By: Thomas S. Tripodianos Published: September 2013

Can parties fix a different rate of interest on judgements in New York State?

Question. I know that that the statutory interest rate on judgments in New York is 9 percent. This is a great return on investment (assuming the debtor can pay) these days. If it's statutory though can the parties fix a different rate of interest or even waive it?

Answer. Yes. Under NY law, interest on a sum awarded as a result of a breach of contract is computed from the earliest date that the claim accrued, "except that interest upon damages incurred thereafter shall be computed from the date incurred" (CPLR 5001 [a], [b]). Thus, CPLR 5001 permits a party that prevailed in a breach of contract action to obtain prejudgment interest. And where a contract provides for periodic payments or installments, the defaulting party is required to pay prejudgment interest on any missed payment from the date the payment became due.

When a claim is predicated on a breach of contract, the applicable rate of prejudgment interest varies depending on the nature and terms of the contract. Most agreements associated with indebtedness provide a "contract rate" of interest (which may be higher or lower than the statutory rate) that determines the value of the loan and that rate is used to calculate interest on principal prior to loan maturity or a default in performance. If the parties failed to include a provision in the contract addressing the interest rate that governs after principal is due or in the event of a breach, New York's statutory rate (currently 9%) will be applied as the default rate

As an important corollary, when the principal on a loan is due on a date certain and the debtor fails to make payment, the interest rate in the contract will be used to calculate interest on unpaid principal from the date of maturity of the loan to the entry of judgment Thus, inclusion of a clause directing that interest accrues at a particular rate "until the principal is paid" (or words to that effect) alters the general rule that interest on principal is calculated pursuant to New York's statutory interest rate after the loan matures or the debtor defaults.

Similarly, the parties are free to agree upon a complete waiver of interest. For example, in the context of a real estate transaction, where the parties' contract language specifying that the seller's "sole remedy" was liquidated damages in the form of retention of the down payment and the seller had "no further rights" against the defaulting purchaser, that trumps language in CPLR 5001 (a) directing that statutory interest be awarded in a contract dispute. The terms of the contract are controlling, and the seller is not entitled to statutory interest.

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