Glossary
Prejudgment Interest
Prejudgment interest is interest awarded by a court on a money claim for the period between when the debt became due and when judgment is entered.
Prejudgment interest compensates a creditor for the time value of money it should have received earlier. When a court enters judgment on an unpaid commercial account, it may add interest running from the date the debt was due, or from another date such as the date of demand or the date suit was filed, up to the date of judgment. After judgment, a separate post-judgment interest rate usually applies.
The rules come mostly from state law, and they differ in important ways. Some states award prejudgment interest as a matter of right on liquidated sums, meaning amounts that are fixed or easy to calculate, like unpaid invoices. Others leave it to the court's discretion. The rate may be the contract rate if the parties agreed to one, a fixed statutory rate, or a rate tied to a published index. Some states also set rules for when interest starts to run. Federal courts hearing state law claims generally look to state law for prejudgment interest.
Consider a fictional example. Westfield Office Interiors sues a tenant improvement contractor for $40,000 in unpaid invoices. There was no interest rate in the parties' agreement. The court enters judgment 18 months after the invoices were due and, applying the state's statutory rate for prejudgment interest on contract claims, adds interest for that period. If the contract had set a lawful interest rate, the court might have applied that rate instead.
Prejudgment interest matters to a creditor because commercial lawsuits take time, and without interest a debtor gets the benefit of delay at no cost. Knowing whether interest is available, at what rate, and from what date helps a creditor value a claim, evaluate settlement offers, and decide whether to file suit. A written interest clause in the credit agreement often gives the creditor a clearer path.
Example
Westfield Office Interiors wins a $40,000 judgment 18 months after the invoices were due. With no contract rate, the court adds prejudgment interest at the state's statutory rate.