An unpaid invoice can cost more than its face value. California law may allow a creditor to recover interest for the time between when payment became due and when judgment is entered. But 10% is not automatic, and neither is the starting date. This guide explains when prejudgment interest in California applies, which rate may govern, and what California businesses and individuals should document before requesting it.
What is prejudgment interest in California?
Prejudgment interest compensates a claimant for being deprived of money before a court enters judgment. It is separate from the underlying debt, attorney fees, court costs, and interest that may accrue after judgment.
For example, a business that proves a customer failed to pay a $40,000 invoice may also be entitled to interest for an eligible period before judgment. The court must still determine whether the claim qualifies, when interest begins, and which rate applies.
Interest can affect settlement discussions and the amount requested in a lawsuit. It does not establish that the debt is valid or eliminate defenses. A sound debt collection strategy starts with the contract, payment history, and evidence supporting the balance.
When does interest become a matter of right?
California Civil Code § 3287(a) provides for interest on damages that are certain, or capable of being made certain by calculation, when the right to recover those damages vested on a particular day. This is often called interest on “liquidated” damages.
An overdue invoice for a fixed amount may qualify. So may a contract balance that can be calculated from agreed prices, quantities, and recorded payments. The key question is whether the amount was ascertainable, not simply whether the debtor disputed liability.
- A fixed invoice: A stated balance and clear payment deadline may support interest beginning when payment became due.
- A disputed obligation: A disagreement about whether payment is owed does not necessarily make the amount uncertain.
- A disputed calculation: Competing evidence about the amount of loss may make an automatic interest award less straightforward.
- Delayed payment caused by the creditor: Section 3287(a) excludes periods when the debtor was prevented by law or by the creditor’s act from paying.
The starting date requires attention. Depending on the agreement, payment may become due upon delivery, completion, receipt of an invoice, or another specified event. Sending a demand letter later does not necessarily establish the earliest available interest date.
Why 10% is common, but not universal
California Civil Code § 3289(b) provides a 10% annual interest rate after breach for a qualifying breach-of-contract claim involving a contract entered into after January 1, 1986, when the contract does not stipulate a legal interest rate. This is why creditors often request 10% prejudgment interest on unpaid debts in breach-of-contract actions.
If the contract specifies a lawful interest rate, that provision may govern instead. Under Civil Code § 3289(a), a legal rate stipulated by contract generally continues after breach until the contract is superseded by a verdict or another new obligation.
Do not assume every claim arising from a contractual relationship receives 10%. Section 3289(b) does not govern every such claim; for example, prejudgment interest on quantum-meruit claims is generally governed by the 7% default rate under California Constitution article XV, section 1, rather than § 3289(b)’s 10% rate. Other non-breach claims may also be subject to that default rate unless another rule applies. Contract terms require review for enforceability, including potentially applicable usury restrictions. A late charge is not necessarily the same thing as an agreed interest rate.
Clear payment deadlines and lawful interest provisions reduce uncertainty. Reviewing business contract terms before extending credit can make later calculations easier to support.
What if the amount cannot be calculated in advance?
Not every contract dispute involves a fixed unpaid balance. Claims for incomplete work, defective performance, or other losses may require evidence and judicial findings before the amount can be determined.
California Civil Code § 3287(b) permits a court, in its discretion, to award prejudgment interest on unliquidated contract damages. The court may select a starting date, but it cannot award interest under that subsection for a period before the lawsuit was filed.
This differs from § 3287(a), which can support interest from an earlier date when its requirements are met. A claimant should identify the basis for the request rather than assume that every contract loss earns interest from the alleged breach.
Claims combining fixed invoices with uncertain additional damages may need separate calculations. Interest on one portion does not automatically establish entitlement on every other portion.
Calculate the request and preserve the evidence
For a straightforward simple-interest estimate, multiply the eligible principal by the annual rate and the elapsed portion of a year. At 10%, a $40,000 principal balance produces $4,000 in interest over one full year, assuming the entire balance remains unpaid and interest applies throughout that period.
Actual calculations may need adjustments for partial payments, credits, different invoice due dates, and the applicable interest provision. Do not compound interest merely because the debt remains unpaid.
- Collect the signed agreement, amendments, invoices, and proof of performance.
- Identify each payment deadline and the legal basis for the interest rate.
- Reconcile payments and credits before calculating the remaining principal.
- Prepare a dated interest schedule showing the principal, rate, and accrual period.
- Request interest in the litigation and support it with evidence appropriate to the proceeding.
Prejudgment interest does not extend the deadline to sue. It also does not automatically authorize collection fees or attorney fees. Each additional amount needs its own legal basis.
Talk to a California business attorney
Itkin Law offers a free consultation to California businesses and individuals about unpaid debts, contract terms, and potential prejudgment interest. Schedule a free consultation or call (424) 603-8888.
This article is attorney advertising and provides general information only. It is not legal advice and does not create an attorney–client relationship. The law changes, and this article reflects the law as of its publication date. Every situation is different — contact us to discuss how the law applies to your exact circumstances. See our full disclaimer.
