem to be appetite for change. For example, ten years ago the Law Commission for England and Wales recommended the application of compound interest, as it better reflects commercial reality. In the Sempra Metals case, the UK House of Lords ruling also notes that a claim based on simple interest ‘will inevitably fall short of its true value’.
Interest calculations in damages cases brought in the Netherlands tend to be more in tune with economic principles. Here, interest on past damages is routinely calculated on a compound basis (as illustrated in the table).
Courts generally accept that, to adequately compensate victims, interest should be added to damages suffered in the past. However, the rates used and the methodologies applied to calculate the interest component of a claim vary greatly across jurisdictions. This can have a significant impact on a claim’s value.
While some cross-jurisdictional differences will be reduced by the Directive on antitrust damages actions, a significant degree of flexibility is likely to remain with regard to applying interest. This makes the interest component an important aspect of a claimant’s choice of jurisdiction for bringing a claim.
 Directive of the European Parliament and of the Council on certain rules governing actions for damages under national law for infringements of the competition law provisions of the Member States and of the European Union (November 2014).
 Case: 1178/5/7/11 2 Travel Group PLC (in liquidation) v Cardiff City Transport Services Limited.
 Pursuant to §288 German Civil Code (Bürgerliches Gesetzbuch, BGB).
 Article 6:119a Dutch Civil Code (Burgerlijk Wetboek).
 European Commission (2008), ‘Summary of Commission Decision of 12 November 2008 relating to a proceeding under Article 81 of the Treaty establishing the European Community and Article 53 of the EEA Agreement (Case COMP/39.125 — Car glass)’, available here.
 Joined cases C-295/04 to C-298/04 Manfredi  ECR I-6619, 95.
 Credit Lyonnais SA v Russell Jones & Walker  PNLR 2, Laddie J at 27-28.
 § 289 Bürgerliches Gesetzbuch.
 Law Commission, Pre-Judgement Interest on Debts and Damages, Report Law Com No 287, 24 February 2004.
 Sempra Metals Ltd v. Revenue & Anor  UKHL 34, 18 July 2007.