1.4.1 Pre-judgment 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."
At first glance, it may seem that prejudgment
interest would be of minor importance—only
a small percentage tacked on to the principal
award. Indeed, for centuries many courts have
approached the issue with this attitude. But,
as the time between injury and judgment grows—as
it often does in complex, high-stakes litigation—the
potential impact of prejudgment interest grows
Despite the importance of prejudgment interest,
there is no uniform method for determining it.
In some jurisdictions, courts have wide discretion
on whether and how to calculate the prejudgment
interest and what factors to consider in determining
the interest. In other jurisdictions, there are
strict statutory or common law prescriptions on
the application and calculation of prejudgment
King Tobacco Company has entered into negotiations
with the State of New Columbia to compensate the
state for its health-related costs related to
tobacco use. The company says it will pay the
State of New Columbia $200,000,000 for the payments
incurred by the state over the last twenty year
-- which have averaged $10 million per year for
the last 20 years. (More>>)
Simple vs. compound. Some
courts may apply only a basic calculation of “simple
interest,” while other courts may apply
some form of “compound interest.”
The common-law rule is that prejudgment interest
is not compounded. See Restatement (Second)
of Contracts § 354 cmt. a (1981); Michael
S. Knoll, A Primer on Prejudgment Interest,
75 Tex. L. Rev. 293 n. 76 (1996).
Many states have liberalized this rule by adopting
statutes that set out with varying degrees of
specificity the method and manner in which prejudgment
interest may be calculated. Whether by case law,
statute, or both, the guidelines imposed on a
court’s decision to grant prejudgment interest
can vary widely.
Choice of rate. When court have
discretion to choose the pre-judgment interest
rate, many choose an interest rate equal to the
defendant's cost of funds.
Lost statutory rights. The methods
for computing prejudgment interest may also inform
how to value lost statutory rights. For example,
when a corporate issuer fails to provide investors
registration rights as required by contract, it
might be argued that compensation for the lost
rights should take into account the lost liquidity
value. Using a method of "synthetic registration
rights", Professor Barondes asserts the prevailing
method of computing the rate of prejudgment interest
(the defendant's cost of capital) can improperly
shift value from corporate investors to corporate
creditors. See Royce de R. Barondes, "Valuing
1933 Act Registration Rights" Working Paper
Consider the approaches
in different states on the question of simple
or compound interest in awarding pre-judgment
- New York courts have fairly unfettered freedom
to award prejudgment interest, providing that
“interest and the rate and date from which
it shall be computed shall be in the court's
discretion.” N.Y.C.P.L.R. § 5001
- California courts have discretion whether
to grant prejudgment interest. Cal. Civil Code
§ 3288 (2001).The California Supreme Court
has recently ruled, however, that this discretion
does not include the power to grant compound
interest—only simple interest calculations
are allowed. Hess v. Ford Motor Co.,
27 Cal. 4th 516, 533, 41 P.3d 46, 58 (2002).
- North Carolina courts must add interest to
the principal amount of the award. N.C. Gen.
Stat. § 24-5 (2001). The rate is that set
by contract agreed upon by the parties or, absent
that, the legal rate provided by statute (§
24-4: 8% per annum, “and no more.”
Courts have interpreted the statute as permitting
courts to use a rate below the statutory rate.
- Delaware does not permit compounding of prejudgment
interest. Del. Code Ann. tit. 6, § 2301(a)
(2001). Notably, however, Delaware courts may
choose simple or compound interest in appraisal
proceedings. Del. Code Ann. tit. 8, 262(i) (2001).
- Federal courts are generally granted wide
latitude in the award of prejudgment interest—including
whether to apply simple or compound interest.
See, e.g., Bio-Rad Lab., Inc. v. Nicolet
Instrumental Corp., 807 F.2d 964, 969 (Fed.
| Michael S. Knoll & Jeffrey Miguel
Colon, "The Calculation of Prejudgment Interest"
paper 732765 (May 31, 2005)
This Essay describes the proper method of calculating
prejudgment interest based on sound financial
principles. Using the paradigm that the claim
plaintiff holds in litigation represents an involuntary
loan from plaintiff to defendant and recognizing
that in bankruptcy courts treat legal claims similarly
to unsecured debt, we argue that prejudgment interest
should be computed using the defendant's unsecured
borrowing rate. Furthermore, we argue that courts
should use a short-term, floating interest rate
rather than a long-term rate in order to provide
the proper incentive for the parties to settle.
