The Calculation of Prejudgment Interest
36 Pages Posted: 1 Jun 2005
Date Written: 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 plaintiffs.
Keywords: Prejudgment interest, litigation, trial, compensation
JEL Classification: G39, K10, K49
Suggested Citation: Suggested Citation