1. General

A very large number of the awards rendered in international arbitrations award interest as well as damages. The interest component can represent anything from 4% up to 40% of the total award. 2 The amount of the interest component in an award is a function of the time during which interest accrues and the interest rate used. The amount of interest also varies according to whether simple or compound interest is used. 3

Despite the importance of the rate of interest in the fixing of the quantum of an award, in international arbitration there is repeated inconsistency in the choice of the rules followed to determine this rate. A review of reported cases shows that arbitral tribunals follow a mixed bag of guidelines including the legal rate of the law of the contract, the legal rate of the place of arbitration and even a subjective estimation of what they consider is fair or reasonable (see part 2, below).

From a strictly financial point of view, the proper rate of interest that accrues on an obligation to pay a sum of money is always the market rate of the currency in which the obligation is denominated. The market rate in any particular currency is a function of the inflation expectations and the supply and demand for loanable funds in that currency. 4 In turn, the market rate in the currency of the obligation is the rate that merchants dealing in that currency are in fact applying and is a real rate of interest, as opposed to legal interest. Though some of the reported cases in international arbitration use the market rate of the currency of the award, most do not, thus [Page44:] creating a contradiction between the practice in international commerce, specifically in international financial markets, and the rules used in arbitral awards. 5

According to the UNIDROIT Principles of International Commercial Contracts (UNIDROIT Principles), 6 'if a party does not pay a sum of money when it falls due . . . the rate of interest shall be the average bank short-term lending rate for the currency of payment' (Article 7.4.9(2)). In other words, the rate of interest is the market rate ('lending rate') in the currency of the debt (see part 3, below). The UNIDROIT Principles offer a solution to the inconsistency that has reigned until now. In an ICC award of 1989, the tribunal held that the normal usages of international commerce contained no detailed rules with regard to interest rates (ICC case 5904). 7 This holding, following the adoption of the UNIDROIT Principles, would no longer be correct.

The rate of interest relates to the currency of the award and not to the currency in which the award is to be paid in such cases where this currency is not the same as the currency of the award. For example, if an award is rendered in euros but the respondent is ordered to pay the amount in US dollars at the prevailing euro-US dollar exchange rate on the date of payment, the rate of interest is applied to the euro value of the award and not to its dollar equivalent.

This article addresses the problem of the interest rate applicable to an award. It does not address the problem of the liability of the losing party to pay interest, which normally is a matter dealt with by the proper law of the contract. It also does not address the problem of compounding interest when compounding is against applicable public policy rules. 8

2. Different methods used for fixing interest rates in international arbitration

A review of the most recently reported awards shows that there are at least seven different methods currently used by international arbitral tribunals to determine the rate of interest: (i) the contract rate (rate by agreement); (ii) the legal rate of the law of the contract; (iii) the legal rate of the lex fori; (iv) the rate at the place of payment; [Page45:] (v) a reasonable or fair rate as determined by the tribunal; (vi) the market rate in the currency of the award; and (vii) the inflation rate of the currency of the award.

Most awards fix the rate of interest by reference to the legal rate of interest of a particular municipal internal law (either the law of the contract, lex fori or the law of the place of payment). In turn, most legal systems define the legal rate as a fixed number (X%), which then is used by the tribunal to calculate the interest. There are some exceptions, such as France, where after 1989 the legal rate is fixed yearly by decree (Civil Code, Article 1907, Law No. 89-421). 9 In Spain, the legal rate after 1984 is fixed periodically by the Banco de España. 10 In Venezuela, the Commercial Code provides that the legal rate is equivalent to the market rate (Commercial Code, Article 108). In Switzerland, the legal rate is fixed. The most recent trend is for international arbitral tribunals to either look at the market rates or simply set a rate according to what the tribunal considers reasonable, fair or appropriate. The use of the legal rate as provided in the legal system of the law of the contract or in the lex fori appears to be gradually falling into disuse.

(i) The contract rate (rate by agreement)

If the contract between the parties to an arbitration establishes a specific rate applicable to late payments or in any way addresses the issue of the rate of interest applicable to late payments, the arbitral tribunal will normally apply this rate, thus respecting the agreement of the parties (pacta sunt servanda). 11 The autonomy of the parties is 'a fundamental principle in private international law', 12 and sacred to international arbitration. In ICC arbitration, the arbitral tribunal must take the provisions of the contract into account (ICC Rules of Arbitration, Article 17(2)), 12 including any provisions regarding the rate of interest. Further, tribunals will go out of their way to find some form of agreement or understanding among the parties regarding the rate of interest. The agreement on the rate of interest must define a number (X% per annum) or a formula or method to define the rate (i.e. Libor plus, Fed funds, etc.). An agreement on the law governing the contract is not an agreement on the rate of interest. 14 In ICC case 5597 (1990), the contract provided for interest at 5% per annum on late payments which the tribunal found to be in accordance with Article 210 of the Yemen Commercial Code and thus applicable to the balance due to the claimant. 15 In ICC case 5789 (1998), 16 the tribunal applied interest at the rate of the security-based loans of the Bank of France set forth in the contract. [Page46:]

