Interest on overdue payments / Award rendered in Paris / No contractual provision as to the applicable law / Freedom of the arbitrator in fixing the rate of interest, yes / Obligation to refer to the legal rate of a national legal system, no / Application of the French legal rate to the amounts awarded from the date of the Award to the date of effective payment, yes / Application of criteria noted in numerous arbitral awards in order to determine the rate of interest on overdue payments

'The Claimant formally developed his claims concerning interest on overdue payments in his introductory request and repeated them in the Terms of Reference.

These claims are that the Defendants should be sentenced to pay interest on overdue payments at a rate of 10.25% per annum on all sums unpaid when due.

The principal (i.e., the amount of the unpaid promissory notes) on the basis of which the interest is to be computed is not disputed. Neither are the dates from which the interest should be running, these dates being those on which the promissory notes were to be cashed. And as the Claimant never asked that such interest be capitalized and produce interest in its turn prior to the award, the only remaining question is that of the rate to be applied.

The Arbitrator holds that neither the agreement dated . . . nor the behaviour of the parties afterwards, nor the telex dated . . . allow the question of the applicable rate of interest on overdue payments to be determined.

In the case of an international arbitration, such a determination cannot be subject to strict, specific rules.

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 (See i.a., J. Gillis Wetter, "Interest for an Element of Damages in the Arbitral Process", International Financial Law Review, Dec. 1986, pp. 20-25; S. Boyd, "Interest for the Late Payment of Money", Arbitration International, July 1985, p. 153; Ad hoc Award Liamco v. Libya, Geneva, July 12, 1977, Revue de l'Arbitrage 1980, p.132, spec. pp.187 and foll.; ICSID Award AGIP v. Government of the Republic of the Congo, Nov. 30, 1979, Rev. crit. dr. int. pr. 1982, p. 92, spec. p. 104; Yearbook Commercial Arbitration,1983, p. 133, spec.142; ICSID Award Benvenuti & Bonfante v. Government of the Republic of the Congo, Aug. 8, 1980, Yearbook Commercial Arbitration, 1983, p. 144, spec. p. 151; ICC Award of February 17, 1984, n° 4237, Yearbook Commercial Arbitration 1985, p. 52, spec. p. 59; Award of the IranUS Tribunal, McCollough & Company, Inc., April 22,1986 quoted by T.G., in Bulletin, Association Suisse d'Arbitrage, 1987, p. 55, spec. p. 57). 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 of the place of arbitration. In the present case, moreover, it should be noted that the parties did not submit their agreement to the domestic law of any specific country and that, conversely, the Terms of Reference do not specify either the law applicable to the merits of the case. Furthermore, to settle this issue, none of the parties asks for the application of a given national law or of the legal interest rate in force either in Japan or in [the African State].

As to the French legal rate, while it must naturally be applied to the amounts awarded from the date when the Award is rendered to the date of effective payment, there is no special reason to apply it to contractual delays. It is nevertheless not useless to recall its developments: fixed for a long time at 9.50% (law of 11 July 1975), it dropped to 7.82% on 15 July 1989 (Law of 29 June 1989, Art. 12). For the year 1990 it rose to 9.36% (Decree of 4 January 1990).

As noted in numerous arbitral awards, interest on overdue payments is awarded to compensate the damage resulting from the fact that the creditor has been deprived during a certain period of time of the use and availability of the sums he should have been given. 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).

(a) In the present case, the Arbitrator considered first the rate specified in the contract, i.e. 8.5%. Naturally this was the rate for a supplier credit of a duration of four and a half years, against promissory notes with specific maturity dates; but it was also provided that "failing payment on a single maturity date . . . the balance of the amount of the contract, with the addition of the accrued interests and ancillary costs, would become immediately and ipso facto due, at the seller's discretion". As no other rate of interest was foreseen, this clause can be interpreted as meaning that the parties at least did not exclude the possibility of applying this same rate of 8.5% in case of default of payment on the maturity date. Of course, as said above, it was a rate of 10.25% that was later on agreed . . . but it was so only until . . . For further delays another rate was to be negotiated and the Defendants suggested the Japanese prime rate for six months, plus 1.7/8%.

(b) As this rate of 8.5% had been accepted by the debtors, the origin and scope of the financial difficulties of Defendant No. 1 are such that increasing his debt in foreign currency by raising the rate of interest would be both unrealistic and unwarranted (on this aspect of the dispute, see below . . .).

(c) Lastly this rate seems all the more reasonable that interest rates on the yen, while they gradually rose from 1985 until today, were still no higher than 4 or 5% in 1988 and through the major part of 1989 (See the OECD Survey: trends in capital markets, no. 44, October 1989, p. 99 to 103). Today, whatever their duration, Euroyen credits do not yield more than 8%. Furthermore inflation in Japan, nonexistent in 1987 and 1988, remained below 2% in 1989, far less than in any other industrialized country; in other words, from the Defendants' default at the end of 1985 until now the depreciation of the Japanese currency, in absolute as well as in relative value, was-if not insignificant-at least extremely moderate: a rate of 8.5% greatly exceeds this depreciation and reasonably rewards the capital the Claimant has been deprived of during that period.'