Too often, litigants overlook prejudgment interest. This compensates for the loss of the use of funds and the effects of inflation after a party suffers economic damages. It’s usually calculated between the date of injury and the date of judgment. In some cases, the amount of interest can approach or even exceed the underlying damages award.
Consider this example: Plaintiff sues Defendant for breach of contract. The alleged breach took place on July 1, 2008. After protracted litigation, Plaintiff wins a $3 million judgment on June 30, 2013. Applicable state law calls for prejudgment interest at a rate of 8%, compounded annually, which in this case results in a prejudgment interest award of more than $1.4 million.
Perhaps the most famous prejudgment interest case is General Motors Corp. v. Devex Corp. In that case, the U.S. Supreme Court upheld a prejudgment interest award of $11 million on just under $9 million in damages.
Given the potential impact on a plaintiff’s recovery, it’s important for plaintiffs and defendants alike to consider prejudgment interest when evaluating a case, developing a litigation strategy or negotiating a settlement. Typically, prejudgment interest is limited to contract-type actions or to economic losses in tort-type actions, although some states allow prejudgment interest on noneconomic damages under certain circumstances.
The amount of interest and the types of damages for which interest is available generally are controlled by state or federal statute. Often, especially in cases involving federal law, courts have discretion to award prejudgment interest calculated to compensate a plaintiff for its economic losses. This may turn on what the plaintiff would have done with the money but for the defendant’s actions. For example, the appropriate interest terms may depend on whether the plaintiff would have invested the money or used it to avoid borrowing to keep its business going.
In these cases, a financial expert can help you build a case for an appropriate interest rate and compounding period.
For more information, please contact Kent Pummel at [email protected]