In ICC case 7878 (1997), 17 where there was no written agreement covering the rate of interest, the sole arbitrator considered that 'there is a tacit agreement on the rate of 10%, which will be applied to both the claim and the counterclaim'. The tacit agreement in this case apparently arose from the fact that the claimant contended that the rate of interest should be 10% and that the defendant, while contending that interest at 18% should be added to its counterclaim, did not object to the rate used by the claimant.

The interest rate established in promissory notes was applied on the principal amount of the award in a decision before the International Centre for Settlement of Investment Disputes (ICSID). 18 The tribunal in this case applied the interest rate in the promissory notes, being satisfied that 'the figures submitted by Fedax N.V. . . . correspond exactly to the calculation of interest established in the promissory notes'.

(ii) Law of the contract

If the parties have not agreed on a rate of interest applicable to late payments, the classical solution was, up until recently, to apply the legal rate of the law governing the contract (lex contractus), which originally was interpreted as being the legal rate prevailing in the state whose law is applied. 19 In case 5289 (1986), the arbitral tribunal applied the rate of 6% under the Korean Commercial Code, which was the law applied to resolve the dispute. Though there were several cases in the 1970s and 1980s where tribunals fixed the interest rate following the law of the contract, 20 the use of the legal rate of the law of the contract seems to be falling into disuse. 21

The award in ICC case 8123 (1995) 22 involving an Italian company as claimant (supplier) and a Canadian company as respondent (purchaser) states: 'The Arbitral Tribunal is mindful of the fact that the agreement is governed by the laws of Quebec, but does not believe that an award rendered in US dollars in proceedings conducted in Paris should apply the legal rate of interest that obtains in the courts whose law happens to be the lex contractus'. Quoting the final award in ICC case 6219 (1992), 23 the tribunal went on to state that 'with respect to interest on overdue payments: "The Arbitrator is not obliged to refer to the legal rate of any national legal system, whether that of the law of the contract or the lex fori or of the place of arbitration."' The tribunal in case 8123 decided to apply the French legal rate (lex fori in this particular case), which it held to be 'the rate most consonant with the legitimate expectations of the parties'. This case suggests that the law of the contract is no longer necessarily the proper law to apply to the determination of interest. Lex fori was used in this particular instance because the tribunal considered it a reasonable basis for establishing the interest rate in this matter (see subsection v, below).

(iii) Lex fori

A popular method of determining the rate of interest consists in applying the legal rate of the place of arbitration (lex fori). The rationale for using the lex fori is that the amount of interest is a procedural question and not a substantive question. 24 The fact that lex fori is the applicable law for determining the rate does not, [Page47:] however, mean that the applicable rate is the domestic rate at the place of arbitration.2 25 Indeed, lex fori could either give the arbitrators the discretion to determine the rate or could confine the arbitrators to the legal rate of the law of the currency. In the final award in ICC case 5731 (1989), 26 the tribunal 'examined the English conflict of laws rules to determine which law it should apply when making its determination in respect of interest'. It held that 'the question of liability to pay interest is to be determined by the proper law of the contract under which the obligation arises . . . and that the amount of such interest (i.e., the period and the rate) is to be determined by English law' (lex fori). The same principle was followed in ICC case 7078 (1995), 27 where the place of arbitration was Paris, France, although the agreement was subject to English law. In this case the tribunal held that '[t]he rate of interest is under English conflict of laws rules determined by the lex fori, i.e. in the instant case by French law'. The danger of lex fori is that in many cases it will be totally unrelated to the currency of the award or the law of the place of payment. Major problems arise in arbitrations that take place in a jurisdiction of convenience with a high inflation rate and where the lex fori is completely unrelated to the conflict or the award or the damage initially suffered by the winning party. The application of the lex fori is even more artificial when the place of arbitration was not chosen by the parties but by an arbitration institution.

(iv) The rate of the place of payment

Normally, the place of payment of an obligation set forth in an agreement will be a country where the currency of payment is legal tender, in which case the law of the place of payment will also be the law of the currency in which the obligation is denominated (e.g. a debt in sterling payable in London). Most continental codes expressly provide as the place of payment the domicile of the creditor, 28 although in some jurisdictions it is the domicile of the debtor. In international contracts, payments are made by transfer to accounts held by creditors in countries where the currency is legal tender. Thus, a payment in dollars is paid by transfer to an account in the United States. Occasionally, there are contracts where a debt in dollars must be paid outside of the United States (e.g. dollars payable in Venezuela) or a debt in euros payable outside Europe (e.g. euros payable in Colombia).

