Contractors to Take Cut on Claim Interest

Kegler Brown Construction Alert

Ohio has long had a statute which provides prejudgment interest on contract claims at the generous rate of ten percent per annum. However, a recent bill (Sub. H.B. 212) passed and will become law effective June 6, 2004, substantially reducing that ten percent per annum to a rate determined by the Tax Commissioner based upon the federal short-term rate instead. This will result in much smaller contractor interest recoveries on claims and provide much less incentive for public authorities to timely resolve those claims.

The question arises as to what happens to existing claims with respect to this law change. Sub. H.B. 212 has been drafted in a way so that any cases pending in the courts as of the effective date of the Act (June 6, 2004) shall result in the recovering party receiving ten percent interest until that date and the lower short-term federal rate thereafter. With respect to claims that are not filed in Court by the effective date, it is believed that these claims will only result in federal rate interest from start to finish. This means that contractors and other claimants have a real financial incentive to file any significant pending claims in Court before the June 6 deadline.

This lower interest rate (when no interest rate is specified in the contract) also emphasizes the need on private work (where contract language can be negotiated) for contractors and subcontractors to insert an appropriate interest rate in the contract itself, rather than remaining silent and simply relying upon the statute to recover interest in the event any sum is "past due." In this way, contractors and subcontractors can preserve their right to recover a competitive rate of interest rather than default to the statutory federal short-term rate, currently a much lower figure.