Prejudgment Interest and Choice-of-Law: Careful Draftsmanship is Key

Prejudgment interest may not come to mind when drafting a settlement agreement. But it can become a crucial issue if one settling party later sues another for misrepresentation related to the agreement and the parties disagree over which state’s prejudgment interest rules apply. States vary widely in the amount of prejudgment interest available. In some cases—as in Conway v. Planet Fitness Holdings, LLC, 101 Mass. App. Ct. 89 (2022)— applying the prejudgment interest rules of one state over another translates to millions of dollars in additional liability. And fighting over applicable law costs money and time. Defense counsel can hedge these risks by negotiating and carefully drafting choice-of-law clauses in settlement agreements. A welldrafted clause will help attorneys predict the size of an interest award and reduce the likelihood of choice-of-law motion practice.

Conway v. Planet Fitness Holdings, LLC

Conway arose from a failed settlement of employment claims. The plaintiff was hired by the defendant as chief financial officer and, as part of her compensation package, received equity shares. The plaintiff was eventually discharged for reasons she contended were wrongful. She and the defendant hired a consultant to appraise the plaintiff’s equity interest and reached a presuit settlement soon after the consultant issued its report. In relevant part, the settlement agreement provided, “[t]his Agreement shall be governed by and construed in accordance with the laws of the State of New Hampshire, without regard to the conflicts of law principles thereof.” Conway, 101 Mass. App. Ct. at 92.

The plaintiff later discovered that the appraisal undervalued her shares because the defendant withheld information about the value of the company. The plaintiff sued in Massachusetts for fraud, misrepresentation, and other claims, contending that she would have sought a higher settlement if she had known the withheld information. A jury awarded her over $5 million in damages.

After the verdict, the parties disputed whether Massachusetts or New Hampshire prejudgment interest rules applied. The court found that common law choice-of-law rules favored application of Massachusetts prejudgment interest rules. The court nonetheless held that the choice-of-law clause in the parties’ settlement agreement governed this issue. Accordingly, the court applied New Hampshire’s prejudgment interest statute and awarded $729,025.43 in prejudgment interest. Massachusetts law would have yielded over four times that amount, at $3,318,000.

The plaintiff appealed, arguing that the choice-of-law clause in the settlement agreement was inapplicable to her tort claims, and that choice-of-law rules required application of Massachusetts prejudgment interest rules.

The Massachusetts Court of Appeals agreed with the plaintiff on both points.

The court observed that the “plain language of the choice of law provision . . . clearly states that it applies only to disputes arising out of the settlement agreement and not to claims . . . that allege misleading and negligent conduct that induced the execution of the settlement agreement.” Id. at 95. The court next conducted a choice-of-law analysis and ruled that Massachusetts had the greater interest in the case: that is where the plaintiff resided, received information, and was injured—even if she was employed, and the defendant was headquartered, in New Hampshire.

Accordingly, the Court of Appeals vacated the trial court’s prejudgment interest ruling and remanded for calculation in accordance with the Massachusetts prejudgment interest statute, resulting in a much larger interest award.

Prejudgment Interest & Choice-of-Law Considerations

The defendant likely could have avoided this result. While choice-of-law clauses may be “expressly self -limiting” to cover only claims that arise from the agreement, they can also be drafted in broader terms to encompass claims arising from conduct that predates the agreement. For example, a choiceof-law clause that governs claims “related to,” “in connection with,” or “with respect to” the agreement would cover claims not only for breach of contract, but also for fraudulent misrepresentation. Many courts would enforce such a clause unless the clause was, itself, the product of misrepresentation. See Grace v. Corp. of Lloyd’s, No. 96 Civ. 8334 (JGK), 1997 U.S. Dist. LEXIS 14994, at *23 (S.D.N.Y. Sept. 30, 1997) (“[A] general allegation of fraud in the inducement of the contract as a whole is not enough to support the invalidation of the forum selection and choice of law clauses.”); cf. Huffington v. T.C. Group, LLC, 685 F. Supp. 2d 239, 243 (D. Mass. 2010) (“Although the plaintiff alleges that he was induced to purchase the securities by misrepresentation, the plaintiff does not allege that the inclusion of the forum selection clause in the contract was the product of misconduct. Therefore, the forum selection clause is enforceable.”). And if prejudgment interest is treated as substantive rather than procedural under the laws of the forum state, the court will likely apply the prejudgment interest rules of the state whose law the parties selected to govern. Morris v. Watsco, Inc., 385 Mass. 672, 673 -74, 678 (1982) (holding that because prejudgment interest is a substantive remedy under Massachusetts law, the Florida choice-of-law clause in the parties’ contract governed prejudgment interest). Results may vary if either state views prejudgment interest as a procedural issue. See, e.g., Schwan’s Sales Enters., Inc. v. SIG Pack, Inc., 476 F.3d 594, 598 (8th Cir. 2007) (affirming U.S. District Court for the District of Minnesota ruling that Minnesota prejudgment interest rules applied, notwithstanding Michigan choice-of-law clause, because prejudgment interest was procedural issue under Minnesota law).

While prejudgment interest will not always be the most important factor in choosing applicable law, defense counsel should at least be mindful that states vary widely in the amount of prejudgment interest available. Taking New England states as examples, Maine and New Hampshire are generally most favorable to defendants. Both states tether prejudgment interest to U.S. Treasury bill rates (except that Maine provides a fixed rate of 8% for claims not exceeding $30,000). 14 MRS §1602-B (7)(a-b); RSA 336:1, II. Under those formulas, prejudgment interest has, since 2009, exceeded 5% just twice in Maine and once in New Hampshire. By contrast, Rhode Island, Massachusetts, and Vermont allow 12% prejudgment interest for tort claims. R.I.G.L. § 9-21-10; M.G.L. c. 231, §6B; 9 V.S.A. §41a(a). Connecticut is nearly as high, providing for 10% prejudgment interest, with some exceptions. Conn. Gen. Stat. §37-3a(a).

Conclusion

Prejudgment interest may often be overlooked but can significantly impact the outcome of a case. A well-drafted choice-of-law clause can reduce the risk of a large (surprise) prejudgment interest award and litigation on choice-of-law issues. From a defense standpoint, the ideal choice-of-law clause in a settlement agreement is broad enough to cover claims arising from pre-settlement conduct. And while choosing the applicable law requires consideration of many factors, it may benefit defendants to select the law of a jurisdiction with conservative prejudgment interest rates.