There are very few cases where an arbitral tribunal uses the rate of interest of the place of payment instead of the rate of the currency of the debt. In ICC case 5324 (1989), 29 to which Swiss law was applicable, the tribunal referred to the importance of 'the normal interest rate prevailing in the place of payment applicable to credits expressed in the currency due, in the present case, US dollars'. The tribunal in fact used a rate equal to the US Federal Reserve Bank Discount Rate.

In many cases, the currency of the debt is preferred to that of the place of payment. In ICC case ICC 6573 (1991), 30 dealing with a US dollar draft available by negotiation, the place of payment was deemed to be the place of business of the confirming bank, i.e. Geneva. The tribunal stated: 'This does not mean, however, that the discount rate applicable to commercial papers in Swiss francs applies . . . economic reality requires that interest be computed at the rate . . . in the currency of the debt, i.e. here in US dollars.' [Page48:]

(v) A reasonable or fair rate as determined by the tribunal

In recent cases, some tribunals have ignored the legal rate of any particular municipal law and have applied a rate which they considered to be reasonable or fair, thus effectively granting themselves a discretion to determine the rate according to what is reasonable, fair or appropriate in their opinion. The terms 'reasonable', 'fair' and 'appropriate' that appear frequently in the decisions are not synonymous: 'appropriate' refers to some form of proper market rate; 'reasonable' or 'fair' are terms giving even more discretion to the tribunals, implying that the rate is to be determined taking into account the particulars of the case under review.

In ICC case 7622 (1995), 31 despite the fact that the contract provided for a rate of LIBOR + 1%, the tribunal found 5% to be a reasonable rate to apply in light of the contract clause. In ICC case 9466 (1999), the claimant requested that the US dollar LIBOR rate be applied but did not specify which LIBOR. The tribunal then considered that the 'appropriate' rate was the one-year LIBOR. Looking more at considerations of equity, the tribunal in the ICSID case Metalcad Corporation (U.S.A.) v. United Mexican States applied a rate of 6% 'so as to restore the claimant to a reasonable approximation of the position in which he would have been if the wrongful act had not taken place'. 32

(vi) Inflation rate and the currency of the award

In the final award in ICC case 7063 (1996), 33 the question arose as to whether a successful claimant under Saudi law would also be entitled to anything in the nature of interest by way of additional compensation or whether such an award would be prohibited by the Sharia doctrine of riba. The tribunal held that the doctrine of riba did not prohibit awarding interest. It went on: 'However, in order to respect the sensitivities of Sharia law in this field, we do not consider that compensation should be awarded at a commercial rate of interest, but that it should rather be based on a rate which reflects the incidence of annual inflation over the period . . .' The tribunal awarded simple interest at the rate of 5% per annum over a five-year period. In so doing, it seems to have been estimating the inflation rate. Taking a different stance, the tribunal in ICC case 5285 (1992) discussed the difference between damages and restitution, concluding that the claimant was entitled to restitution 'of its May 1979 investment of $X million, without adjustment for inflation over the past ten years, but with interest from the date of the final breach of fiduciary obligations by Defendant'. 34 The tribunal went on to establish an interest rate of 12% per annum compounded.

(vii) The market rate in the currency of the award

A method of determining the interest rate that has gained acceptance recently is that whereby interest is calculated according to the market rate of the currency in which the award is rendered. In ICC case 5904 (1989), 35 the claimant demanded interest at the basic rate in Mauritius, which was 12% at the time. The arbitrator, however, held that 'the French rate is more relevant. It is logical that the law of the country is whose currency the claim was specified should govern the interest rates which are, theoretically, related to the position of that currency in financial markets'. In an [Page49:] interesting set of arguments regarding the interest rate in the final award in ICC case 6219 (1990), 36 the arbitrator observed: 'The general trend arising out of the legal literature and the international arbitral practice is to grant the arbitrator a large measure of freedom in fixing such rates. . .' 37 Further, the arbitrator held that he was not obliged to refer to the legal rate of any national legal system, whether that of the law of the contract or the lex fori. In addition, he noted: 'The rate must be reasonable and fixed in light of all relevant circumstances, in particular in light of: any significant contractual provision (a), the nature of the events having generated the damage (b), the rates prevailing in the monetary market concerned and the rate of inflation of said market (c).' Despite this analysis, the arbitrator finally applied the rate of 8.5% that was supposedly specified in the contract.

