Brattle principals Dan Harris, Richard Caldwell, and Alexis Maniatis recently authored an article on pre-award interest rates and the significant impact they can have on damages awards the longer the legal process takes.
The article discusses the economic principles that should underlie the choice of pre-award interest rate, using the following observations as a framework:
- It is the riskiness of borrowers/respondents that determines interest rates. Interest rates compensate lenders for the risks associated with borrower default, not for the risks or costs associated with a lender’s own capital raising activities.
- Interest rates reflect the actual risks born by lenders/claimants. Interest rates do not compensate lenders for the returns available to them on hypothetical projects with a different risk profile to the actual borrower.
Additionally, the authors pose the following fundamental question for pre-award interest: what should it compensate claimants for—the time value of money, or also for the risk of respondent default? The authors suggest that this legal issue depends on whether the damages are viewed as a “forced loan” from the claimant that arose at the time of the breach, or whether the liability did not arise until the award date.
The final determination of pre-award interest rate will require careful economic consideration with selection of market data used and with any additional adjustments that may be required.
The full article can be downloaded below.