We criticize alternative bases for awarding prejudgment
interest and address modifications to account
for taxes, insurance, foreign currency conversion,
asynchronous payments, and suits involving individual
"Rejecting the Marie Antoinette
Paradigm of Prejudgment Interest"
ROYCE DE ROHAN BARONDES, CORI Working Paper
This paper examines principles for properly
prejudgment interest by examining the impact on
different corporate constituencies. This paper
concludes that prejudgment interest at a promisor's
cost of funds can undercompensate promisees, by
shifting value from the promisee's equityholders
to its creditors through a forced investment that
decreases the risk of the promisee's portfolio
* * *
"Prejudgment Interest in International Arbitration"
JEFFREY M. COLON, Fordham University - School of Law
MICHAEL S. KNOLL, University of Pennsylvania Law School, University of Pennsylvania - Real Estate Department
Tribunals in international arbitration are regularly asked by claimants to award prejudgment interest. Unless foreclosed by an agreement between the parties, there is widespread agreement prejudgment interest should put the claimant in the same position as it would have been had it not been injured by the respondent. However, there is little consensus how to calculate prejudgment interest in order to accomplish that purpose.
In this Essay, we describe the proper method of calculating prejudgment interest based on sound financial principles. Using the paradigm that the respondent has forced the claimant to make an involuntary loan to the respondent, we argue that prejudgment interest should be computed using the respondent's borrowing rate. Furthermore, we argue that tribunals should use a series of short-term, floating interest rates rather than a single long-term rate at the commencement of the dispute in order to provide the parties with the proper incentive to settle their dispute. We also discuss how the calculations are different when the parties are individuals and closely held corporations as opposed to corporations and governments, and we address complications that arise when a tribunal calculates damages in one currency and makes a final award in another currency.
* * *
"Interest as Damages"
THIERRY SENECHAL, International Chamber of Commerce
JOHN Y. GOTANDA, Villanova University School of Law
In this article, we posit that when arbitral tribunals decide international disputes, they typically fail to fully compensate claimants for the loss of the use of their money. This failure occurs because they do not acknowledge that businesses typically invest in opportunities that pose a significantly greater risk than the risk reflected in such commonly used standards as U.S. T-bills and LIBOR rates. Claimants also must share the blame when they do not set out a well-constructed claim for interest as damages. However, even when claimants do so, tribunals often award damages at a statutory rate or at rate reflecting a nearly risk-free investment because they are unfamiliar with modern economic and financial principles. We propose changing this practice. We set out a legal framework for allowing an award of interest as damages and then furnish a model for claimants and tribunals to use. Under this model, interest accrues at a risk-free interest rate plus a market risk premium with the interest award to be compounded on a yearly basis. This model would bring awards in line with modern economic realities and more accurately compensate injured parties.
For further reading:
- David E. Ault and Gilbert L Rutman, The
Calculation of Damage Awards: The Issue of "Prejudgment
Interest," Journal of Forensic
Economics, Vol. 12, No. 2,Spring/Summer 1999.
- John C. Keir & Robin C. Keir, Opportunity
Cost: A Measure of Prejudgment Interest,
39 Bus. Law. 129 (1983).
- Michael S. Knoll, A
Primer on Prejudgment Interest, 75
Tex. L. Rev. 293 (1996)
- Student paper, Andre
Wiggins, An Introduction to Prejudgment
Interest for Advocates.
Consider the case of In
the Matter of: Oil Spill by the Amoco Cadiz,
954 F.2d 1279 (7th Cir. 1992). The suit was brought
by the government of France, as well as private
French citizens and businesses, against the Amoco
Oil Company when one of Amoco’s supertankers,
the Amoco Cadiz, ran aground in the North Sea
and dumped millions of gallons of oil on the Brittany
coast in 1978.
The litigation continued for thirteen
years. When the case reached the Seventh Circuit
in 1992, the court awarded the plaintiffs $65
million in damages and $148 million in prejudgment
interest. The power of compounding interest and
the sharp increase in inflation during the late
70’s and early 80’s, along with other
factors considered by the court, combined to make
the prejudgment interest more than double the
principal damages award. (More>>)