Calculating Prejudgment Interest in Construction Defects Cases
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Construction defects claims are earning interest from the date of loss. As a result, prejudgment interest is accruing even before construction defects are discovered. Prejudgment interest can be a substantial amount in construction defects cases. Especially if it is a large commercial construction defects case or a community association construction defects case. In these types of cases, it is often many years before damage from the construction defects manifests. Therefore, it is not uncommon for the judicial system to take more than five years to resolve a construction defects claim.
It can often be ten years or more between the time the Certificate of Occupancy is issued and a judgment is rendered in the trial. Also, ten years or more in prejudgment interest can often be more than half of the actual damages sought in this type of case. Historically, owners waived these large prejudgment interest awards in favor of settlement. Every case is unique, but waiving prejudgment interest can leave significant money on the table. This blog will discuss some of the basics of prejudgment interest.
What Is Prejudgment Interest?
Prejudgment interest is essentially used to make a plaintiff “whole” again after being deprived of the use of the “principal loss amount” of the plaintiff’s claim. Becker Holding Corp. v. Becker, 78 F.3d 514, 516 (11th Cir. 1996). It reimburses a plaintiff from the time of loss to the time the final judgment is entered. Id.
Damages are liquidated when “the proper amount to be awarded can be determined with exactness from the cause of action as pleaded,” such as by mathematical computation or definitive rules of law. Rich v. Spivey, 922 So. 2d 326, 327 (Fla. 1st DCA 2006). However, damages are unliquidated when “the ascertainment of their exact sum requires the taking of testimony to ascertain facts upon which to base a value judgment.” Id. Damages can become liquidated when a jury verdict establishes the amount of damages, and then once a verdict acts to liquidate the damages as of a certain date, prejudgment interest becomes a matter of right. See Bosem v. Musa Holdings, Inc., 46 So. 3d 42, 43 (Fla. 2010).
“Prejudgment interest compensates the plaintiff for the loss of use of the amount awarded, and thus interest accrues from the date the money was due until the date of judgment.” Regions Bank v. Maroone Chevrolet, LLC, 118 So.3d 251, 257 (Fla. 3d DCA 2013). “The computation of prejudgment interest is a purely ministerial duty and is not affected by the merit of the defense or the certainty of the amount of loss.” Wood v. Unknown Personal Rep. of Estate of Samuel E. Burnette, 56 So.3d 74, 76 (Fla. 2d DCA 2011).
How Is Prejudgment Interest Calculated?
While courts will enforce a prejudgment interest rate that is provided for in a contract, the rate that applies to a case with no previously agreed upon rate is determined by statute. Florida’s Chief Financial Officer is in charge of setting the judgment interest rate on a quarterly basis. Pursuant to Florida Statute § 55.03:
On December 1, March 1, June 1, and September 1 of each year, the Chief Financial Officer shall set the rate of interest that shall be payable on judgments or decrees for the calendar quarter beginning January 1 and adjust the rate quarterly on April 1, July 1, and October 1 by averaging the discount rate of the Federal Reserve Bank of New York for the preceding 12 months, then adding 400 basis points to the averaged federal discount rate. Fla. Stat. § 55.03.
The interest rate set as of August 2018 is 5.97% per annum. See Division of Accounting and Auditing. However, historically, this rate has been as high as 12%. See Historical Judgment Interest Rates. Sections 215.422(3)(b), 337.141(3) and 687.01 of the Florida Statutes require the use of this rate:
- for “the payment of interest for late payments to vendors;
- for late payments on construction or maintenance contracts administered by the Department of Transportation; and
- for cases where a rate of interest is not specified in a contract.”
So to avoid the fluctuation and uncertainty of the statutory interest rate, and to better predict its future obligations, you want to include a prejudgment interest rate within the terms of each contract.
The prejudgment interest rate is the rate which is effective at the time of entitlement. IberiaBank v. Coconut 41, LLC, 984 F. Supp. 2d 1283, 1300 (M.D. Fla. 2013). The statutory interest rates from 2000 through 2018 are as follows:
2018 5.97% 2008 11.00%
2017 4.97% 2007 11.00%
2016 4.75% 2006 9.00%
2015 4.75% 2005 7.00%
2014 4.75% 2004 7.00%
2013 4.75% 2003 6.00%
2012 4.75% 2002 9.00%
2011 6.00% 2001 11.00%
2010 6.00% 2000 10.00%
From What Date Does Prejudgment Interest Accrue?
Florida courts follow the “loss theory” as to prejudgment interest because “interest is merely another element of pecuniary damages.” Berloni S.p.A. v. Della Casa, LLC, 972 So. 2d 1007, 1011 (Fla. 4th DCA 2008). Under the “loss theory,” neither the “merit of the defense nor the certainty of the amount of loss affects the award of prejudgment interest.” Id. at 1012. Instead, the “loss itself” is a “wrongful deprivation” of the plaintiff’s property by the defendant. Argonaut Ins. Co. v. May Plumbing Co., 474 So. 2d 212, 215 (Fla. 1985).
