Prejudgment Interest and the Interplay With C.C.P. Section 998 Offers to Compromise

Author: Kelly Denham

Prejudgment interest can have a sizeable effect on the recovery of damages in California.  Pursuant to Civil Code section 3287, a party is entitled to recover prejudgment interest where the damages are “certain” or “capable of being made certain by calculation” from the time the right to recover arises.  (Civ. C. § 3287(a).)  One purpose of the award is to make the party whole as of the date of the initial injury.  (Lakin v. Watkins Associated Industries (1993) 6 Cal.4th 644, 663.)

The test for determining “certainty” is whether the defendant actually knows the amount owed or could have computed the amount from reasonably available information.  (Wisper Corp. v. California Commerce Bank (1996) 49 Cal.App.4th 948, 960.)  However, where the amount of damages is in dispute (i.e. cannot be resolved except by verdict or judgment), an award of prejudgment interest is not appropriate.  (Id.)  For example, in Iverson v. Spang Industries (1975) 45 Cal.App.3d 303, the landlord sued a former tenant for damages to the rented premises.  The tenant disputed the cost of repair.

The recoverable interest rate depends on the nature of the claim.  For breach of contract claims, the legal rate specified in the contract applies until the contract is superseded by the verdict.  (Civ. C. § 3289.)  If the prejudgment interest rate is not specified in the contract, the rate is ten percent per annum from the date of the breach.  (Id.) For tort and other non-contractual claims, the interest rate is seven percent per annum from the date the claim arose.  (Children’s Hosp. & Med. Ctr. v. Bonta (2002) 94 Cal.App.4th 740, 775.)  However, post-judgment interest accrues on the unpaid principal amount of the judgment at the rate of ten percent per annum from the date of entry of judgment.  (C.C.P. § 685.010.)

Prejudgment interest can come into play when analyzing C.C.P. § 998 offers and the “cost shifting” consequences associated with the offers.  Pursuant to Civil Code § 3291, prejudgment interest begins to run from the date of the § 998 offer.

Civil Code § 3291 provides that if, in a tort action, the plaintiff makes an offer pursuant to C.C.P. § 998, the defendant does not accept the offer, and the plaintiff obtains a more favorable judgment at trial, then the plaintiff may recover prejudgment interest.  (Civ. C. § 3291.)  It must be stressed that to be entitled to prejudgment interest, the plaintiff must receive “a more favorable judgment” than her offer to compromise.  If the plaintiff fails to satisfy this prerequisite (i.e. she did not obtain a more favorable judgment than her compromise offer), then she is not entitled to recover prejudgment interest.  “The plain language of section 3291 provides for a simple comparison in personal injury cases between the judgment and the offer to compromise.  If the judgment is “more favorable,” the plaintiff is eligible for prejudgment interest on the damages attributable to personal injury.  (Latkin v. Watkins Associated Industries (1993) 6 Cal.4th 644, 662-663, fn. 13.)

Prejudgment interest has a different effect where a plaintiff turns down a defendant’s § 998 offer and fails to obtain a “more favorable” judgment at trial.   In Bodell Constr. Co. v. Trustees of California State University (1992) 62 Cal.App.4th 1508, the court held that prejudgment interest accrued before the defendant made a § 998 offer counts in determining whether the judgment is “more favorable” than the offer.  However, interest accruing after the offer (i.e. post-offer interest) does not apply.  (Id. at 1526.)

Bodell was decided under the pre-1997 version of § 998, which distinguished between contract and tort actions, thus its holding was limited to non-tort (i.e. contract) actions.   Since the statute no longer distinguishes between contract and tort actions, presumably Bodell applies equally when prejudgment interest is recoverable in a tort action.  Thus, prejudgment interest accruing before the date of the defendant’s § 998 offer is included when determining whether plaintiff obtained a “more favorable” judgment.  Interest accruing post-offer, however, is not considered.

Prejudgment interest can add thousands of dollars to the rejecting party’s liability.  Thus, it is important to take prejudgment interest into account to make an informed C.C.P. § 998 offer.

ABOUT THE AUTHOR

Kelly Denham graduated from Loyola Law School in 2012. Ms. Denham’s primary focus at Tyson & Mendes is construction defect litigation. Contact Kelly at 858.263.4117 or kdenham@tysonmendes.com.

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