1.4 Legal Applications

Time value of money appears in numerous legal contexts. This section considers some simple examples that arise from the litigation process - namely, pre-judgment interest, post-judgment interest, and structured court judgments. It also looks at how damages are computed in a case of contract breach.

As you review these materials, ask yourself whether the courts seem to know what they're doing. What policy decisions do their approaches to past and future payments reflect? How do they calculate interest (discount rate)? Whose responsibility is it to point out, for example, mistakes in methodology or interest rate choices? When is compound interest appropriate, and when not?

1.4.1 - Prejudgment interest

Justice is not immediate. It may take months or (very often) years before an injured party receives an enforceable judgment. To compensate for the loss of the use of funds and the effects of inflation after the party suffers cognizable economic damages, courts sometimes award "pre-judgment interest." (More 1.4.1>>)

1.4.2 - Post-judgment interest

Even after winning a judgment, payment (and justice) may be further delayed. “Post-judgment interest” compensates the successful party for the lost use of money from the trial court’s original judgment until the time the judgment is actually paid—including the period during which appeals are pending. (More 1.4.2>>)

1.4.3 - Structured court judgments

Sometimes known as viatical settlements, court judgments or settlements that call for payments by the defendant to the plaintiff over time offer advantages to both parties. The defendant can pay from revenues as they become available, increasing available funds with which to pay plaintiff. The plaintiff will receive a stream of payments that may exceed, even when valued in present terms, what the defendant would have been willing or able to pay in a lump sum. The plainitff will also be assured a stream of income, rather than a lump-sum payment that might be squandered. (More 1.4.3>>)

1.4.4 - Contract damages

Contract damages usually involve past and future events. (More 1.4.4>>)

Laycock v. Parker, 79 N.W. 327, 332 (Wis. 1899):

“The question of interest is one much more often passed upon than carefully considered by courts. It is usually presented only incidentally to much more important issues, and often decided one way or the other at the close of exhaustive investigation of the other questions, and with the perhaps unconscious feeling that it is not of sufficient magnitude to justify further serious labor. Again, the elements involved in determining the question are many of them so elastic in their application that cases may be rightly resolved in different ways without the distinction being apparent from the statement of them."

"With some exceptions, these observations could be made with equal pertinence today.” Nelson v. Travelers Ins. Co., 306 N.W.2d 71, 75 (Wis. 1981).