Fundamentals of Prejudgement Interest
March 2010
Parties regularly demand prejudgment interest in their complaints, but too often the rules regarding the propriety and calculation of prejudgment interest are not fully understood, leading to faulty awards.
General Credit
1. The earlier that parties resolve litigation, the less time the prevailing party will be deprived of the benefit in dispute. True False
2. For typical loans, interest “is the compensation allowed by law or fixed by the parties for the use, or forbearance, or detention of money.” True False
3. It is not the purpose of prejudgment interest to compensate for the time that the plaintiff was denied use of the money or property in dispute. True False
4. In tort actions, awarding prejudgment interest essentially gives the plaintiff the benefit of the bargain denied by the defendant. In contract actions, prejudgment interest serves to make the plaintiff whole for the out-of-pocket losses suffered. True False
5. Since prejudgment interest is not considered a part of the plaintiff’s damages, it cannot be awarded unless separately requested in the complaint. True False
6. Because interest in general cannot be recovered against a state or municipality, prejudgment interest is also unavailable in a suit against a state or municipality. True False
7. To ensure fairness to the losing side, prejudgment interest is generally available only if and starting when the damages become certain or capable of calculation. True False
8. In order to obtain an award of prejudgment interest, it is not necessary for the defendant to know how much is owed because a defendant can reasonably be expected to pay a debt even before the defendant is able to compute its amount. True False
9. No demand need ever be presented by a plaintiff to start the running of interest, including when a defendant does not know or cannot readily compute damages. True False
10. In contract actions, awarding prejudgment interest is mandatory on liquidated claims, and for previously unliquidated contract claims, prejudgment interest can be awarded “from a date prior to the entry of judgment as the court may, in its discretion, fix, but in no event earlier than the date the action was filed.” True False
11. In noncontract cases, particularly those involving oppression, fraud, or malice, prejudgment interest may be awarded in the discretion of the trier of fact, but not with respect to noneconomic damages (such as pain and suffering) because these are speculative and unliquidated before a verdict. True False
12. Since prejudgment interest is not a substitute for exemplary damages, prejudgment interest and exemplary damages may never be awarded in the same case. True False
13. Although most courts calculate the daily interest factor for prejudgment interest by multiplying the principal sum due by the applicable interest rate, and then dividing the product by the 365 days in a year, some courts use the “bank industry” method and divide the product by 360 rather than 365. True False
14. In contract cases, prejudgment interest runs at the annual rate of 7 percent, unless the contract stipulates a different interest rate (whether lower or higher than 7 percent), and in all other cases and absent any statute to the contrary, prejudgment interest runs at the constitutional rate of 10 percent. True False
15. In contract actions, the compounding of prejudgment interest may be allowed in the discretion of the trier of fact. However, in all other cases, compounding is generally barred by the Usury Law unless the debtor signs an express agreement allowing for compound interest. True False
16. The special prejudgment interest allowed in personal injury actions, when a judgment exceeds a prior rejected statutory offer to compromise, is not added to the judgment and does not bear postjudgment interest. True False
17. Because a single late fee is not considered a liquidated damage for late performance, the late fee should probably not bear prejudgment interest along with the unpaid balance. True False
18. In automobile and consumer credit sales, finance charges are not considered interest, but the rate establishes the rate used for prejudgment interest. True False
19. Although contractual arbitration awards bear prejudgment interest at 10 percent annually from the date the award is issued, no case deals with awards that already contain preaward interest. True False
20. Equitable subrogation claims by insurers, to recover payouts to their insureds from third parties, bear prejudgment interest annually from the date a demand was served on the defendant. True False
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