- ae59d2f5-6d71-1014-90bf-c1927c3ed365 — Conflict of laws — ae5ee520-6d71-1014-90bf-c1927c3ed365 — ae5ee971-6d71-1014-90bf-c1927c3ed365 — ae5eeb7c-6d71-1014-90bf-c1927c3ed365 — ae5f6dea-6d71-1014-90bf-c1927c3ed365 — ae5feff2-6d71-1014-90bf-c1927c3ed365 — ae5ff708-6d71-1014-90bf-c1927c3ed365
1.01 Interest1 in international arbitration has proven to be complicated.2 A combination of religion, history, and lawyers’ natural hesitancy to engage with numbers has led to a patchwork of half-solutions to the issue. This has created great uncertainty. As Gary Born puts it:
The interplay between differing national laws dealing with interest, as well as national characterizations of interest rules and national choice-of-law rules, can be metaphysical in their theoretical complexity.3
1.02 Although it was identified as problematic long ago, international arbitration has largely failed to grapple with this issue. For example, more than thirty years ago, the Iran–US Claims Tribunal identified in the McCullough case that:
… no uniform rule of law relating to interest has emerged from the practice in transnational arbitration, in contrast to the well developed rules regarding the determination of the standard of compensation for damages resulting from a breach of contract, where the rule of full compensation usually is applied.4
1.03 Despite this problem being evident and identified, interest in international arbitration does not receive a great deal of attention.5 This lack of attention is surprising given that interest is claimed in nearly every arbitration in which damages are claimed,6 and granted (p. 2) in nearly every award in which damages are granted.7 It seems that often parties and arbitrators8 do not pay sufficient attention to the question of interest in their submissions and subsequently in awards.9 This is perhaps surprising because, as one prominent arbitrator states, ‘[t]he issue of interest compensation is as important as the main claim for damages or payment of principal and should be given the same attention both by counsel and tribunals.’10 Indeed, interest generally adds a significant amount to awards. One 2016 study of ICSID awards found that on average, pre-award interest added around 26 per cent to the damages awarded.11
1.04 Interest has three key facets: the rate at which interest accrues; the way interest is calculated (simple or compound); and the period over which interest is calculated (usually defined by a start date and end date). These three facets apply equally to commercial instruments, such as loans or overdrafts, and interest on arbitral awards (the focus of this work). Any award granting interest must decide on these three issues to enable the parties to calculate the interest payable.
1.05 Arbitral awards have taken different approaches when deciding questions relating to interest. Some arbitrators approach interest as a purely legal question. They determine a national law through a conflict of laws approach and then apply that law to interest. In other awards, arbitrators have decided that they are free to determine what interest is reasonable.
1.06 The traditional approaches to interest in international arbitration are often inconsistent, internally illogical, or ill-suited to international situations.12 Worse, the traditional approaches sometimes lead to unjust results.
1.07 Of course, the approaches taken to interest in international arbitration are not static. Over time, the law and practice of international arbitration has converged, or is converging, on some general principles when it comes to interest. For example, it now seems broadly accepted that international arbitrators should respect any agreement by the parties on (p. 3) interest. If the parties’ agreement states that interest should be paid on overdue sums at a certain rate, between certain dates etc, arbitrators almost always grant interest as agreed.
1.08 However, on other issues, no uniform approach has emerged. An illustration is whether interest on awards should be simple or compound.13 Arbitrators have treated this question in radically different ways. Along with the core legal issues, this work considers the role that economics might play in resolving such issues. Economic principles support certain approaches to the granting of interest.
1.10 First, it deals with international arbitration understood broadly. It considers both commercial and investment arbitration. Certain authorities suggest that in commercial and investment arbitration, interest should be treated differently. Specifically, some suggest that state parties (sovereign states, state-owned enterprises etc) should be treated differently to non-state actors.14 This work suggests the opposite: commercial and investment arbitration should treat interest the same.15
1.11 Second, it does not consider the right to interest on awards as a separate topic. This is because—subject to a few exceptions—applicable laws allow arbitrators to grant at least some interest on arbitral awards.16 Where awards, applicable laws, and other legal approaches (such as the lex mercatoria) differ is on the rate, calculation method, and period over which interest is payable.
1.12 This work first lays out some of the necessary background to interest in international arbitration (Chapter 2). It then considers the rate of interest (Chapter 3), the calculation method (simple v compound) (Chapter 4), and the period over which interest is calculated (Chapter 5). The final chapter sets out the work’s conclusion: a possible overall, uniform approach to the granting of interest (Chapter 6).
1.13 The three main facets of interest—the rate, the way interest is calculated, and the period—are distinct, yet interrelated. The three key substantive chapters (Chapters 3–5) deal with each separately.