Good Faith Controversy
Therefore, if the breach of a contract to pay a certain amount of money is caused by “good faith controversy as to the amount due under the terms of a contract,” when a verdict liquidates the damages “the plaintiff is entitled to prejudgment interest on the amount found to be due” and from the date the debt was due. Berloni, 972 So. 2d at 1012. However, when the due date is in dispute and the court cannot determine the date of loss, the court may decide to award interest from the date the lawsuit was filed. Id.
Completion Of Construction
Also, determination of the date of loss is not as simple in a construction defects case as it is in a breach of contract case. In a construction defects case, there are likely many construction defects and determination of when the construction defect accrued may not be simple. Nevertheless, in construction defects cases, the defects are generally present upon completion of construction. As a result, some courts have held that the date of turnover in a community association construction defects case is the proper date from which prejudgment interest should accrue. Pine Ridge at Haverhill Condo. Ass’n, Inc. v. Hovnanian of Palm Beach II, Inc., 629 So. 2d 151 (Fla. 4th DCA 1993).
Failure To Establish An Actual Date Of Loss
It might seem that the date a certificate of occupancy is issued would also be an appropriate date. However, at least one case has held that the failure to establish an actual date of loss results in the forfeiture of prejudgment interest. Albanese Popkin Hughes Cove, Inc. v. Scharlin, 141 So.3d 743, 746-47 (Fla. 3d DCA 2014).
Albanese conflicts with several other cases that state that at a minimal prejudgment interest is always appropriate from the filing of the lawsuit forward. Specialized Transportation of Tampa Bay, Inc. v. Nestle Waters North America, Inc., 356 Fed. Appx. 221, 231 (11th Cir. 2009); Hawkins v. Condominium Owners Ass’n of Sand Cay, Inc., 2012 WL 4761357 (M.D. Fla. 2012); Arizona Chemical Co., LLC v. Mohawk Industries, Inc., 2016 3879252 (Fla. 1st DCA 2016); Wood v. Unknown Per. Rep. of the Estate of Burnette, 56 So.3d 74, 76 (Fla. 2d DCA 2011); Berloni S.p.A. v. Della Casa, LLC, 972 So. 2d 1007, 1011 (Fla. 4th DCA 2008).
Date Of Repairs
Finally, in Riverside Avenue Partners, Limited v. The Auchter Co., Riverside Avenue Partners (“RAP”) filed suit against The Auchter Company (“Auchter”) for a declaratory judgment, damages for breach of contract, and for breach of the performance bond, related to Auchter’s construction of a 13-story office building. Id. at 2. RAP alleged that damages included deficiencies in the “glass and glazing systems of the building envelope,” as well as “unfinished or deficient punch list work.” Id.
The court found that RAP was entitled to damages for breach of contract and breach of the performance bond. Additionally, the court determined that RAP was entitled to prejudgment interest as to repairs to the “building envelope,” repairs or completion of “deficiency items on the punch list,” as well as to its delay damages from the date “each rental installment would have come due or [when] the extended financing was paid or incurred.” Id.
Time Of Entitlement
Importantly, the court determined the appropriate prejudgment interest rate was the effective rate at the time of “entitlement.” Id. at 57. Consequently, the court found that the date of “substantial occupancy” was the most logical date of entitlement. That’s because it reflected when RAP started to accrue its losses. Id. So although the statutory interest rates for prejudgment interest are lower now than in the past, a plaintiff may be able to recover at those higher rates, based on the time of entitlement.
Why Is Prejudgment Interest Important When It Comes To Construction Defects?
Suppose a condominium association board sues a builder for construction defects. In 2011, the builder turned over the building to the association. Then in 2018, the verdict is entered and the association receives an award of $4 million. In this case, the association could recover almost $2 million in prejudgment interest, in addition to the $4 million in damages awarded. However, there is no guarantee of prejudgment interest. There are defenses, including statute of limitations, which may bar recovery of prejudgment interest.
Prejudgment interest is a factor of damages often overlooked when negotiating a claim. However, it is not uncommon for the prejudgment interest component of damages in complex construction defects cases to be half again the actual damages. By the time the significant negotiation of a construction defects claim begins, it is often more than five years after the certificate of occupancy is issued. Depending on the year, the prejudgment interest accrued in five years may be 30 percent or more of the claim. Thus, those who are contemplating the filing of a construction defects claim would be wise to seek legal counsel regarding the calculation of prejudgment interest.
 Rate changed to 4.75% on October 1, 2011.
Original Article Publish Date:
September 15, 2016
Updated Article Publish Date:
August 6, 2018