3. UNIDROIT Principles

The UNIDROIT Principles define the applicable rate of interest in Article 7.4.9(2):

The rate of interest shall be the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place for payment, or where no such rate exists at that place, then the same rate in the State of the currency of payment. In the absence of such a rate at either place the rate of interest shall be the appropriate rate fixed by the law of the State of the currency of payment.

The 'average bank short-term lending rate to prime borrowers' is what is sometimes referred to as the market rate. The market rate further means the rate at which transactions take place (the rate at which loans are made to prime borrowers), and not some sort of rate set by an administrative decision. 38 The 'State of the currency of payment' is a reference to the currency in which the award is rendered, and not the currency in which it is paid. Thus, in a case (not very common in practice) where the arbitral tribunal renders an award in rupees but orders the losing party to pay the award in US dollars at the US dollar equivalent of the rupee award on the date of payment, the 'State of the currency of payment' should be read to mean India and not the United States (see part 1, above).

The UNIDROIT Principles call for the application of an 'average bank short-term lending rate to prime borrowers'. The use of a lending rate is better than the use of a deposit rate, which has been advocated by some commentators. 39 By definition, a lending rate is slightly higher than the deposit rate. The UNIDROIT Principles present a problem in that they use a short-term rate but do not make any provision for the possibility of compounding interest. Further, the official comments of UNIDROIT do [Page50:] not define 'short-term', which could mean one month, 90 days or one year, although in practice the expression means up to one year. 40 Arbitrators will have to choose the appropriate rate for each case. Some currencies, especially in periods of high inflation, do not have long-term interest rates. When the period for which interest is applied is relatively long (say, five years), a short-term rate (say, one month, 90 days or even one year) is only adequate if interest can be compounded at the end of each period. 41 Some arbitration statutes allow arbitral tribunals to compound interest. If the law of the place of arbitration allows compounding 42 or does not forbid it, the arbitral tribunal could consider using compound interest. If the law of the place of arbitration does not allow compounding, then the tribunal should look for a longer interest rate. 43 The UNIDROIT Principles do not specifically state that the rate should be adjusted periodically. Short-term rates are adjustable, so Article 7.4.9(2) of the UNIDROIT Principles should be read as providing for a variable floating lending rate adjustable periodically to reflect changes in the rate.

The UNIDROIT rule works in four steps. First, the tribunal determines if there is a market interest rate at the place of payment. For example, in a US dollar obligation payable in London, the rate of interest is the average bank short-term lending rate to prime borrowers for dollar loans in London, so that, if there is a short-term lending rate for the dollar in London, then this rate must be applied.

As a second step, if there is no short-term bank lending rate at the place of payment, then the tribunal must use the market rate of interest in the state of the currency of payment. In the example, if there is no rate in London for dollar lending, then one must look at dollar rates in the United States. This would be the case of a contract that is payable in dollars in Caracas, Venezuela. Since there is no dollar lending rate in Venezuela, then the tribunal would have to look for this rate in the American market.

Thirdly, if the place of payment is also the state of the currency of payment, then the tribunal must apply the market rate prevailing at the place of payment. For example, for an award in dollars for an obligation payable in New York, the tribunal must use the short-term bank dollar lending rate in New York regardless of the law applicable to the contract or the lex fori.

Lastly, if there is no short-term bank lending rate in the state of the currency of payment, then the tribunal must use the 'appropriate rate fixed by the law of the currency of payment'. According to the official comments on the UNIDROIT Principles, this should be the most appropriate legal rate for international transactions, and if there is no legal rate of interest, the rate will be the most appropriate bank rate. 44

4. Conclusions

If the parties to an arbitration have agreed in the contract or otherwise on a rate of interest, the arbitral tribunal should apply this rate (ICC Rules of Arbitration, Article 17(2); UNCITRAL Model Law, Article 28(4)). The application of this rate may be affected by usury laws or other laws limiting the payment of interest at the place of arbitration (lex fori). The existence of an agreement on the rate of interest must be determined by the arbitral tribunal. The tribunal may find that there is a tacit [Page51:] agreement among the parties (see section 2(i), above). If there is an agreement on the rate of interest, the tribunal does not have to determine if this rate is fair or reasonable. The awarding of punitive or exemplary damages or the awarding of additional damages 45 is unrelated to the determination of the rate of interest. Further, an agreement on the law governing the contract is not an agreement on the rate of interest (see section 2(ii), above).

If there is no agreement on the rate of interest, an international arbitral tribunal should consider applying some form of market interest rate applicable to the currency of the award. The use of a market rate in the currency of the award corresponds to international banking practices. Moreover, if interest is calculated following banking practices, the method used will be uniform, thus producing similar or identical rates for all awards in the same currency.

It is the author's opinion that international arbitral tribunals should be wary of applying the interest rate of the internal law of the contract (see section 2(ii), above), or the rate of interest of the lex fori (see section 2(iii), above). 46

On the other hand, the use of a reasonable or fair rate as determined by the arbitral tribunal gives the tribunal a discretion that is not warranted. Allowing an arbitral tribunal to decide on interest rates according to its own criteria of fairness or appropriateness would in many cases be tantamount to granting the tribunal the power of amiable compositeur. In an ICC arbitration, a tribunal may only act as amiable compositeur if the parties have expressly agreed to give it such power (ICC Rules of Arbitration, Article 17(3)). 47

The UNIDROIT Principles outlined above (section 3) provide international arbitral tribunals with a methodology for the determination of a market interest rate. In applying these principles where there is no agreement among the parties, the arbitral tribunal first determines if there is an average bank short-term lending rate in the currency of the award at the place where the award should be paid or at the original place of payment of the obligation. If there is no such rate, then it determines the average bank short-term lending rate in the state of the currency of the award (UNIDROIT Principles, Article 7.4.9(2)).

The UNIDROIT Principles has gained wide acceptance in international arbitral awards in the past five years 48 and has been applied by arbitral tribunals by voie directe, that is, because the tribunal deemed it appropriate for the case and without consideration of choice-of-law rules. 49 Some legal systems, such as that of Venezuela, expressly call for the application of international practices and usages, which may be deemed to include the UNIDROIT Principles. 50 The 1994 Inter-American Convention on the Law [Page52:] Applicable to International Contracts, ratified by Venezuela in 1995, refers to 'the general principles of international commercial law recognized by international organizations' (Article 9).

There are, however, some doubts regarding the application of the UNIDROIT Principles in contradiction of an express provision in domestic law that is applicable to the dispute in those cases where the parties have expressly agreed to apply a particular domestic law to the contract. 51 In Switzerland, Professor Dessemontet is against extending the principles of UNIDROIT and applying them when a clear rule exists in national law. 52 This means that if the law of the contract sets a legal rate that is different from the short-term market rate called for by the UNIDROIT Principles, then the tribunal would have to apply the rate of the law of the contract. Most legal systems have some form of internal legal interest rate. However, in most cases, this interest rate is only applicable to obligations to pay sums of money in the legal tender of the particular state. 53 It is unusual to find rules regarding the interest rates applicable to foreign money debts, that is, amounts owed in a currency other than the legal tender. Thus, there will generally be no conflict between the UNIDROIT rule and a rule in the municipal law applicable to the contract dispute.

1
The views expressed in this article are those of the author alone and in no way bind ICC or the ICC International Court of Arbitration.

2
Some (most certainly not most) awards also grant post-award interest. The problem of the rate of interest covered in this article refers both to interest accrued up to the date of the award, as well as post-award interest.

3
From interest theory we know that simple interest is that which accrues on a permanently fixed sum of money. In an award, it would be calculated on the amount of the award, independently of the periods of time during which interest is to accrue. Simple interest assumes that 'the interest is not reinvested toward an additional interest', S.G. Kellinson, The Theory of Interest, 2nd ed. (Illinois, 1991) section 1.5. Compound interest assumes that interest is reinvested at the end of every interest period and added into principal so that new interest accrues on the new increased amount of principal (ibid.).

4
The relationship of interest rates to inflation expectations was initially brought up by Irwin Fisher in 1907, in The Rate of Interest, and later in 1930, in The Theory of Interest as Determined by Impatience to Spend Income and Opportunity to Invest It, published originally in 1930, reprinted London 1997, chapter IXX. The relation between the levels of price and the rate of interest was called the Gibson Paradox by John M. Keynes, see J.M. Keynes, A Treatise on Money, vol. 2, The Applied Theory of Money, originally published London 1930, reprinted by the Royal Economic Society, Cambridge 1971, c. 30, p. 177. Modern economic theory questions some of these conclusions, see M.D. Evans and K.K. Louis, 'Do the Expected Shifts and Inflation Affect Estimates on the Long Run Fisher Relation?' (1995) 50 Journal of Finance 225; also, F.S. Mishkin, 'The Real Interest Rate, a Multi-Country Empirical Study' (1994) XVII Canadian Journal of Economics 95. However, there is still recognition of a relation between nominal interest and expected inflation, M. Woodford, Interest Prices (Princeton, 2003) at 37.

