Economic Incentives in Litigation
Justice Koehnen's insightful observation in the 2021 case of SS & C TECHNOLOGIES v. BANK OF NEW YORK MELLON et al., highlights a crucial aspect of litigation economics. He noted that low prejudgment interest rates, which stood at just 0.5% from the third quarter of 2020 up to and including the second quarter of 2022, effectively encouraged defendants to delay settlements. This tactic allowed them to invest funds, earmarked for damages, in ways that yielded higher returns than the prejudgment interest rate.
Prejudgment Interest Rate Increases
This situation was significant in the context of the economy during that period, reflecting broader financial trends. However, there has been a notable shift since the third quarter of 2022. Prejudgment interest rates have risen by nearly 5% for causes of action arising after Q3 2022. This increase changes the litigation landscape significantly.
With these higher rates, litigants – as rational economic actors – need to be increasingly mindful of accruing interest during ongoing litigation.
Key Considerations in Prejudgment Interest Rates
- Agreed Rates or Statutory Rates: If the prejudgment interest rate is predetermined by an agreement between the parties or a specific statute, this rate must be declared in the statement of claim, notice of application, or plaintiff’s claim. For instance, in contract disputes, the interest rate specified in the contract must be used. Similarly, if a law prescribes an interest rate, like the rate for non-pecuniary loss in personal injury actions under rule 53.10 of the Rules of Civil Procedure, this rate should be applied.
- Cases Without Pre-agreed Rates: In scenarios where no prejudgment interest rate has been agreed upon or established by other sources, parties can request the court to apply the rate outlined in the Courts of Justice Act. This rate will only be calculated up to the date of the judgment.
The court retains discretion to vary the amount in either circumstance.
The evolution of prejudgment interest rates and their application under various circumstances is a crucial aspect for litigants and legal practitioners. These rates not only affect the strategy for litigation but also have significant financial implications for the parties involved.
