• Source of authority for granting interest

• Applicable period

• Rate of interest

• Simple/compound interest

A dispute arose between Claimant, a British company, and Defendant, an Iranian corporation, over the termination of a contract following Defendant's failure to pay sums alleged to be due. By a majority decision, the arbitral tribunal finds that Claimant lawfully terminated the contract and orders payment of outstanding amounts due to Claimant under the contract.

'343. [Claimant] claims interest on several claims and for different periods of time. These claims for interest are based on [a provision in the parties' contract stating]: "In the event that any payment is not received by [Claimant] on the due date, [Claimant] may charge [Defendant] interest at the rate of 1% per annum above [Claimant's] Clearing Bankers Base rate with a minimum of ten per cent per annum for the period of delay." [Claimant] also refers to [a provision in the parties' contract] which expresses the principle of a reasonable amount covering damage suffered by [Claimant].

344. The parties themselves did not specifically address the question of the validity of contractual interest. Nevertheless it is interesting to note that [Defendant] does not consider that interest at a rate of 12% would be unreasonable. In fact, in [Defendant]'s Last Pleadings . . . its claim for interest is based on Article 719 of the Iranian Code of Civil Procedure which provides: "In lawsuits where their subject matter is cash money including conditional transactions or other borrowing transactions or transactions other than these, the damages for interest shall be 12% per annum of the judgement debt. In case that in addition to such sum of money, there exist arrangements for payment such as liquidated damages, settlement-amount or rental or arrangements of any other description in any case whatsoever, the damages for interest shall not be more than 12% per annum in respect of the period of delay. If the damages have been fixed at less than 12% the judgement shall be the same as the agreed percentage."

345. Due to the well-known position of the traditional Islamic law concerning interest, the Tribunal considers it appropriate to briefly discuss this matter. Basically the "riba" is not allowed. This rule is based on the Koran (in particular 2:275-281). Nevertheless numerous statute laws of the Islamic world permit the tribunal to award interest to compensate financial damages. It is well known that the Islamic banks grant interest to their clients without using the word "interest". Even in countries which apply rather strictly the position under Islamic law, ". . . it is always possible that a claim for compensation for loss of money may be granted. Consequently, care should be taken in the wording of the relevant claim so as to cover compensation for loss of use of money (and not interest) and to provide proof of costs (such as the costs of borrowing money), so as to establish that the borrowing was directly mandated by, and that the loss suffered was a direct result of, the contractors' failure to receive payments when due".1

346. The question at stake is how to interpret the Iranian Constitution and particularly Articles 43 and 49 which rule:

Article 43. . . . the economy of the Islamic Republic of Iran shall be based on the following consideration: . . .

Prohibition of causing harm to others, monopoly, hoarding, interest (usury) and other religiously void and prohibited transactions.

Article 49. The Government shall be required to take wealth derived from interest (usury), usurpation, bribery, embezzlement, theft, gambling, misuse of pious endowments, misuse of Government contracts and transactions . . .

The Tribunal will also take into account Article 228 of the Civil Code of Iran which rules:

If the object of an agreement consists of the payment of a sum in cash, the judge can, subject to the terms of Article 212, convict the debtor to pay compensation for losses incurred through delay in the payment of its debts.

and Article 221 which states:

If any party undertakes to perform or to abstain from any act, he is responsible to pay compensation to the other party in the event of his not carrying out his undertaking provided the compensation for such losses is specified in the contract or is understood in the contract according to customary law or provided such compensation is by law regarded as guaranteed.

347. Based on these texts, the Tribunal considers that the award of interest is basically designed to compensate the Claimant for the loss of income that would have been earned by the sum of damages for the loss from the date of the loss to the date of payment. Interest rates typically compensate an investor on the one hand for the declining value of the capital sum caused by inflation and, on the other hand, for providing a real rate of return on the capital. In international commercial relations, it would be quite unjust if Claimants were unable to be awarded interest. It is also well known that subject to rare exceptions, interest is commonly awarded by international arbitral tribunals, including the various ad hoc tribunals concerning the expropriation of oil concessions in the Middle East.2

348. It is also interesting to note the general practice of the Iran-United States Claims Tribunal.3 It has consistently awarded interest as part of the award of damages. This occurred as early as awards made in 1982 in White Whestinghouse International Company v. Bank Sepha-Iran.4 The Tribunal has awarded varying rates of interest ranging from 8.5% to 12%. The problem has been in particular addressed in Sylvania Technical Systems Inc. v. Iran.5 The Tribunal noted:

This Chamber finds it in the interest of justice and fairness to develop and apply a consistent approach to the awarding of interest in cases before it. Unless there are special circumstances the rates stipulated in a contract will be accepted by the Tribunal. In the absence of a contractually stipulated rate of interest, the Tribunal will derive a rate of interest based approximately on the amount that the successful claimant would have been in a position to have earned if it had been paid on time and thus had the funds available to invest in a form of commercial investment in common use in its own country.

In another award, McCollough & Co. Inc. v. Ministry of Post,6 the contract provided that the dispute should be settled in accordance with the laws of Iran. The Tribunal noted the practice of most municipal systems in awarding interest as an element of compensation. It also examined the practice of international tribunals, noting the variation of rates of interest that had been awarded, with a range from 6% through 14.5%. The Tribunal drew two principles from international practice, that is: interest is allocated on the amounts awarded as damages in order to compensate for the delay with which the payment to the successful party is made and, secondly, the rate of interest must be reasonable taking due account of all pertinent circumstances. The importance of this award has been recognized in a number of subsequent decisions by the Tribunal. In Exxon Corporation v. Iran7 the Tribunal, in the absence of contractual provision for the payment of interest, found it reasonable to fix the interest rate at 10% per annum.

