Does Utah law require express agreement for compound interest? Error v. Benaroya Explained

In Error v. Benaroya, the Utah Court of Appeals addressed a critical question in commercial lending: whether loan documents must expressly provide for compound interest or whether general language about interest on an “outstanding balance” suffices. The court’s decision reinforces Utah’s longstanding disfavor of compound interest and provides important guidance for drafting loan agreements.

Background and Facts

Brett Error loaned $1 million to Michael Benaroya and BD&P Company LLC under loan documents providing for 2.75% monthly interest “on any outstanding balance” after default. When the borrowers failed to repay by the maturity date, Error sued seeking the principal plus compound interest. The borrowers argued they owed only simple interest. The difference in calculations was nearly $4 million—Error claimed over $7 million total while borrowers acknowledged owing approximately $3 million.

Key Legal Issues

The central issue was whether the loan documents’ language requiring interest “on any outstanding balance” constituted an express agreement for compound interest. The court also considered whether ambiguous contract language regarding interest calculations should be resolved in favor of simple or compound interest.

Court’s Analysis and Holding

The Court of Appeals applied the principle from Brady v. Park that “compound interest is not favored by the law” and requires express contractual agreement. The court found the phrase “outstanding balance” was ambiguous because it could reasonably mean either the principal balance or principal plus accrued interest. Crucially, the loan documents did not use terms like “compound interest,” “interest on interest,” or language indicating that “accrued interest is added periodically to the principal.” Because ambiguous contract terms “fall short of an express agreement” for compound interest, the court held that only simple interest was recoverable.

Practice Implications

This decision underscores the importance of precise drafting in loan agreements. Lenders seeking compound interest must use explicit language describing the compounding mechanism. General references to interest on “outstanding balances” or “entire balances” will not suffice. The court’s reversal of a $7 million judgment to approximately $3 million demonstrates the significant financial consequences of ambiguous interest provisions.