• If justice were immediate, the injured party would receive an enforceable judgment immediately, with no loss in value from the time value of money.• Australian law provides for interest on legal judgments from the time the claim arose until the day of judgment. Such interest is called “prejudgment interest.” • Prejudgment interest can equal or exceed principal.
EfficiencyPJI ensures both parties have proper incentives to take precautions in activity that produced judgment.If no PJI, defendant would have incentive to stretch out litigation.Defendant would have interest free loan.
• Requirement that defendant pay PJI to plaintiff is far from universal.The award of PJI is discretionary. Many of the statutes, which confer the power to award it use the precatory “may,” typical of the grant of a discretionary power, rather than the imperative “shall.” Other statutes require interest to be awarded “unless good cause is shown to the contrary.” • Even where PJI has been allowed, the judiciary has shown little regard to economics in calculating the appropriate interest rate. Wrong interest rate undercuts the goals of fairness and efficiency.
Interest must be paid at same rate as would be required in a voluntary transaction.
Unsecured borrowing is when no security is taken by the lender.Secured Borrowing is when the lender has a legal charge over your home or a property you own, so that if you default on repayments, they can possess that property and sell it to get their money back.
PJI should compensate P for delay and prevent D from being unjustly enriched, yet P and D may have very different borrowing rates. Whose rate should be used?
• Secured debt provides the lender with legal access to assets of the borrower if necessary to recover the original amount of the debt.• Unsecured lender is entirely dependent on the capacity and willingness of the borrower to repay.• Because of its lower risk of repayment, secured debt has a lower interest rate than unsecured debt.
If a claim arises in 1986, gets paid in 1996, the ten-year interest rate in 1986 appears to be the appropriate interest rate, because that is the rate defendant would have to pay to borrow for ten years. If a long-term interest rate is chosen: If rates rise, defendants will be borrowing at below market rates, giving them an incentive to prolong litigation. Plaintiff will have the opposite incentive, but it is easier for one party to unilaterally delay litigation than it is to expedite it. Incentives reversed when rates fall. Plaintiff will have an incentive to delay, since they are receiving above market interest rates.
INTRODUCTION<br /> JUSTICE IS NOT IMMEDIATE.<br />AUSTRALIAN LAW PROVIDES FOR PREJUDGMENT INTEREST.<br />INTEREST FROM TIME OF CLAIM UNTIL DAY OF JUDGMENT.<br />PJI CAN EQUAL OR EXCEED PRINCIPAL.<br />
EXAMPLE<br />IN RE OIL SPILL OF AMOCO CADIZ OFF THE COAST OF FRANCE, 954 F.2D 1279.<br />PLAINTIFF SUFFERED HARM DUE TO OIL SPILL ON JANUARY 1, 1980.<br />FINAL JUDGMENT FOR PLAINTIFF: JULY 1990.<br />PLAINTIFF AWARDED:<br />DAMAGES: $65 MILLION IN CLEANUP COSTS.<br />PJI: $148 MILLION<br />PJI CALCULATED BY APPLYING INTEREST RATE OF 11.9% TO DAMAGES AWARD, COMPOUNDED OVER 10.6 YEARS.<br />
LEGAL AND POLICY JUSTIFICATION FOR PREJUDGMENT INTEREST<br />FAIRNESS<br />PLAINTIFF MUST BE FULLY COMPENSATED.<br />PLAINTIFF MUST BE PUT IN POSITION IT WOULD BE IN IF JUDGMENT HAD BEEN PAID IMMEDIATELY.<br />EFFICIENCY<br />PJI ENSURES BOTH PLAINTIFF AND DEFENDANT HAVE PROPER INCENTIVES.<br />IF NO PJI, DEFENDANT WOULD HAVE INCENTIVE TO STRETCH OUT LITIGATION.<br />DEFENDANT WOULD HAVE INTEREST-FREE LOAN.<br />IF PJI SET TOO HIGH, PLAINTIFF WOULD HAVE INCENTIVE TO STRETCH OUT LITIGATION.<br />
