'With regard to the question of interest there are, in particular, the following points to be considered.

Claimant's request for the application of the interest rate provided for in Section 4.6 of the Agreement is composed of two main points:

a) Request for interest for default. In this regard, it is worth emphasizing that in its submission … Claimant requests 15% p.a. as interest for default stating that this rate is a permissible maximum under the Swiss law and, therefore, "since the contractually agreed interest charges exceed the permissible maximum rate for interest for default, only interest at 15% p.a. can be claimed under the title of interest for default". In its submission … Claimant additionally explains that it claims 15% p.a. "in order to err on the safe side" since the cantonal laws of Zurich, applicable to the Agreement, permit a maximum cost of credit of 18% p.a. generally while 15% p.a. is fixed as the maximum rate for credit to consumers. In the alternative, Claimant requests 5% p.a. as a minimum legal interest rate for default in accordance with article 104 CO which "… would be due if for any reason Art. 4.6 of the Agreement would be considered void in whole or in part".

b) Request for liquidated damages. In this regard, the gist of the matter concerns Claimant's allegations that "the parties may agree on any desired liquidated damages …" and that "interest charges exceeding the permissible maximum rates for interest for default represent liquidated damages", supported by the argumentation referring to the Swiss doctrine and the jurisdiction of the Swiss Federal Court referred to above.

The view of the Arbitrator:

a) Pursuant to Art. 104 CO, the minimum legal rate for interest for default is 5% p.a.; furthermore, the contractual interest rate exceeding 5% may also be claimed for the time of delay. In relation to transactions between merchants, the interest for default may be charged at the customary bank discount interest rate if higher than 5%.

As to the limitation of this rate, Claimant itself asserts that in respect of interest for default the maximum permissible interest rate as provided by the Swiss law should be applied and requests with this regard the application of 15% p.a.

This position of Claimant can be accepted.

b) With regard to liquidated damages, certain arguments of Claimant are not sufficiently convincing.

First, with regard to the Swiss doctrine, it refers in particular to the book of Eugen Bucher on the Swiss law of obligations and quotes i.a. the following sentence: "The agreement of an interest for default which exceeds the legal rate (CO 104) can be interpreted as a liquidated damages clause."

However, in its submission … Claimant states that "it is as well made clear by Bucher that the agreement on interest for default exceeding the legal maximum rate has quite likely to be interpreted as liquidated damages clause".

The problem is that the addition of the word "maximum" appears to deviate from Bucher's statement which simply refers to the exceeding of legal rates (indicated in CO 104 at the level of either 5% or of the discount rate) and not to the maximum permissible interest rates imposed by other legal provisions.

Furthermore, Claimant's reference to the relevant court judgment is not quite convincing. Claimant itself mentions in its submission … that the said court case is different from the matter at issue. In fact, it concerns the specific situation of demanding the interest on the original principal amount until the entire redemption of a debt - and not only the interest charge upon the outstanding amounts.

c) turning to the Swiss doctrine, a book of Ingeborg Schwenzer on the Swiss law of obligations, Schweizerisches Obligationenrecht Allgemeiner Teil, Stämpfli Verlag AG Bern 2000, contains the following assertions of relevance to the issue under consideration:

• Freedom of the parties to fix the interest rate contractually is admittedly limited by different provisions on maximum interest rates ... Pursuant to Art. 795.2 of the Civil Code cantons are also authorized to lay down maximum interest rates. …

• The International Concordat on measures to fight abuses concerning interest, to which belong the cantons Bern, Zug, Freiburg and Geneva, lays down a maximum interest rate of 12% p.a. plus 6% for expenses and costs. In the canton of Zurich a maximum interest rate also amounts to 18%, for consumer loans to 15%. …

• If an agreement on interest rate is in contradiction with the mandatory provision on maximum interest rates, it is in accordance with Art. 20.1 CO not effective. …

• The agreement is null and void only to the extent to which the limit permitted by law or moral rules has been exceeded. Within the scope of the permitted limits the agreement is to be considered valid. The same refers to the interest rate arrangement exceeding the maximum limit. …

d) Art. 163 CO provides that the parties may freely determine the amount of liquidated damages. ("Les parties fixent librement le montant de la peine.") However, at the same time, the last sentence of this provision states that the judge must reduce liquidated damages which he considers to be excessive. ("Le juge doit réduire les peines qu'il estime excessives.")

