Interest Rates

Interest “is a standard form of compensation for the loss of the use of money”.¹ Interest awarded should “address two of the most basic concepts in finance: the time value of money and the risk of the cash flows at issue.”² 

Noteworthy, interest can have a significant impact on damages in arbitral awards³ and is an essential element of achieving full reparation⁴ for the losses and risks a party bore.⁵

An award of interest is often categorized in interest that accrues from the date of valuation, i.e. date of the loss (date of breach of obligation(s),⁶ non- or late payment,⁷ midpoint⁸) or the notice of arbitration⁹ or the statement of claims,¹⁰ to the date of the award (pre-award interest), and from the date of the award¹¹ to the date of actual payment which may include costs¹² (post-award-interest).¹³

Interest rates are sometimes specified either in the contract between the parties,¹⁴ in the applicable law¹⁵ or in a bilateral investment treaty.¹⁶ In these cases, the statutory or contractual rate, which could be a fixed interest rate, or a rate expressed relative to a benchmark rate, is to be applied.¹⁷

In case the interest rate is neither statutory nor established in the contract between the parties, economic principles can be employed to select an appropriate or reasonable interest rate.¹⁸ Three rival theories exist:

1. Claimant is only “entitled to interest compensating it for the time value of money, but it is not also entitled to compensation for the risks it did not bear."¹⁹ By “depriving the plaintiff of an asset […], the defendant also relieved it of the risks associated with investment in that asset."²⁰ Since there is no risk of default once the award is issued, Claimant should earn interest at a risk-free rate.²¹ Examples of interest rates that are considered (at least nearly) risk-free are yields on certain government bonds (issued for example by the US or Germany) or interbank rates, such as the USD LIBOR.²²
2. As per the coerced loan theory, claimant was effectively coerced into providing respondent with a loan at the date of the original breach, and therefore deserves to earn interest on this forced loan at respondent’s unsecured borrowing rate.²³
3. Since claimant had to raise capital to replace the funds lost as a result of a breach, interest should be awarded based on either claimant’s borrowing rate²⁴ or its cost of capital,²⁵ whereas the cost of capital reflects both claimants’ cost of debt and its required return on equity.²⁶

In practice, pre-award interest is mostly awarded based on a market rate - Market rates such as a yield on government bonds,²⁷ certifiates of deposit,²⁸ central banks,²⁹ prime rates,³⁰ or an interbank lending rate³¹ (LIBOR,³² EURIBOR,³³ ROBOR,³⁴ WIBOR³⁵) - plus, in some cases, a spread,³⁶ or based on a fixed rate³⁷ specified by the tribunal. In the context of a plurality of valuation dates at which damages became due, tribunals have considered that it may be appropriate to adopt the prevailing market rate at each of these dates.³⁸

When granting interest, tribunals have taken into consideration the conduct of the parties during the proceedings to determine the period over which interest is calculated,³⁹ as well as parties' concern to avoid generating a double recovery, especially in terms of compensating lost profit.⁴⁰

In absence of a statutory rate or contractual regulations, tribunals need to determine whether interest accrues on a simple basis⁴¹ or on a compound basis⁴² or both.⁴³ While both were equally common in arbitral awards pre-2000 and in the early 2000s, tribunals increasingly rely on compounding since around 2006,⁴⁴ as it better “reflects the economic reality of investment”.⁴⁵

Interest has been compounded annually,⁴⁶ semi-annually,⁴⁷ quarterly⁴⁸ or monthly.⁴⁹