Parties’ Contractual Pre-Judgment Interest Rate May Exceed the Maryland Statutory Post-Judgment Interest Rate

The Maryland Constitution dictates that “The Legal Rate of Interest shall be Six per cent. per annum; unless otherwise provided by the General Assembly.”  Md. Const. art. III, § 57.  The General Assembly took the liberty granted to it by the Maryland Constitution and determined that “the legal rate of interest on a judgment shall be at the rate of 10 percent per annum on the amount of judgment,” with a few exceptions.  Md. Code Ann., Cts. & Jud. Proc. § 11-107(a) (2019).  One of the main exceptions being that the “legal rate of interest on a money judgment for rent of residential premises shall be at the rate of 6 percent per annum on the amount of the judgment.”  Md. Code Ann., Cts. & Jud. Proc. § 11-107(b) (2019).  See also Post-Judgment Interest on Judgments for Breach of a Residential Lease, by W. Hank Fisher III, Esq.

Neither the Maryland Constitution nor the Maryland General Assembly have addressed pre-judgment interest.  The parties to a contract may agree that if a party defaults, he is liable to the other for the principal amount plus pre-judgment interest at a specific rate.  Many parties agree that all delinquent amounts are subject to pre-judgment interest at 18% per annum (or 1.5% per month). If a party sues and obtains a judgment, he may obtain a judgment for all pre-judgment interest accumulated from the date of default up until the date of judgment; however, once the judgment is granted, pre-judgment interest ceases to accrue, and post-judgment interest begins to accrue on the principal of the judgment at the legal rate.

Although in 1998 the Maryland Court of Special Appeals expressly held in Noyes Air Conditioning Contractors, Inc. v. Wilson Towers Ltd Partnership, 122 Md. App. 283, 292 (Md. Ct. Spec. App. 1998) that the trial court shall not alter the terms of a valid contract providing for the payment of pre-judgment interest, notwithstanding the rate exceeds the legal rate, the issue of pre-judgment interest still arises in practice due to the fact the general assembly has not codified its legality.  

In Noyes Air Conditioning Contractors, Inc., the Court of Special Appeals addressed whether the prejudgment interest rate of 1.5% per month, as agreed in a contract between the parties, was permissible.  The Court held: “[T]he payment of interest in the case before us is a matter of right, not discretion, based upon the express provision of the contract. Both parties, furthermore, agreed on the rate of interest.  We perceive no reason why the rate agreed upon should be disturbed, notwithstanding it exceeds the legal rate of 10% specified in sec. 11-107 of the Courts and Judicial Proceedings Article of the Md. Code . . . . Accordingly, the prejudgment interest should be computed at the contract rate, and the post-judgment rate should be at 10% in accordance with Courts and Judicial Proceedings Article, sec. 11-107.  We hold, therefore, that the trial court erred in denying [Plaintiff]’s claim for prejudgment interest, attorney’s fees, and costs. The trial court, in the absence of some identifiable misconduct such as fraud, overreaching, misrepresentation, or void as to other creditors, none of which is present in this case, may not alter the terms of a valid contract as a matter of discretion.  The parties have a right to contract and to have the terms of their contract honored.” Noyes Air Conditioning Contractors, Inc., 122 Md. App. at 293-94.  

Therefore, it is permissible to contract for pre-judgment interest that exceeds the legal rate and you are free to claim that pre-judgment interest as damages in a lawsuit.  A court may not grant you pre-judgment interest, but the Noyes Air Conditioning Contractors, Inc. v. Wilson Towers Ltd Partnership case may lend you some assistance in swaying the court’s mind.