1.15 First, it considers the current or ‘traditional’ approaches to the issue dealt with in the chapter (ie, the rate, the way interest is calculated, or the period). This requires consideration of the variety of ways in which the issue is dealt with both in law and in arbitral practice. For example, some arbitrators consider that the interest rate on an award should be determined by the applicable law. Other arbitrators have found that they can determine themselves an interest rate which they consider to be reasonable.
(p. 4) 1.16 Second, it sets out a critique of some of the most common approaches to the issue. Certain of the major approaches to the various issues have been subject to significant criticism—much of it justified. This part of each chapter sets out that criticism, explaining why that approach might be disfavoured.
1.17 Third, it sets out a possible uniform approach to the issue. Certain elements of each uniform approach are based on established law and practice. For instance, national law and arbitral practice reflect that interest awards should be based on the claimant’s actual losses if the claimant proves those losses. Where no established practice has emerged, the uniform approach proposed takes into account the most appropriate economic solution (which is also consistent with the legal framework and arbitral practice).
1 As a linguistic note, the word ‘interest’ in English is generally used in the singular (eg, ‘I pay interest on three loans’). However, in other languages, the word is generally plural (eg, les intérêts in French or die Zinsen in German). In a number of awards and academic works written in English, perhaps because of the author’s linguistic background, the plural ‘interests’ is used. While this is grammatically incorrect, because of the frequency of this misuse, it is not indicated in the text of quotes as such (ie, no [sic]).
2 For brevity, the party seeking interest is generally referred to as the ‘claimant’ and the party that interest is being sought from is referred to as the ‘respondent’. In practice, interest may be claimed on a counterclaim, cross-claim etc.
Pinpoint references are included in footnotes if possible. Some sources, particularly those only published online, contain neither page numbers nor paragraphs numbers. In that case, no pinpoint reference is included.
3 Gary B Born, International Commercial Arbitration (2nd edn, Kluwer Law International 2014) 3105. See also John Y Gotanda, Supplemental Damages in Private International Law (Kluwer Law International 1998) 11–13, 43, 52–53.
5 Pierre A Karrer, ‘Transnational Law of Interest in International Arbitration’ in Emmanuel Gaillard (ed), Transnational Rules in International Commercial Arbitration (ICC 1993) 225. Dr Karrer proposes several reasons for this, namely, that: organized religions have historically had a negative view of interest; lawyers have a natural aversion to figures; and, in most domestic systems of law, statutory provisions set out a fixed rate of simple interest. Mr Derains suggests that this may be due to historical religious prohibitions on the granting of interest. Yves Derains, ‘Intérets Moratoires, Dommages-Intérêts Compensatoires et Dommages Punitifs Devant l’Arbitre International’, Etudes offertes à Pierre Bellet (Litec 1991) 101.
6 Gotanda (n 3) 12.
7 Professor Gotanda states that the granting of interest in international arbitration has become so common that ‘the liability to pay interest as part of an award of damages is an accepted international legal principle’. Gotanda (n 3) 12.
10 J Gillis Wetter, ‘Interest as an Element of Damages in the Arbitral Process’  International Financial Law Review 20, 23. Interest can also be granted on costs awards. For instance, in the ICSID case Grynberg v Grenada, the prevailing respondent state was granted interest on the costs award in its favour. Rachel S Grynberg & Ors v Grenada, Award, ICSID Case No ARB/10/6, 10 December 2010, para 9.1(d). See also Pac Rim Cayman LLC v The Republic of El Salvador, Decision on the Respondent’s Request for a Supplementary Decision, ICSID Case No ARB/09/12, 28 March 2017, para 1.19; Philip Morris Asia Ltd v The Commonwealth of Australia, Final Award Regarding Costs, PCA Case No 2012-12, 8 March 2017, paras 106–107; Ansung Housing Co Ltd v People’s Republic of China, Award, ICSID Case No ARB/14/25, 9 March 2017, para 169. However, some awards have concluded that, in the particular circumstances, the arbitrators do not have the power to grant pre-award interest on costs. See eg Barracuda and Caratinga Leasing Company BV v Kellogg Brown & Root LLC, Final Award, UNCITRAL Rules Arbitration, 2 November 2011, paras 114–117.
16 For example, the award in ICC case 9466 states that it ‘is a general principle of law, as well as of international trade practice, that the harm normally sustained as a consequence of delay in payment of a sum of money be compensated by interest.’ ICC case 9466, Final Award, (2002) XXVII Yearbook of Commercial Arbitration 170, 1999, para 33. The Vivendi ICSID tribunal stated that ‘the liability to pay interest is now an accepted legal principle’. Compañiá de Aguas del Aconquija SA and Vivendi Universal SA v Argentine Republic, Award, ICSID Case No ARB/97/3, 20 August 2007, para 9.2.1.