Three Contract Provisions a Small Business Cannot Live Without – From a Litigator’s Perspective, Part 4: Contractual Provisions (Prejudgment and Postjudgment Interest)
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Every small business contract should include a provision that states that the business is entitled to recover the maximum rate of interest permitted by law both prejudgment and postjudgment. Many contracts provide for the recovery of interest, but very few provide for the recovery of postjudgment interest at the highest rate permitted by law.
Part 1 of this Blog provided an overview of the importance of including a provision in a small business contract for the recovery of the maximum interest permitted by law. Failing to include such a provision is a big mistake for small businesses. Part 4 further analyzes the right to prejudgment and postjudgment interest.
Prejudgment Interest versus post judgment interest
Prejudgment interest is interest awarded on an obligation that is calculated from the date of injury to the date of final judgment. See Peavy v. Dyer, 605 So. 2d 1330, 1331 (Fla. 5th DCA 1992). In the context of a small business contract, prejudgment interest is the interest that accrues on the outstanding balance before a judgment is entered.
On the other hand, postjudgment interest is interest that accrues on the total amount of the final judgment. If prejudgment interest is awarded in a final judgment, post judgment interest accrues on the prejudgment interest. As provided in Peavy, if prejudgment interest “is awarded in the final judgment, prejudgment interest, like all other elements of damage, becomes part of a single total sum adjudged to be due and owing. See Phillips v. Parrish, 585 So. 2d 1038 (Fla. 1st DCA 1991). The amount awarded for prejudgment interest, like all other components of the ‘judgment’, automatically bears interest as provided by section 55.03, Florida Statutes.” Peavy, 605 So. 2d at 1332; See also Quality Engineered Installation, Inc. v. Higley South, Inc., 670 So. 2d 929, 931 (Fla. 1996) (approving Peavy v. Dyer, 605 So. 2d 1330 (Fla. 5th DCA 1992)).
Contractually agreeing to prejudgment interest
Pursuant to Florida law, a business may charge interest on an outstanding debt as long as the interest charged is not greater than 18% per annum simple interest (i.e., 1.5% per month). See §687.03(1), Fla. Stat. (2018). With this in mind, as of July 1, 2019, the current statutory interest rate is 6.77% per annum. As such, a business can charge almost three times the current statutory interest rate provided that the right to recover said amount is set forth in the small business contract.
If a small business contract does not include a specific rate of interest that applies on an outstanding obligation, then the statutory interest rate will apply for all prejudgment interest. From a practical standpoint, by not including the right to recover the maximum interest permitted by law in the small business contract, a small business is missing out on a great opportunity (e.g., currently an additional 11.23% interest per annum).
Contractually agreeing to postjudgment interest
As of July 1, 2019, the current statutory judgment interest rate is 6.77% per annum. The statutory interest rate is permitted to be adjusted every quarter. See §55.03(1), Fla. Stat. (2018). While the statutory rate of interest has increased every quarter over the last two years, it is going to take a long time to reach 18% per annum. Thus, every small business contract should include a provision allowing the small business to recover 18% interest per annum on a judgment.
Section 55.03, Florida Statutes specifically permits parties to contractually agree to a higher interest rate on judgments. See §55.03(1), Fla. Stat. (2018) (“Nothing contained herein shall affect a rate of interest established by written contract or obligation.”); Whitehurst v. Camp, 677 So. 2d 1361, 1362 (Fla. 1st DCA 1996) (“Although Section 55.03(1) allows the parties to contractually set the rate of post-judgment interest, a contractual provision, as here, which sets only the rate of interest for the debt does not also govern the rate of post-judgment interest. To contractually set the interest rate applicable to a judgment or decree arising from a contract, the parties must expressly provide that the specified rate governs post-judgment interest.”).
Assume a small business contract provides that a small business is entitled to recover 18% interest on all outstanding amounts owed. Once a judgment is obtained on the amount owed, unless the small business contract is clear that the small business is permitted to recover 18% interest postjudgment, the total judgment amount will only accrue interest at the statutory rate. See Roger’s Cushions, Inc. v. Baroody, 683 So. 2d 542, 542-43 (Fla. 5th DCA 1996) (providing that the statutory interest rate applied to the judgment and not the contractual interest rate of 18% because the contract did not expressly provide that the contractual interest rate governed postjudgment interest); Whitehurst, 677 So. 2d at 1362 (same). As such, it is a big mistake for a small business to not include a provision permitting the small business to recover postjudgment interest at 18% per annum.
Every small business contract should include a provision providing that the small business is entitled to recover interest on all outstanding balances at the maximum rate permitted by law and that said interest rate will apply to any judgments obtained by the small business. This is a simple provision to include in a small business contract that can provide great dividends.
Read other blogs from this series: