Effect of prejudgment interest.

• Author: Keith, Chris
• Position: Letters

In commenting on Jorge Lopez's article published in March and Judge Herring's responding article in July/ August, I offer two points: First, the rationale for the imposition of prejudgment interest is less important than the effect of prejudgment interest on the behavior of defendants, and, second, arguing over whether to compound interest eschews the court's subordination to the command of the legislature in our system of government.

The rationale for the imposition of prejudgment interest affords only a justification for the rule. It is not the talisman of the policy. The effect of a rule of law upon the shape of society should be the justification of the rule. Our common law tradition teaches us to look to prior decisions. That system affords our society continuity while permitting individuals liberty to meet changing needs. But too great a reliance upon precedent may eschew the benefit of increasing knowledge of human behavior afforded by the social sciences, economics in this case.

Prejudgment interest is recoverable in contract from the date of breach. This rule requires a party contemplating breach to factor into his breach, no-breach, calculus the true cost to the plaintiff of the breach. If prejudgment interest were not available, a party would discount the cost to the plaintiff by the implicit interest rate in conjunction with the time to judgment.

An example: If the cost of breach to the plaintiff is $100 and the interest rate is 10 percent and it takes one year to get to judgment, then the perceived cost of the breach to the defendant is about $91. The defendant's perceived cost will tend to encourage breaches of contract where it is not optimal from a societal perspective. That is, societal wealth will not be maximized. Therefore, the imposition of prejudgment interest in contract cases may make sense. Whether imposing prejudgment interest makes sense requires an inquiry into additional factors. Those factors include the rate of interest and transaction costs among others.

As Mr. Lopez tells us, in tort actions prejudgment interest is not available, at least not until the date of the verdict, for injuries, though economic damages will accrue interest from the date the economic damages are incurred. An analysis similar to that just considered in the contract case will lead one to the conclusion that failing to award prejudgment interest for injuries will tend to cause defendants to underinvest in accident prevention...