5
International arbitration awards use practices of international commerce. The system of rules and practices applicable to international commercial contracts is what is known as lex mercatoria (see, Enciclopedia del Diritto, 2nd ed. (Garzanti, 2001)). Clive Schmitthoff refers to common principles in the law relating to international commercial transactions, C. Schmitthoff, 'Nature and Evolution of the Transnational Law of Commercial Transactions' in N. Horn & C. Schmitthoff, eds., The Transnational Law of International Commercial Transactions, vol. 2 (Kluwer, 1982) 19. There is no question that the method used commonly in banking to fix interest rates has all the characteristics of a lex mercatoria, a concept that dates back to more than 300 years before the Christian era; on the origins of lex mercatoria, see H.J. Berman & C. Kaufman, 'The Law of International Commercial Transactions (Lex Mercatoria)' (1978) 19 Harvard International Law Journal 221, and J.O. Rodner, El Crédito Documentario, 2nd ed. (Caracas, 1999) c. 12. The initial source of lex mercatoria is thus the practices in international markets; the immediate source is the way these usages are interpreted nowadays by international arbitration tribunals, see M.R. Ferrarese, L'Istituzione della Globalizzazione, Diritto et diritti nella Società Trasnazionale (Bolonia, 2000). International tribunals absorb the usages and give them written expression in their awards, see M. Damasca, Il Volti della Justicia del Podere (Bologna, 1999), quoted by M.R. Ferrarese, ibid. at 138. International tribunals do not therefore themselves create or dictate usages of commerce when there is a practice in place.

6
The UNIDROIT Principles were adopted by the International Institute for the Unification of Private Law (UNIDROIT) in 1994. On the development of these principles see M.J. Bonell, Un Codice Internazionale del Diritto dei Contratti (Milan, 1995). On the UNIDROIT Principles and their application in international arbitration see The UNIDROIT Principles for International Commercial Contracts: A New Lex Mercatoria?, dossier of the ICC Institute of International Business Law and Practice (Paris: ICC, 1995 (ICC Publication 490/1)), especially Part II; and UNIDROIT Principles of International Commercial Contracts: Reflections on their Use in International Arbitration, ICC ICArb. Bull. Special Supplement (Paris: ICC Publishing, 2002) [hereinafter 'ICC ICArb. Bull. 2002 Special Supplement'].

7
(1992) 3:2 ICC ICArb. Bull. 52.

8
Although in international financial markets interest that accrues over multiple periods of time is calculated as compound interest, unless interest is assumed to be paid to the beneficiary of the interest at the end of each accrual period, the compounding of interest ('anatocism') smacks of usury in most internal legal systems and thus represents a continuing problem for arbitrators. Laws against usury and other similar statutes limit the application of compound interest. For a brief study of usury doctrines and their effects on interest, see generally S. Homer & R. Sylla, The History of Interest Rates, 3rd ed. (New Brunswick, 1999) c. 6ff.

9
According to Law 75-619 of July 1975 (Law 75-619), the legal rate for a particular year was equal to the discount rate of the Bank of France effective on 15 December of the preceding year (Law 75-619, Article 1). Obviously, this refers to a rate applicable to obligations in French francs. Law 89-421 repealed Article 1 of the 1975 law and provided that the legal rate would be fixed annually by decree. Since then, a decree has each year defined a legal rate for the given year. The current rate is applicable to obligations in euros.

10
C.V. Urruzubeitía, Doctrina y Jurisprudencia del Código Civil, 4th ed. (Madrid, 1992). Both France and Spain adopt a floating legal rate that is adjusted once a year to conform with the market rate.

11
See J.Y. Gotanda, 'Awarding Interest in International Arbitration', (1996) 90 American Journal of International Law 39. Gotanda sees 'the agreement as the primary source of authority for interest', ibid. at 50. Y. Derains states that since arbitrators perform a task conferred upon them by the parties, they should firstly respect the will of the parties concerning late payment interest. See Y. Derains, 'Intérêts moratoires, dommages-intérêts compensatoires et dommages punitifs devant l'arbitre international', Etudes offertes à Pierre Bellet (Paris: Litec, 1991) 101 at 103.

12
Principle adopted by the Institute of International Law in 1991, see Resolutions 1957-1991 at 409, cited in L. Collins, ed., Dicey and Morris on the Conflict of Laws, 12th ed., (London, 1993) [hereinafter Dicey and Morris] at 1212.

13
ICC Rules of Arbitration in force as from 1 January 1998. This provision is taken from Article 13(5) of the previous version of the ICC Rules of Arbitration dating from 1988. The provision in Article 17(2) 'serves to assure the parties that "in all cases", whatever legal rule may apply to their dispute, the arbitral tribunal will not lose sight of either the terms of their contract or the business practices of their trade', Y. Derains & E. Schwartz, A Guide to the New ICC Rules of Arbitration (The Hague, 1998) at 224. A similar rule to Article 17(2) of the ICC Rules of Arbitration is contained in Article 28(4) of the 1985 UNCITRAL Model Law on International Commercial Arbitration (UNCITRAL Model Law).

