Florida Appellate Court Limits Prejudgment Interest Claims

The First District Court of Appeal recently addressed the standard to apply in calculating prejudgment interest.  In Arizona Chemical Company, LLC. v. Mohawk Industries, Inc., 41 Fla. L. Weekly D1662 (Fla. 1st DCA July 18, 2016), the First District found that the trial court erred in awarding prejudgment interest for periods earlier than the dates the Plaintiff “suffered the pecuniary losses for which the jury awarded damages.”

Arizona Chemical supplied Mohawk Industries with a resin designed for use as a component of carpet that Mohawk began manufacturing in 2000.  Five years into this contractual relationship, Arizona Chemical changed its resin formula without informing Mohawk of the change.  A few years later, in 2008, Mohawk began receiving an unusually high number of warranty claims, and eventually discontinued using Arizona Chemical’s resin.  Upon discovering the defect, Mohawk sold some of the remaining carpet at a discount and discarded some.

After prevailing under theories of breach of contract and breach of warranty, the trial court accepted Mohawk’s argument that it was entitled to interest on all past damages from the date of Arizona Chemical’s breach, “meaning the date Arizona delivered defective resin.”  When that date could not be determined, the court used the date that Mohawk applied the resin to each roll of carpet that was later found to be defective.

Arizona Chemical argued that prejudgment interest does not begin to accrue until: (1) the defendant had notice of plaintiff’s claim, and (2) the plaintiff sustained the actual pecuniary loss for which it was awarded damages.  The First District ruled as follows:

Arizona is partially correct: there is no bright-line rule establishing that prejudgment interest begins to accrue only after the date the plaintiff has notice of a claim, but Florida law does link the date prejudgment interest begins to accrue to the date the plaintiff suffered the pecuniary loss for which the plaintiff is being compensated.

The First District cited Argonaut Ins. Co. v. May Plumbing Co., 474 So. 2d 212, 214-15 (Fla. 1985), to explain that prejudgment awards in Florida are governed by the “loss theory.”  Under the loss theory set forth in Argonaut, the purpose of awarding prejudgment interest is to make the plaintiff whole.  “[A]n award of prejudgment interest is not an opportunity for the plaintiff to obtain a windfall or for the court to penalize the defendant.” Arizona Chemical, 41 Fla. L. Weekly D1662.  The First District reiterated the rule from Argonaut that “when a verdict liquidates damages on a plaintiff’s out-of-pocket, pecuniary losses, plaintiff is entitled, as a matter of law, to prejudgment interest at the statutory rate from the date of that loss.” Argonaut, 474 So. 2d at 215.

While recognizing that using the date of breach is appropriate when damages occur simultaneously, the First District explicitly rejected the argument that prejudgment interest automatically accrues from the date of breach rather than the date the plaintiff sustains a pecuniary loss.  The Court concluded:

In sum, our review of all recent controlling precedent leads us to the conclusion that the beginning date for the accrual of prejudgment interest depends on the timing of the pecuniary loss for which damages have been awarded, not the type of action the plaintiff has brought. Whether the case sounds in tort or contract, when prejudgment interest is proper, it is to be awarded from the date of the plaintiff’s actual loss, be that loss a diminution in the value of the plaintiff’s property, a payment the plaintiff has made to a third party, or some other form of pecuniary loss for which prejudgment interest is authorized.

Arizona Chemical, 41 Fla. L. Weekly D1662.  Applying that rule to the case before it, the First District held, “Mohawk was not entitled to recover prejudgment interest from the date the defective resin was delivered or applied to the carpet. Rather, Mohawk was entitled to recover prejudgment interest from the date it realized each loss in dollars.” Id.

In reaching the decision, the First District noted two Fourth District opinions that seemingly reach a different conclusion.  Most noteworthy is Pine Ridge at Haverhill Condo. Ass’n, Inc. v. Hovnanian of Palm Beach II, Inc., 629 So. 2d 151 (Fla. 4th DCA 1993).  In that brief opinion, the Fourth District ruled that a jury award for construction defects, including the failure to install adequate lighting and windows resulting in water intrusion, “had the effect of fixing the damages at no later than the turnover date of the condominium . . . .” Id.  As a result, “prejudgment interest should have been awarded on those claims from that date.” Id.  Relying on Pine Ridge at Haverhill, it is typical for owners to claim prejudgment interest dating back to the alleged breach or the date of turnover of a condominium, rather than the date that pecuniary losses are incurred.

The First District Court’s decision in Arizona Chemical, along with cases like CH2M Hill Southeast, Inc. v. Pinellas County, 698 So. 2d 1238 (Fla. 2d DCA 1997), should assist in defending claims for improper prejudgment interest in construction defect cases.  Conceptually, the key to distinguishing Pine Ridge at Haverhill is to note the court’s ruling that the jury verdict “had the effect of fixing the damages” as of a date certain.  It is the “fixing of damages” to a particular date that matters. To avoid improper prejudgment interest awards, the defense must make efforts to establish that a plaintiff had not suffered any economic loss at the time of the alleged breach.  It is critical to develop and present evidence to show that any pecuniary loss, whether that loss is a diminution in value or a payment to a third party, occurred at a time later than the breach or the date of turnover of a project.