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In furtherance to The ‘Twilight issues’ series: Determination of applicable law on the status of non-signatories in international commercial arbitration, in this blog I am dealing with the issue of interest on award and determinants involved in its quantification.
In the absence of express provisions allowing the arbitrators to award interest and provided that there is no prohibition under the arbitration agreement, including the applicable arbitration rules, and/or the law of the place of arbitration, it is widely accepted that arbitrators have a broad discretion whether to award interest, as part of their inherent powers.
No uniform Standard
Currently, there is no uniform and coherent method to quantify the interest in international arbitrations. Most institutional rules of arbitration do not contain express provisions for the payment of interest, largely because their drafters assumed that an arbitral tribunal has the power to make an award in respect of interest in just the same way as it has the power to make an award in respect of any other claims submitted to it.
Problems faced due to lack of Standard
As per David J. Branson and Richard E. Wallace, “in absence of any defined parameter in this regard, parties in similar situations are treated dissimilarly; settlement becomes difficult because parties are unable to forecast accurately the amount an arbitrator would award; and the parties and arbitrators spend considerable resources litigating and resolving interest issues in each case.” The general trend in awarding interest is to apply the interest laws of the jurisdiction whose law governs the contract. The domestic laws of countries often prescribe a fix rate of interest in domestic statutes to simplify calculations and to ensure fairness and uniformity. But application of such domestic rates stipulated in the laws of the jurisdiction governing the contract may prove to be unfair of the party of other country. It can also be unjust for the party getting interest since these rates are often substantially lower than even the prevailing market rates.
Laws affecting the interest on Award
The arbitrators must pay attention to the law of the place of arbitration, which may impose some limits or even prohibitions. The laws of the place of enforcement may also affect whether interest can be awarded.
Jurisdictions vary widely in their approach to interest awards. Some laws specifically grant arbitrators the power to award not just simple interest but compound interest. In some jurisdictions, for example Bermuda, Hong Kong, England, and Scotland, the power to award interest is governed by the law of the place of arbitration. In others, for example under German conflict-of-laws rules, the liability to pay interest is a question of substantive law and thus governed by the law of the contract. In jurisdictions where an award of interest is prohibited by law, such as in certain Islamic states, international arbitrators have nonetheless found a way to award interest by referring to it as “compensatory indemnity in lieu of interest.”
Whether Interest Laws are Substantive or Procedural?
In this regard J. Gillis Wetter, states “it is believed that in most jurisdictions interest is regarded as a matter of substantive law.” On the other hand, the writers from common law jurisdiction do not agree to this assertion.
Here I would like to cite the “International Arbitration Practice Guideline, Drafting Arbitral Awards Part II —Interest” issued by Chartered Institute of Arbitrators which provides much clarity on this issue. It states “[s]ome national laws provide that the right, if any, to interest is a matter governed by the substantive law of the contract, while others provide that it is a matter governed by the procedural law of the arbitration. Accordingly, when considering the issue as to whether to award interest arbitrators should take into account: (1) the substantive law applicable to the contract (lex causae) , (2) the lex arbitri, (3) the applicable arbitration rules and (4) any provisions in the arbitration agreement. They may also choose to consider the law of the place of likely enforcement, if known.”
For determining Rate of Interest
Applying International Standards – In such a scenario, the arbitrator be take assistance of Article 7.4.9 of the UNIDROIT Principles of International Commercial Contracts. Detailed procedure to apply this procedure is provided in its commentary which is reproduced below:
“1. Lump sum compensation for failure to pay a sum of money
This Article reaffirms the widely accepted rule according to which the harm resulting from delay in the payment of a sum of money is subject to a special regime and is calculated by a lump sum corresponding to the interest accruing between the time when payment of the money was due and the time of actual payment.
Interest is payable whenever the delay in payment is attributable to the non-performing party, and this as from the time when payment was due, without any need for the aggrieved party to give notice of the default.
If the delay is the consequence of force majeure (e.g. the non-performing party is prevented from obtaining the sum due by reason of the introduction of new exchange control regulations), interest will still be due not as damages but as compensation for the enrichment of the debtor as a result of the non-payment as the debtor continues to receive interest on the sum which it is prevented from paying.
The harm is calculated as a lump sum. In other words, subject to paragraph (3) of this Article, the aggrieved party may not prove that it could have invested the sum due at a higher rate of interest or the non-performing party that the aggrieved party would have obtained interest at a rate lower than the average lending rate referred to in paragraph (2).
The parties may of course agree in advance on a different rate of interest (which would in effect subject it to Article 7.4.13).