14
J.Y. Gotanda, supra note 11 at 56, holds that if the contract provides for the applicable law, the arbitrators should resolve the interest claim according to the agreement. However, the choice of an interest rate is different from the choice of law governing the agreement (see subsection (ii), below).

15
(1992) 3:1 ICC ICArb. Bull. 16.

16
ibid. at 19.

17
See hereinafter, pp. 80 f.

18
Case ARB/9613, Fedax N.V. (Netherlands Antilles) v. Republic of Venezuela, decision of July 1997, (1999) Y.B. Comm. Arb. 23 at 41.

19
See Y. Derains, supra note 11 at 106, who refers to this as a conflict-of-laws approach to the determination of the rate of interest. The law of the contract includes the law expressly chosen by the parties or, in the absence of a choice by the parties, the law that results from the application of the choice-of-law rules.

20
Y. Derains cites, among others, ICC case 4237 of 1984, (1985) X Y.B. Comm. Arb. 52; ICC case 2637 of 1975, (1977) II Y.B. Comm. Arb. 153; and ICC cases 3099 / 3100 of 1979, (1982) VII Y.B. Comm. Arb. 87.

21
In fact, most of the cases that use the interest rate of the law of the contract were decided prior to 1990. Further, to the extent that the interest rate is a matter of procedural law, the law of the contract (substantive issues regarding the merits) does not necessarily apply. In America, J.Y. Gotanda, supra note 11 at 53, holds that ' resolving interest claims by reference to a particular national law analysis has led to inconsistent and sometimes arbitrary awards'.

22
See hereinafter, pp. 82 f.

23
(1992) 3:1 ICC ICArb. Bull. 22.

24
This is the rule followed in England, where the liability to pay interest is determined by 'the law applicable to the contract under which the debt is incurred but the rate of such interest is determined by English law' (lex fori); Rule 197(2), Dicey and Morris, supra note 12 at 1444.

25
ibid. at 1449.

26
(1992) 3:1 ICC ICArb. Bull. 18.

27
See hereinafter, pp. 68 f.

28
Under the UNIDROIT Principles, if the place of payment is neither fixed nor determined by the contract, a party must perform at the obligee's place of business, UNIDROIT Principles, Article 6.1.6(1).

29
(1992) 3:2 ICC ICArb. Bull. 49.

30
(1992) 3:2 ICC ICArb. Bull. 55.

31
See hereinafter, pp. 79 f.

32
Case ARBAF/97/1 (2000), (2001) XVI Y.B. Comm. Arb. 99.

33
(1997) XXII Y.B. Comm. Arb. 87.

34
(1992) 3:2 ICC ICArb. Bull. 48. The award refers to the action as one of an equitable nature, from which the tribunal in turn draws its discretion. It is not clear whether or not the arbitrators in the case were given the powers of an amiable compositeur.

35
(1992) 3:2 ICC ICArb. Bull. 51.

36
(1992) 3:1 ICC ICArb. Bull. 22.

37
The arbitrator refers to J. Gillis Wetter, 'Interest for an Element of Damages in the Arbitral Process' International Financial Law Review (December 1986) 20, and to S. Boyd, 'Interest for the Late Payment of Money' (1985) 1 Arbitration International 153. J. Gillis Wetter, ibid. at 21, refers to 'Judge Charles N. Brower in his concurring and dissenting opinion' in Iran-US Claims Tribunal, Award of 22 April 1986, McCollough & Company v. Ministry of Post, Telegraph and Telephone, the National Iranian Oil Company, and Bank Markhazi, IALR, 9 May 1986, 12276-12306, 'to the effect that interest is an item of damage', but then adds that 'Judge Brower rejected this approach because of its complexity and instead accepted an award of 10% simple interest'.

38
Up until the early 1990s, many developing countries followed the practice of fixing short-term interest rates, including short-term lending rates, via an administrative decision of the central bank or some other monetary authority. See M. Fry, Money Interest in Banking and Economic Development, 2nd ed. (Baltimore: John Hopkins, 1995). Fry calculated the average of real interest rates in sixteen developing countries and found that the range ran from -30% to +30%. Real interest is nominal interest minus inflation. When nominal interest is lower than inflation, negative real rates result. Obviously, if the interest rate is fixed by the administrative authority, the rate is not necessarily the rate at which loans are made (a clearing rate). The practice of fixing the rate still continues; one such example is currently Venezuela, where the Central Bank fixes lending rates to ensure that the government can borrow at low interest rates. Under the UNIDROIT Principles, the rate to be applied is that at which loans are made, i.e. not Fed funds, rates announced by a central bank or other 'non-market' rates.