AVAILABILITY OF PJI IN AUSTRALIA<br />PJI AVAILABLE PURSUANT TO STATUTORY PROVISIONS IN MOST AUSTRALIAN COURTS.<br />AWARD OF PJI MOSTLY DISCRETIONARY.<br />
PURPOSE OF THIS PRESENTATION<br />DEMONSTRATE HOW PJI SHOULD BE CALCULATED, BASED ON<br /> ECONOMIC PRINCIPLES<br /> THE POLICY GOALS OF FAIRNESS AND EFFICIENCY.<br />
CONCEPTUALIZATION<br />PUT BOTH PARTIES IN SAME POSITION THEY WOULD BE IN HAD DEFENDANT PAID PLAINTIFF AN AMOUNT EQUAL TO ORIGINAL JUDGMENT WHEN INJURY OCCURRED.<br />VOLUNTARY TRANSACTION<br />DEFENDANT MUST PAY PLAINTIFF THE FUTURE VALUE OF THE ORIGINAL JUDGMENT<br />PRINCIPLES OF TIME VALUE OF MONEY<br />
CRUNCHING THE NUMBERS<br />FUTURE VALUE OF ORIGINAL JUDGMENT <br />= AMOUNT IT WOULD HAVE GROWN INTO <br />IN THE INTERIM<br />FV = J x [1 + R]T <br />J = ORIGINAL JUDGMENT<br />R = ANNUAL INTEREST RATE FOR THE PERIOD<br />T = TIME IN YEARS BETWEEN THE INJURY AND ISSUANCE OF AN ENFORCEABLE JUDGMENT<br />
NUMERICAL EXAMPLE<br />AMOCO CADIZ OIL SPILL <br />R = AVERAGE PRIME RATE OVER THE 1980S = 11.9%.<br />T = 10.6 YEARS, STARTING FROM JANUARY 1, 1980, WHEN CLEANUP COSTS WERE INCURRED.<br />DAMAGES AWARD = $65 MILLION<br />FV = 65M x [1 + 0.119]10.6<br />= $213 MILLION<br />BETTER CHOICES FOR THE INTEREST RATE.<br />
PRINCIPLED APPROACH TO PREJUDGMENT INTEREST<br />PARADIGM: SUIT BETWEEN TWO PUBLICLY TRADED CORPORATIONS WITH READY ACCESS TO CAPITAL MARKETS.<br />PRINCIPAL CONCLUSIONS<br />INTEREST RATE SHOULD CORRESPOND TO DEFENDANT’S UNSECURED BORROWING RATE.<br />PJI SHOULD BE COMPOUNDED.<br />PJI SHOULD BE ASSESSED AT A FLOATING RATE.<br />
INTEREST RATE: DEFENDANT’S UNSECURED BORROWING RATE<br />KEY: LOOK AT GOAL JUDGMENT INTENDS TO ACCOMPLISH.<br />GOAL IS TO PREVENT DEFENDANT FROM BEING UNJUSTLY ENRICHED BY ITS ACTIONS: SHOULD NOT BE ABLE TO “BORROW” FROM PLAINTIFF AT BELOW MARKET RATE.<br />GOAL IS TO COMPENSATE PLAINTIFF: SHOULD BE COMPENSATED FOR DELAY AS WELL AS RISK OF DEFAULT AND INFLATION.<br />
DEFENDANT’S UNSECURED BORROWING RATE.<br />DEFENDANT = UNSECURED CREDITOR TO PLAINTIFF.<br />PLAINTIFF “INVESTED” IN DEFENDANT’S UNSECURED DEBT. INTEREST RATE SHOULD REFLECT RISK UNDERTAKEN BY PLAINTIFF.<br />BOTH POINT TO DEFENDANT’S UNSECURED RATE AS THE APPROPRIATE PREJUDGMENT INTEREST RATE.<br />
ACCOUNTING FOR POSITION IN CAPITAL STRUCTURE<br />RATES OF RETURN VARY ACROSS INVESTMENTS IN A SINGLE COMPANY<br /> DIFFERENT RISKS<br />PJI ASSESSED AT RATE EQUAL TO RATE ON CORPORATE DEBT WITH SAME DEFAULT RISK AS THE JUDGMENT.<br />IN BANKRUPTCY, COURTS TREAT LEGAL CLAIMS SIMILAR TO UNSECURED DEBT.<br />
SIMPLE VERSUS COMPOUND INTEREST<br />FAIRNESS AND EFFICIENCY REQUIRES PJI TO BE COMPOUNDED.<br />DEFINE COMPOUND INTEREST.<br />BANKS PAY COMPOUND INTEREST ON DEPOSITS, AND CHARGE COMPOUND INTEREST ON LOANS.<br />SIMPLE INTEREST UNDERDETERS DEFENDANT, UNDERCOMPENSATES PLAINTIFF.<br />
SIGNIFICANCE OF COMPOUNDING<br />TOTAL AWARD TO AMOCO CADIZ PLAINTIFF WOULD HAVE BEEN REDUCED BY $66 MILLION IF COURT HAD AWARDED SIMPLE, INSTEAD OF COMPOUND INTEREST.<br />
FIXED OR FLOATING INTEREST RATE?<br />LONG-TERM RATE CORRESPONDING TO DURATION OF PREJUDGMENT PERIOD APPEARS APPROPRIATE.<br />SHORT-TERM FLOATING RATE PREFERABLE AS MATTER OF POLICY.<br />LONG-TERM RATE WILL INTERFERE WITH PARTIES’ INCENTIVES TO SETTLE. <br />COMMERCIAL PAPER = SHORT-TERM UNSECURED PROMISSORY NOTES.<br />
CONCLUSION<br />PREJUDGMENT INTEREST COMPENSATES PLAINTIFF FOR DELAY BETWEEN DAMAGE AND FINAL JUDGMENT.<br />GOALS: FULL COMPENSATION, FAIRNESS AND EFFICIENCY.<br />DEFENDANT’S UNSECURED BORROWING RATE.<br />FLOATING RATE, COMPOUNDED.<br />