Compound interest
Also called: Interest on interest
Interest calculated on both the original principal and on interest previously accrued, so the total grows at an accelerating rate.
Definition
Compound interest adds interest to the running balance (principal plus accrued interest) at each calculation period, so that interest itself attracts further interest. In English civil litigation, the default is simple interest — the court awards interest on the principal sum only (not on accrued interest). Courts can award compound interest only in equity, where a special claim is made: the jurisdiction derives from Wallersteiner v Moir (No 2) [1975] QB 373, in which the Court of Appeal confirmed the equitable jurisdiction to award compound interest where the defendant has wrongly used money to which another was entitled, particularly in cases of breach of fiduciary duty, fraud, and deliberate breach of contract. The Supreme Court expanded the jurisdiction in Sempra Metals v IRC [2007] UKHL 34 to commercial claims. In practice, compound interest claims require specific pleading — they will not be awarded by default. For most everyday civil claims (breach of contract, personal injury, small claims), interest is simple at 8% per year.
In practice
If you are pursuing a commercial claim involving misappropriation of funds, fraud, or serious breach of fiduciary duty, it may be worth asking your legal adviser whether compound interest should be claimed. For standard debt and consumer claims, expect simple interest only. The <a href="/glossary/statutory-interest" class="body-link">statutory interest entry</a> and the <a href="/glossary/daily-rate-of-interest" class="body-link">daily rate of interest entry</a> explain the simple interest calculation used in most claims. The <a href="/tools" class="body-link">interest calculator</a> computes simple interest to the date of judgment.