349. This Tribunal also examined the practice of the ICC arbitral tribunals. This practice may be found in the ICC International Court of Arbitration Bulletin, 1992, p. 15ff8 and 46ff9. The Tribunal is convinced that the general practice of arbitral tribunals to award simple interest (and not compound interest) is consistent with modern municipal and international tribunals. This survey establishes that an additional claim for financial damages is not precluded under the doctrine of riba. The Tribunal of course agrees that anything in the nature of usury or unjust taking of interest, as well as compound interest are barred by this doctrine under Sharia law. But it does not accept that this doctrine also bars all awards of compensation for financial loss due to a party not having had the use of a sum of money to which it would have otherwise been entitled, e.g. as the result of late payment. Moreover the general trend arising out of legal literature and the international arbitral practice is to grant the arbitrators a large freedom in fixing such rates.

350. The Tribunal concludes that Article . . . of the Contract, being an international transaction between legal persons of different nationalities, is not unlawful in Iran or contrary to international public order as reasonably interpreted in Iran as anywhere else in the Islamic World. It is not a form of usury.

351. The Tribunal also considered the Law of 17 April 1979, as amended by the Law of 16 August 1979.10 This legislation forms part of Iranian law as the law agreed to be the law applicable to the Contract; and interest is here governed by the lex causae. Having carefully considered the terms of this legislation, the Tribunal has come to the conclusion that it is not directly relevant to [Claimant]'s claim: it relates to negotiable instruments and commercial paper, legally distinct from the Payment Statements; and it touches legislative rights to interest and penalties, legally distinct from the contractual interest invoked by [Claimant]. Moreover, we note that this legislation is not invoked as a defence to [Claimant]'s claim for interest in [Defendant]'s Closing Submissions . . . In the circumstances, the Tribunal has not considered it necessary to consider a further defence based on force majeure, operating up to 29 March 1979.

352. The principal sums are the five amounts set out under no. 341 above, subject to the deduction made for the mobilisation payment. The Tribunal will examine in turn each claim for interest on these amounts.

353. Claim 1(i): [Claimant] claims interest on unpaid Payment Statements from the due dates of each Payment Statement to the date of [Claimant]'s termination letter of 29 March 1979, amounting to . . . The Tribunal rejects this claim on several cumulative grounds.

354. First, interest should not be calculated as from the due date, but after the 60 days provided by [Clause Y of the parties' contract]. Second, [Claimant]'s position during the earlier progress of the Contract was studiously ambiguous. For commercial reasons, [Claimant] was not particularly strict in urging [Defendant] to pay interest for late payment of its previous Payment Statements. This may well have led [Defendant] to the false conclusion that [Claimant] was not seeking payment of interest for late payment, as opposed to payment of the principal sums under the Payment Statements; and indeed the wording of Clause . . . is expressly discretionary ("[Claimant] may charge . . ."). This ambiguity persisted in [Claimant]'s letter of 16 January 1979; and, arguably, it was not expressly removed even by [Claimant]'s letter of termination of 16 March 1979.

355. Claim 1(i): [Claimant] next claims interest on unpaid Payment Statements from 30 March, 1979 to 31 August 1981. Its interest calculation is based on a principal amount of . . . It is of course correct that [Defendant] was late in paying these Payment Statements and that such a principal amount was due to [Claimant] by March 1979. However, this was not quite the same position after the Contract's termination by [Claimant]'s letter dated 16 March 1979. At that point, for the calculation of interest, it becomes necessary to take into account the mobilisation payment of . . . as an admitted credit to [Defendant], which necessarily extinguishes the said amount of . . . otherwise due from [Defendant] to [Claimant]. Accordingly, the Tribunal decides that there cannot be any accrual of interest on such amount for the period from 30 March 1979 to 31 August 1981.

356. Next, [Claimant] claims interest on all sums due from 1 September 1981 to the date of this Award, which, for arithmetical convenience only, we take as being 30 September 1996. Having regard to the interests rates in the evidence that is:

. . . . . . . . . . . . .

and the minimum contractual rate of 10% per annum from 1 October 1992 applied to the net total principal amount above, the Arbitral Tribunal decides that the total figure for interest during this period shall be . . .

357. Lastly, [Claimant] claims interest on sums due from the date of the Award until payment by [Defendant]. This claim is also allowed as from 1 October 1996 to date of payment by [Defendant] at the minimum contractual rate of 10% per annum on the said total principal amount of . . . (or pro rata in the event of part payment).'

1
Nancy B. Turck, Resolution of disputes in Saudi-Arabia, in Arab Law Quarterly, vol. 6 I, 1991, p. 30.

2
See for instance Sapphire International Petroleum Ltd v. NIOC (1993) in 13 I.C.L.Q. 1011; Lybian American Oil Company v. Government of the Lybian Arab Republic (1977) in 62 I.L.R. 140; American Independent Oil Company v. Government of Kuwait (1982) in 21 I.L.M. 976.

3
Iran United States Claims Tribunal, The first ten years 1981-1991, Wayne Mapp, Manchester University Press

4
1 Iran-USCTR, 169, 170-2 (1981-82)

5
8 Iran-USCTR, 198, 320-2 (1985)

6
11 Iran-USCTR, 3, 26-31 (1986)

7
17 Iran-USCTR, 3, 17 (1987)

8
Editor's Note: ICC International Court of Arbitration Bulletin, Vol. 3/No. 1.

9
Editor's Note: ICC International Court of Arbitration Bulletin, Vol. 3/No. 2.

10
See [Defendant] Exhibit . . .