Just when you thought the drama of Spanish penalty interest had peaked, the recent appeals heard in the Court of Appeal have added another layer of complexity to this legal quagmire. Those initial judgments that stirred up a storm? They were just the beginning. The appeals have been heard and if the first round felt like a never-ending gift, these appeals prove that this particular "gift" still has more legs. 

Introduction and background

Casting our minds back to 4 May 2023, when Mr Justice Martin Spencer handed down judgment on the conjoined appeals of Nicholls v Mapfre and Woodward v Mapfre [2023] EWHC 1031 (KB), 50% of litigators rejoiced having learned that Mapfre’s appeals had been dismissed. The issue at play, is Spanish penalty interest a procedural (and thus governed by the lex fori in accordance with Article 1 (3) of Regulation (EC) No 864/2007 [“Rome II”]) or a substantive (and thus governed by the lex causae in accordance with Article 15 Rome II) remedy?

Mr Justice Spencer, dismissing Mapfre’s appeal, held that: 

1. The Judges at first instance were wrong to exercise their discretion to award Spanish penalty interest rates pursuant to s69 County Courts Act 1984; and
2. Article 20 of the Spanish Insurance Contract Act 50/1980 (which provides for penalty interest) is a substantive right, rather than procedural, and was therefore under the umbrella of Article 15 Rome II, meaning the Court must award interest pursuant to those Spanish provisions. 

Mapfre, clearly being none too pleased about this turn of events, appealed Mr Justice Spencer’s findings. The hearing of that appeal took place on 22 May 2024 at the Royal Courts of Justice before Lords Justice Coulson, Dingemans and Stuart-Smith. While judgment has been reserved, we have gone over the arguments raised by both sides, not only to add even more tension to this hotly awaited judgment but to understand more about where each party is coming from in terms of this contentious issue. 

The Grounds

If the battleground for the appeal was the issues laid before the Court, then surely the submissions by counsel for the parties were the weapons. William Audland KC, representing the Appellant Mapfre, laid out before the Lord Justices of Appeal the four grounds of the appeal to be heard:

Issue one: The fundamental distinction between penalty interest and standard interest

The appellant argued from the outset that there is a fundamental distinction to be drawn between penalty interest and standard interest, with the former designed to penalise a party, in this case under Spanish law, for non-compliance with the Spanish Insurance Contract Act and the latter designed to compensate a claimant for being kept away from his damages since the tort and is fully restitutional in nature. 

After guiding the Lord Justices through the relevant Spanish statute, the appellant submitted that Mr Justice Spencer failed to draw a distinction between standard and penalty interest and that an award of penalty interest falls foul of Article 15 (c) Rome II because, when read in conjunction with Article 13, is clear that the assessment of damage and what is to be decided on a matter of substantive law is restitution. The appellant argued that penalty interest is not restitution as it adds a significant amount more and does not compensate but penalises in order to achieve procedural goals. 

In submission, the appellant argued that applicable law applies to the restitution award and how it should be assessed, but not to a penalty applied to an insurer for failing to comply with civil provisions and that to suggest otherwise was an impermissible use of the law. 

In the second session of the hearing, Matthew Chapman KC and Max Archer, acting for the respondents, made their submissions. 

As to issue one, the respondent questioned whether there was a basis to be found within Rome II regarding what Article 20 of the Spanish Insurance Contract Act 50/1980 describes as compensation for default as procedure despite it being accepted that legal interest as referred to within the 1980 Spanish Act is substantive. 

The respondent’s submission was that a broad approach to the law applicable and a narrow approach to procedure, was necessary, such that it would fall within Article 20 of the 1980 Spanish Act and the scope of the law applicable to the tort, which fits the purposes of the Rome II Regulation. 

Issue two: If Spanish penalty interest is an issue of procedure, can the Court exercise its discretion by application of Spanish Rates under the Spanish Insurance Contract Act 50/1980?

The appellant continued on strand two of the appeal by submitting that if the issue of interest was a matter of procedure, then it was wrong for the judges at first instance to exercise their discretion under s35A Senior Courts Act 1982 and/or s69 County Courts Act 1984 to award interest under English law but applying foreign procedure provisions and that the English provision must be applied alongside Rome II. 

