The State of Missouri—like nearly all other states—has enacted a Prompt Pay Act to ensure and promote the timely payment of contractors, subcontractors, suppliers, and others involved in the execution of a public works construction project. Missouri's Prompt Pay Act requires, among other things, that payment be made promptly by certain deadlines set forth in the Act. If a party unjustifiably fails to comply with these payment deadlines, the Act imposes penalty interest at the rate of "one and one-half percent [1½%] per month calculated from the expiration of the [payment deadline] until fully paid." See Mo. Rev. Stat. §§ 8.960.1(5), 8.960.1(7).
Although the Prompt Pay Act provides for this monthly penalty interest, the statute is silent as to whether it should be calculated as "simple" or "compound" interest. Simple interest is computed solely on the principal; compound interest, meanwhile, is "interest upon interest," meaning accrued interest is added to the principal amount each period and that enhanced sum is used as the principal amount in calculating interest for the next period. Accordingly, compound interest increases exponentially in a short timeframe and, if imposed under Missouri's Prompt Pay Act, would have costly consequences for late payers.
Until recently, Missouri courts were undecided on the issue. On November 8, 2022, however, the Missouri Court of Appeals for the Eastern District provided much-needed clarity, ruling that the Prompt Pay Act only authorizes the recovery of simple—and not compound—interest.
In the case, Penzel Construction Company, Inc. v. Jackson R-2 School District, a general contractor (Penzel) filed suit against a project owner (Jackson) under Missouri's Prompt Pay Act relating to a school addition project. The trial court awarded Penzel, among other things, $800,000.00 in principal and "Prompt Pay penalty interest 'at the rate of one and one half percent (1½%) per month commencing May 10, 2010.'" Jackson paid the judgment, but the parties disagreed over whether penalty interest under the Prompt Pay Act should be calculated as simple or compound.
The Missouri Court of Appeals squarely addressed the question and held "the interest called for in the Prompt Pay Act is simple interest." Noting that the statute itself is silent on the issue, the Court refused to "read into" the Prompt Pay Act an unexpressed compound interest provision that the legislature deliberately chose not to include: "[Penzel] is asking us to do what we cannot do, add a provision to the statute which does not explicitly, or by implication, appear within it." The fact that interest is to be assessed on a monthly—not yearly—basis pursuant to the Act was of no consequence to the Court; in fact, simple interest at 1½% per month (totaling 18% per year) is significantly higher than annual interest rates prescribed in other Missouri statutes and thus serves the purpose of the Prompt Pay Act by penalizing late payment.
Project owners, contractors, subcontractors, and others involved in public works construction projects should therefore be aware that penalty interest imposed for late payment under the Prompt Pay Act is calculated as simple, not compound, interest.
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