Opinion ID: 2303411
Heading Depth: 3
Heading Rank: 3

Heading: Contractual Interest

Text: As noted above, where a party to a contract reserves the right to the payment of interest, that interest is considered conventional or contractual interest. In cases where the contract expressly provides for the payment of interest, or the payment of interest is implied by the nature of the promise, the interest is said to become an integral part of the debt itself, and, therefore, is recoverable as of right under the terms of the contract. See, e.g., Restatement (Second) of Contracts § 354 cmt. a; Somerset, 685 A.2d at 148 ([i]f the parties have agreed on the payment of interest, it is payable not as damages but pursuant to a contract duty that is enforceable) (emphasis original); Philadelphia Housing Auth. v. CedarCrestone, Inc., 562 F.Supp.2d 653, 658-59 (E.D.Pa.2008) (noting that, under Pennsylvania law, where parties to a contract agree on the payment of interest, such interest is payable not as damages, but pursuant to a contract duty that is enforceable as is any other such duty, subject to legal restrictions on the rate of interest) (citing Somerset ). Moreover, it is a well-established principle of contract law that, where the language of a contract is clear and unambiguous, a trial court is required to give effect to that language. Madison Constr. Co. v. Harleysville Mut. Ins. Co., 557 Pa. 595, 606, 735 A.2d 100, 106 (1999). Indeed, this Court has cautioned that it is not the function of a court to rewrite agreements between parties, and a court must give effect to the clear terms to which the parties have agreed. Amoco Oil Co. v. Snyder, 505 Pa. 214, 478 A.2d 795 (1984). Thus, we have no hesitation in concluding that, where the terms of a contract provide for the payment of interest, a court's award of such interest in favor of the prevailing party is not discretionary. Accordingly, because the Retail Member Agreement between TruServ and MTS clearly provided for the payment of interest at a rate of 18% per annum on MTS's past due balances, MTS had a contractual obligation to pay that interest, and the trial court did not have discretion to refuse to include such interest in its award. Perhaps recognizing that the award of contractual interest was not discretionary, the panel majority of the Superior Court, as noted above, affirmed the trial court's decision on the basis that Tru-Serv failed to take reasonable steps to mitigate its losses. A party who suffers a loss due to a breach of contract generally has a duty to make reasonable efforts to mitigate his losses. Delliponti v. DeAngelis, 545 Pa. 434, 443, 681 A.2d 1261, 1265 (1996); Bafile v. Borough of Muncy, 527 Pa. 25, 588 A.2d 462 (1991). Moreover, the burden is on the breaching party to show how losses could have been avoided. Delliponti, 545 Pa. at 443, 681 A.2d at 1265 (reinstating employee's back pay because borough did not establish that employee failed to mitigate her damages); Ecksel v. Orleans Constr. Co., 360 Pa.Super. 119, 519 A.2d 1021, 1028 (1987) (burden is on the party that breaches a contract to show how further loss could have been avoided through the reasonable efforts of the injured party). However, an injured party ... is not obligated to mitigate damages when both it and the liable party have an equal opportunity to reduce damages. Somerset, 685 A.2d at 150; Fiat Motors of North America, Inc. v. Mellon Bank, N.A., 827 F.2d 924, 930 (3rd Cir.1987) (applying Pennsylvania law in an action for breach of a letter of credit and holding the duty to mitigate damages is not applicable where the party whose duty it is primarily to perform a contract has equal opportunity for performance). Indeed, where it cannot be determined which party was responsible for delay in litigation, this Court has held equity entitles the nonbreaching party to interest from the breaching party, which had the use of the nonbreaching party's money during the course of the litigation. Penneys, 408 Pa. at 280-81, 183 A.2d at 546-47. Similarly, and consistent with this proposition, in Dox Planks of Northeastern Pa. v. Ohio Farmers Ins. Co., 423 Pa.Super. 311, 621 A.2d 132, 136 (1993), the Superior Court affirmed the trial court's holding that a subcontractor was not obligated to mitigate its damages after a contractor's breach of a contract to pay, because the contractor had already received the subcontractor's precast concrete barriers and was using them on a highway project at the time of breach, precluding the subcontractor from taking steps to avoid any loss. In cases where the payment of interest is an express term of the contract, as in the instant case, some courts have held that the right to recover contractual interest is not subject to mitigation. See, e.g., Universal Investment Co. v. Sahara Motor Inn, Inc., 127 Ariz. 213, 619 P.2d 485 (App. Div. 2 1980) (doctrine of avoidable consequences [9] is not applicable when there is an absolute promise to pay); Lake Ridge Academy v. Carney, 66 Ohio St.3d 376, 613 N.E.2d 183, 190 (1993) (where a liquidated damages clause is deemed valid, nonbreaching party does not have a duty to mitigate damages following a breach). After consideration, we conclude that, to the extent the Superior Court affirmed the trial court's decision on the ground that TruServ failed to take reasonable steps to mitigate its losses, the court erred. Although the Superior Court opined that TruServ could have reduced its lossesi.e., the amount of contractual interest to which it was entitledby prosecuting its claim in a more expedient fashion, MTS likewise could have reduced the amount of contractual interest to which TruServ was entitled by paying its invoices in a timely manner or by acting affirmatively to settle or bring the lawsuit to a conclusion. We recognize that, in situations involving a breach of contract for the payment of a sum certain, the breaching party could always reduce its obligation for losses incurred by the non-breaching party simply by paying the amount due and performing the contract. Nevertheless, we conclude that a party who breaches a contract containing an express promise to pay interest may not be permitted to reduce or escape entirely his contractual obligation by subsequently arguing that the nonbreaching party did not prosecute its breach of contract claim with dispatch. Thus, to the degree the Superior Court affirmed the trial court's disallowance of contractual interest due to TruServ, based on a finding that TruServ failed to mitigate its losses, we hold that such affirmance was in error.