Discussing in detail the fact that the English Civil Procedure Rules has Part 36 much like Greece and Germany have their own provisions to incentivise early settlement, Spain has penalty interest. The purpose of Article 3 Rome II is to ensure that only one set of procedural rules apply, the position as left by Mr Justice Spencer appears to support the view that both Part 36 and Spanish penalty interest can apply concurrently in any given case in which the appellant submitted was entirely the wrong approach. 

The respondent, relying heavily on the pre-Rome II case of Maher v Groupama Grand Est [2009] EWCA Civ 1191, submitted that all the judges in the first instance decisions exercised their powers under s35A and s69 which has not modified a procedural power nor has the Court been fettered by Rome II. The respondent urged the Court to refer to paragraph 40 of Maher which has been used time and time again to show that the Court has the right to exercise its procedural powers. The relevant extract is as follows: 

“[40] In these circumstances I agree with the judge that the existence of a right to recover interest as a head of damage is a matter of French law, being the law applicable to the tort, but whether such a substantive right exists or not, the court has available to it the remedy created by section 35A of the 1981 Act. Having said that, the factors to be taken into account in the exercise of the court's discretion may well include any relevant provisions of French law relating to the recovery of interest. To that extent I agree with the judge that both English and French law are relevant to the award of interest.”

Referring also to passages in Troke v Amgen along with academic support from the likes of Dicey, the Respondents argued that there is no policy consistency of Rome II and discretion under s35A or s69. The respondents urged the Court not to depart from Maher. 

Issue three: The proper approach to interpretation of European Law Instruments

The appellant raised an interesting ground of appeal in stressing the importance of giving words their proper and true meaning. Referencing various cases, legal textbooks and Rome II itself, the appellant submitted that words should not be given a meaning wider than they are suggested as written and that the natural approach should be a matter of law and allowing the lex fori discretion to widen the intended meaning of words cannot make up for a shortfall in the substantive law. The appellant concluded that Rome II is harsh and does cause some injustice, however, the English overriding objective is consistency; the appellant urged the Court not to form a view that Spanish law is unfair and so use a procedural rule to remedy that unfairness. 

The respondents argued that Articles 1, 4 and 15 require construction and that is not made any easier by the language of the draftsman and used examples such as “creditor”, “debtor” and “third party”, which the respondents asked the Court to consider as “claimant”, “tortfeasor” and “travel insurer” respectively. 

Issue four: subrogation

The issue at play with respect to subrogation initially arose in the first instance decision of Sedgwick where the claimant brought a subrogated claim on behalf of her travel insurer for losses it had incurred by way of an insurance policy. In accordance with Article 43 Spanish Insurance Contract Act 50/1980, such claims must be brought by the insurer and not as a subrogated loss, which is the norm in England and Wales. The appellant argued that as a matter of construction and language, Article 4 (1) prevailed and that the law and rights of subrogation are the law of the tort, i.e. Spanish law. 

The respondent argued that Article 19 presents two systems of law allowing a travel insurer party to cross the barrier of entry. The issue in this case, as per Mrs Justice Lambert in Sedgwick, is that the standing of the claimant to pursue a claim for subrogation is a matter of the lex fori, given it is English law that governs the law of the insurance contract. The respondents noted academic support from the likes of Doherty which was a Food Poisoning example. 

Summary

As we await the reserved judgment, the appeal arguments presented provide a fascinating glimpse into the complexities surrounding Spanish penalty interest and its interplay with Rome II. The rigorous debates on whether it is a substantive or procedural remedy highlight the significant financial and legal ramifications for cross-border litigation.

These cases underscore the importance of clear legal interpretation and the potential pitfalls of cross-border issues. The outcome will not only clarify the application of Spanish penalty interest in the English Courts but also set a precedent for future cases involving cross-border, not just where the law applicable is that of Spain. Until the judgment is handed down, litigators and insurers alike will be waiting with bated breath, anxious to see how this contentious issue will ultimately be resolved, if indeed it will be finally resolved and not further appealed to the Supreme Court.