Rate of interest
Paragraph (2) of this Article fixes in the first instance as the rate of interest the average bank short-term lending rate to prime borrowers. This solution seems to be that best suited to the needs of international trade and most appropriate to ensure an adequate compensation of the harm sustained. The rate in question is the rate at which the aggrieved party will normally borrow the money which it has not received from the non-performing party. That normal rate is the average bank short-term lending rate to prime borrowers prevailing at the place for payment for the currency of payment.
No such rate may however exist for the currency of payment at the place for payment. In such cases, reference is made in the first instance to the average prime rate in the State of the currency of payment. For instance, if a loan is made in pounds sterling payable in country X and there is no rate for loans in pounds on country X financial market, reference will be made to the rate in the United Kingdom.
In the absence of such a rate at either place, the rate of interest will be the “appropriate” rate fixed by the law of the State of the currency of payment. In most cases this will be the legal rate of interest and, as there may be more than one, that most appropriate for international transactions. If there is no legal rate of interest, the rate will be the most appropriate bank rate.
Additional damages recoverable
Interest is intended to compensate the harm normally sustained as a consequence of delay in payment of a sum of money. Such delay may however cause additional harm to the aggrieved party for which it may recover damages, always provided that it can prove the existence of such harm and that it meets the requirements of certainty and foreseeability (paragraph (3)).
A concludes a contract with B, a specialised finance company, for a loan which will permit the renovation of its factory in country X. The loan specifically mentions the use of the funds. The money lent is transferred three months later than agreed. During that period the cost of the renovation has increased by ten percent. A is entitled to recover this additional sum from B.”
- As per Lawrence W. Newman and David Zaslowsky, “an alternative approach is to consider the rate of interest at which a party in the position of the paying party would have to borrow to pay the sum awarded.”
- The Arbitrator can use interest rates stipulated in the domestic laws only if they determine whether a party is entitled to any interest award, and that commercial rates be used to determine the amount of interest to be awarded.
For Determining the Time of Accrual
I believe Michael F. Hoellering best describes the current practice in his following words “[s]everal theories exist as to when interest should attach to an amount of money awarded at arbitration. The basic rule that interest begins to accrue at the time the debt becomes due and payable, or at the time a breach of the underlying contract occurs, is followed by some arbitrators. The courts generally agree that it is within the arbitrator’s jurisdiction to determine the proper date from which interest is to accrue. The most common exception to this rule occurs where interest is compelled at a given rate and/or from a given point of time by statute.”
Alternatively, if the arbitrators conclude that it is not possible to establish the exact date or dates when the damage started to accrue, for example, where damages were incurred over a period of time, they may conclude that it is just and fair to both parties to award interest from a middle or average date from which the damage started to accrue.
 Jeffrey Waincymer, Procedure and Evidence in International Arbitration (Kluwer Law International 2012), p. 1177
 Exceptionally, the LCIA Rules, Art. 26(6), provides that the arbitral tribunal may award compound interest not limited to the period up to the date of the award. (Chapter 9. Award in Nigel Blackaby, Constantine Partasides, et al., Redfern and Hunter on International Arbitration (Sixth Edition), 6th edition (© Kluwer Law International; Oxford University Press 2015) pp. 501 – 568)
 David J. Branson and Richard E. Wallace, Awarding Interest in International Commercial Arbitration: Establishing a Uniform Approach, 28 Va. J. Int’l L. 919 1987-1988
 Sylvania Technical Sys., Inc. v. Gov’t of the Islamic Republic of Iran, Iranian Assets Litig. Rep., July 12, 1985. at 10,839, 10,855
 Section 49 of the English Arbitration Act, 1996
 Klaus Peter Berger, International Arbitration Practice and the UNIDROIT Principles of International Commercial Contracts, 46 Am. J. Comp. L. 129, 136 (1998), and cases cited therein.
 Wetter, Interest as an Element of Damages in the Arbitral Process, Int’l Fin. L. Rev., Dec. 1986 at 22
 W. Craig, W. Park & J. Paulsson, International Chamber of Commerce Arbitration pt. 2, § 7.04, at 53
 Last retrieved on 25th June from http://www.ciarb.org/docs/default-source/ciarbdocuments/guidance-and-ethics/practice-guidelines-protocols-and-rules/international-arbitration-guidelines-2015/drafting-arbitral-awards-part-ii-interest-8-june-2016.pdf?sfvrsn=14
 Nigel Blackaby and others, Redfern and Hunter on International Arbitration (6th edn, OUP 2015), para 9.73; Born, n 4, pp. 3104 – 3108 and John Yukio Gotanda, ‘Awarding Interest in International Arbitration’ (1996) 90 The American Journal of International Law, p. 52
 ‘Awards of Interest in International Arbitration’, New York Law Journal, 22 May 2014.
 Supra note 3 at page 947
 The Forum (Section of Insurance, Negligence and Compensation Law, American BarAssociation), Vol. 20, No. 3 (Spring 1985), pp. 516-530
 Supra note 9 at page 6