In Tennessee, pre-judgment interest may be an important element of damages in lawsuits involving breach of a contract. In these types of lawsuits, pre-judgment interest may be awarded as an element of damages. The rationale for this award is that when a party has breached a contract, the other party has loss of the use of funds due to the other party’s breach or failure to pay an obligation according to the terms of the contract. In order to compensate for this loss, the courts will often allow pre-judgment interest as part of the damage award (also known as “delay damages”). Because litigation can sometimes take years to complete, pre-judgment interest can quickly accrue and become a significant component of damages.
As is often the case with an award of attorney’s fees, the allowance of pre-judgment interest is within the discretion of the trial court. Trial courts generally have the discretion to award pre-judgment interest in accordance with principles of equity. That is, the court must decide whether the award of prejudgment interest is fair, given the particular circumstances of the case. Prejudgment interest may be awarded at any rate not excess of 10% per annum. Tenn. Code Ann. § 47-14-123. Interest begins to run on the date the cause of action accrues.
Unlike pre-judgment interest, which is awarded only within the discretion of the court, post-judgment interest accrues on all judgments. Tenn. Code Ann. § 47-14-121. Post-judgment interest begins to accrue on the date that the trial court or jury returned the verdict. Tenn. Code Ann. § 47-14-122. Post-judgment interest serves as an incentive for the non-prevailing party to pay the judgment. It also serves to protect the value of a judgment in the event the non-prevailing party cannot pay or refuses to pay the judgment.
The rate of post-judgment interest is controlled either by the terms of the contract between the parties, or by the statutory default interest rate. Until recently, the default the statutory post-judgment interest rate was 10%. However, effective July 1, 2012, the interest rate applicable to judgments is now set at two percent below the formula rate as published by the Tennessee Department of Financial Institutions. On January 3, 2013, the Department announced that the rate of interest under the formula is 7.25% per annum – the rate is based on a ceiling of 4% over the weekly average prime loan rate of 3.25% as published by the Federal Reserve on December 31, 2012. Accordingly, the current post-judgment interest rate is 5.25%. The Tennessee Administrative Office of the Courts lists the current judgment interest rates here.