39
J.Y. Gotanda, supra note 11 at 59, advocates the adoption of a uniform methodology for determining the rate of interest and proposes that interest 'accrues at a savings rate, a deposit rate that is commonly used in the country of the currency in which payment is to be made'.

40
According to the International Monetary Fund (IMF), long-term debt means 'debt with an original maturity of more than one year or with no stated maturity' (such as perpetual bonds), and short-term debt means 'debt repayable on demand or with an original maturity of one year or less'. External Debt Statistics: Guide for Compilers and Users (IMF, 2003) § 2.53.

41
As an example, simple interest of 6% per annum over five (5) years produces a total interest of 30% [(1 + 0,06 (5)-1]; compound interest of 6% per annum over five (5) years, compounded monthly, produces a total interest of 34.89% [(1 + 0,06 / 12)60-1]. The higher the rate and the longer the compounding period, the larger the difference between simple and compound interest. More importantly, longer term rates are normally higher than short-term rates (this is the normal form of a yield curve), in part accounting for the compounding of rates in the shorter periods. There is the rare case of an inverted yield curve, that is, where short-term rates are higher than long-term rates.

42
e.g. English Arbitration Act of 1996, s. 49.

43
A long-term rate is one that is fixed for a period of more than one year. The period of the rate is not the period in which interest is paid. Thus, a loan can be for a fixed rate of 8% fixed for five (5) years where interest is payable quarterly in arrears. Five-year rates are found in most major currencies. Countries where there are high inflation expectations do not have long-term interest rates.

44
Comment on Article 7.4.9 of the UNIDROIT Principles, § 2.

45
Under the UNIDROIT Principles, the aggrieved party is entitled to additional damages if the non-payment caused it a greater harm (UNIDROIT Principles, Article 7.4.9(3)). Such damages are in addition to interest, see Comment on Article 7.4.9 of the UNIDROIT Principles, § 3.

46
Some arbitration laws, such as the English Arbitration Act of 1996, s. 49(3), grant the arbitral tribunal broad powers to award interest as befits the case. See A. Redfern & M. Hunter, Law and Practice of International Commercial Arbitration, 3rd ed. (London, 1999) §§ 8-77 to 8-82. Thus, the arbitral tribunal could conclude that the just rate is the market interest rate in the currency of the award and arrive at the same result as if it had applied the UNIDROIT Principles.

47
This limitation on acting as amiable compositeur extends to countries that have adopted the UNCITRAL Model Law, see Article 28(3) of the Model Law.

48
Y. Derains, 'The Role of the UNIDROIT Principles in International Commercial Arbitration (1): A European Perspective' in ICC ICArb. Bull. 2002 Special Supplement, 9. According to Y. Derains, by using the UNIDROIT Principles, the tribunal responds to the legitimate expectations of the parties, ibid. at 12. According to E.A. Farnsworth, the UNIDROIT Principles offer a solution when it is impossible to find a rule in the applicable law, see E.A. Farnsworth, 'The Role of the UNIDROIT Principles in International Commercial Arbitration (2): a US Perspective on their Aims and Application', ICC ICArb. Bull. 2002 Special Supplement, 21.

49
As an example of the application of UNIDROIT Principles by voie directe, see case 117/1999 of the Arbitration Institute of the Stockholm Chamber of Commerce, reported in L. Mitselis, 'The UNIDROIT Principles Applied as "Most Appropriate Rules of Law" in a Swedish Arbitral Award' (2003) VIII Unif. L. Rev. 631 at 637. The case involved a Luxembourg company and a Chinese company.

50
See the Venezuelan statute on private Iiternational law (conflicts), Official Gazette No. 36511 (1998), Article 31. See also the commentary of T. Maekelt, La Ley de Derecho International Privado a Tres Años de su Vigencia (Caracas, 2002) at 101.

51
F. Dessemontet, 'Use of the UNIDROIT Principles to Interpret and Supplement Domestic Law', ICC ICArb. Bull. 2002 Special Supplement, 39.

52
ibid. at 46ff.

53
For example, in the case of Venezuela, the Civil Code provides for legal interest of 3% per annum (Article 1746), and the Commercial Code refers to a market rate (Article 108). These rules have been interpreted as referring to the market rate in bolivars, the legal tender in Venezuela. More explicit is the adjustable legal rate in the French Civil Code (Article 1907). Under Law 75-619 of July 1975, legal interest was the discount rate fixed by the Banque de France, obviously a reference to the French franc. It is now fixed yearly by decree with an implied reference to a debt in euros (Law 89-421, Article 1). See supra note 9.