Turning to the Swiss jurisprudence in this regard, a federal court judgment of June 1988 (BGE 114 II 264) contains i.a. the following assertions: "A judge intervention in the contract is justified in accordance with these principles only if the agreed amount is so high that it exceeds a reasonable measure still compatible with the law and justice. A reduction of liquidated damages is justified in particular if there is a flagrant disproportion between the amount agreed and the claimant's interest to maintain this amount in its entirety. What presumptions are required with respect to the justification and the proportionality of this intervention is to be decided not in general terms but depending upon the circumstances of the case ... as in particular the kind and duration of the contract, ... the gravity of its breach or of the fault, ... the economic situation of the parties, in particular of the obligee." ("Ein richterlicher Eingriff in den Vertrag rechtfertigt sich nach diesen Grundsätzen nur, wenn der verabredete Betrag so hoch ist, dass er das vernünftige, mit Recht und Billigkeit noch vereinbare Maß übersteigt. ... Eine Herabsetzung der Konventionalstrafe rechtfertigt sich insbesondere, wenn zwischen dem vereinbarten Betrag und dem Interesse des Ansprechers, daran im vollen Umfang festzuhalten, ein krasses Missverhältnis besteht. Welche Anforderungen dabei an die Rechtfertigung und an die Verhältnismäßigkeit des Angriffs zu stellen sind, entscheidet sich nicht im allgemeinen, sondern hängt von den Umständen des Einzelfalles ab ... Dazu gehören insbesondere die Art, Dauer des Vertrages, ... die Schwere des Verschuldens und der Vertragsverletzung, ...die wirtschaftliche Lage der Beteiligten, namentlich der Verpflichteten.")

In connection with the above it is pertinent to make the following observations:

• In accordance with the excerpt from its court register referenced to … above Respondent has capital … equivalent to [slightly less than six thousand US dollars]. It means that it is a rather small company with no capacity and financial resources necessary to cover such significant liquidated damages as required resulting from the application of such a high interest rate as 0.5% per day. Furthermore, it may not be contested that the change of the exchange rate … had unfavourably influenced the economic situation of Respondent ... Even if it should have forwarded the moneys to Claimant only after having sold the goods, the payments could and should have been made within the time periods specified in sections 4.5 and 4.6 of the Agreement. In general, the more and more expensive American dollar had to negatively influence the market conditions in [Respondent's country] for selling imported goods.

………

In addition, it can be noted that [in] its submission … Claimant states that "a deterioration of the [local] currency did not have an impact on Respondent's ability to pay the invoices". However, … it states further that "If Respondent had forwarded the moneys ... within the agreed time limits, then the impact of a change of the exchange rate would only have been limited" - thus recognizing such negative, even if limited, impact.

• With reference to the Respondent's assertion … that "The Country Managers of [Claimant] have been regularly informed about the situation" Claimant stated … that "there exists no correspondence concerning the alleged information of the Country Managers". However, [earlier correspondence] from Claimant to Respondent … mentioned "the cash problems because hospitals do not regularly pay". Thereafter, [a letter] from Claimant to Respondent notes "the growing unpaid volume of invoices" and states that [Respondent's representative] explained the difficulties of the financial situation of the [local] Health Care System … In spite of this, Claimant was delivering on a regular basis Products to Respondent until December 1999 while Respondent paid on a regular basis only until May 1998. All the above can be interpreted as attenuating the gravity of Respondent's fault.

In conclusion:

a) Section 4.6 of the Agreement should not be considered as void on the ground that it exceeds the permissible maximum interest rate. It is perfectly valid up to this limit. Therefore, in the light of the said Section the maximum permissible rate in canton Zurich should be applied. With this regard, the Arbitrator accepts 15% p.a. as indicated by Claimant in its submission … as the maximum permissible rate for interest for default.

b) On the other hand, Claimant's request to apply the full rate of 180% p.a., assuming that the excess rate above the permissible maximum rate should be considered as liquidated damages is in the view of the Arbitrator not sufficiently proven in the light of the Swiss doctrine to be accepted as the basis for the relevant part of the present award.

c) In any case, the interest rate of 0.5% per day (even if admitted as liquidated damages) should be radically reduced, in view of the circumstances of the case, on the basis of the third sentence of Art. 163 CO as well as taking into account the federal court judgment referred to … above. This argument additionally justifies the reduction of the rate in question to 15% p.a.

d) Finally, in accordance with Article 35 of the Rules,1 the Arbitral Tribunal shall make every effort to make sure that the Award is enforceable at law. In this respect it should be noted that the enforcement of the award will take place in [a country] which is a party to the 1958 New York Convention on the recognition and enforcement of foreign arbitral awards. Pursuant to Article V of the Convention, recognition and enforcement of an arbitral award may be refused if the competent authority in the country where recognition or enforcement is sought finds that the recognition or enforcement of the award would be contrary to the public policy of that country. The Arbitrator is aware that Article 35 of the Rules is not intended to have any influence on the resolution of substantive issues in the arbitration. However, it should simply be noted that application of an exorbitant interest rate for delays in USD payments in an emerging country and in face of deterioration of value of its currency in relation to USD could lead to the refusal of enforcement of the present award.'

1
Editor's note: The reference is to the 1998 ICC Rules of Arbitration.