Oxford University Comparative Law Forum

Compound Interest in International Disputesⁱ

by John Yukio Gotandaⁱⁱ

(2004) Oxford U Comparative L Forum 1 at ouclf.iuscomp.org | How to cite this article | Discuss this article

Table of contents

• I. Introduction
• II. Overview of Interest
• III. National Laws and Compound Interest
  • A. Europe
    • 1. Common Law System (England)
    • 2. Civil Law Systems
    • 3. European Union
  • B. Oceania
    • 1. Australia
    • 2. New Zealand
  • C. Asia
    • 1. Japan
    • 2. China and Hong Kong
    • 3. Taiwan
    • 4. Korea
    • 5. India
  • D. The Americas
    • 1. Mexico
    • 2. Argentina
    • 3. Canada
    • 4. United States
  • Conclusions
• IV. Tribunal Decisions
  • Conclusions
• V. Should Compound Interest Ever Be Awarded?
• VI. Circumstances Warranting Awards of Compound Interest
  • A. Enforcing the Parties' Agreement on the Payment of Compound Interest
  • B. Awarding Compound Interest When Respondent Caused Claimant to Incur Charges of Such Interest
  • C. Awarding Compound Interest Based on the Claimant's Lost Opportunity Cost
• VII. Conclusions
• Endnotes

I. Introduction

One cannot imagine that a sophisticated businessman ... would invest his companies' funds in instruments yielding simple rates of interest. Nor is it conceivable that ... [his] lenders w[ould] provid[e] his companies with capital at simple rates of interest.

In today's economic world, compound interest, and not simple interest, is the norm in both third-party financing and investment vehicles. Yet, in disputes between transnational contracting parties, simple interest awards are the norm.

This odd disparity between awards of international tribunals and standard business norms can have striking consequences. In disputes between transnational contracting parties, awards of interest are often significant and, in some cases, may even exceed the principal owed.² For example, in one recent arbitration, a panel awarded the claimant approximately $4 million for the property expropriated by the respondent and approximately $12 million in compound interest.³ With interest awards of this magnitude, an award based on simple interest would be far less than an award based on compound interest.

In international disputes, the traditional view is that a tribunal may award only simple interest.⁴ In fact, a federal district court in Washington, D.C. recently opined in a dispute between an American contractor and the Government of Iran that the prohibition on compound interest was so well settled that it could be considered a principle of customary international law.⁵ However, as the United States Court of Appeals for the District of Columbia Circuit pointed out, this statement was incorrect.⁶ Yet, the Court of Appeals declined to award the claimant compound interest for the loss of the use of its money.⁷ This arguably left the claimant without full compensation.

Perhaps misunderstandings over the availability of compound interest stem from the lack of comparative study of the issue.⁸ Indeed, some commentators have simply presumed that compound interest may not be paid because it is generally prohibited in many legal systems.⁹ This has led one authority to argue that laws simply have not kept pace with modern financial practices and that tribunals should not apply them when awarding interest.¹⁰

In this article, I examine the laws of various countries on the awarding of interest to learn whether there exists a prohibition on the awarding of compound interest. I found that many countries do indeed provide generally for the payment of only simple interest on damage awards. However, my study also reveals that many countries have made exceptions to this practice, and that these exceptions are significant and allow for the awarding of compound interest in a number of important circumstances. I conclude that, if utilized, these exceptions may enable tribunals to fully compensate parties for their loss of the use of money.

The article is divided into seven parts. Part II provides an overview of the payment of interest. Part III reviews the circumstances under which interest may be awarded pursuant to the laws of various countries in Europe, Oceania, Asia, and North and South America. My study finds a divergent practice concerning awards of compound interest; some prohibit it, others allow it in certain circumstances, and a number of statutes are silent on the issue. Part IV reviews the decisions of international tribunals on compound interest. I determine that these tribunals have traditionally awarded only simple interest, but that recently a few tribunals have granted compound interest. Part V examines whether compound interest should be awarded in disputes between transnational parties. I conclude that, where an award of interest is warranted, in general, it would be more appropriate for a tribunal to award compound, as opposed to simple, interest. This is because today almost all financing and investment vehicles involve compound interest. Thus, limiting interest awards in all cases to simple interest would result in the claimant not being made whole for its loss. In addition, it would confer a windfall on the respondent, who likely had the use of the claimant's money for less than the cost of borrowing it. Part VI sets forth the circumstances under which awards of compound interest are appropriate. I argue that there are three situations where such an award is warranted: (1) when the parties have expressly agreed to the payment of compound interest; (2) when the respondent's failure to fulfill its obligations caused the claimant to incur financing costs in which it paid compound interest; and (3) when the claimant can prove that it would have earned compound interest in the normal course of business on the money owed if the claimant had been paid in a timely manner. Awarding compound interest in these circumstances would be consistent with the laws of many countries and would better achieve the goals of awarding interest than does the traditional practice of granting only simple interest. Part VII offers a brief conclusion.

II. Overview of Interest

Interest is a sum paid or payable as compensation for the temporary withholding of money.¹¹ It has been distinguished from usury, which was considered to be a form of unjust enrichment in that persons were receiving more than what they had lent.¹² Unlike usury, interest has been “considered the compensation due to a creditor because of a loss which he had incurred through lending.”¹³ Throughout history, the charging of interest has been regulated, restricted, and prohibited: both Aristotle and Plato disapproved of interest;¹⁴ the Old Testament placed restrictions on the charging of interest (but it did not absolutely bar it);¹⁵ and, until 1830, the Roman Catholic Church placed various restrictions on, and often prohibited, the charging of interest.¹⁶ However, under Roman law, interest was well accepted as a sum “due from a debtor who delayed or defaulted in repayment of a loan. The measure of the [amount] due for the default or delay was ...the difference between the creditor's current position and what it would have been if the loan had been timely and fully repaid.”¹⁷

Today, interest is a standard form of compensation for the loss of the use of money.¹⁸ In fact, it is often awarded without proof of actual loss. Courts and tribunals presume that the delayed payment of money deprives the injured party of the ability to invest the sum owed.¹⁹ The U.S. Supreme Court justified this practice, noting:

It is the dictate of natural justice, and the law of every civilized country, that a man is bound in equity, not only to perform his engagements, but also to repair all the damages that accrue naturally from their breach. ... Every one who contracts to pay money on a certain day knows that, if he fails to fulfill his contract, he must pay the established rate of interest as damages for his non-performance. Hence, it may correctly be said that such is the implied contract of the parties.²⁰

There are three reasons for requiring a respondent to pay interest to a claimant that has succeeded on its damages claims. The first rationale is to fully compensate the claimant by restoring it to the position it would have enjoyed if the breach had not occurred.²¹ In this context, the payment of interest recognizes that, by refusing to pay the claimant immediately, the respondent has deprived the claimant of the ability to invest the sum owed. Thus, interest compensates the claimant for the loss of the use of its money because of this delay.²²

The second reason for awarding interest is to prevent unjust enrichment of the respondent.²³ Respondents that retain the use of money owed to the claimants during the resolution of the dispute are said to have unfairly benefited from its use.²⁴ They are receiving the earning capacity of the borrowed money without compensating the claimants for the loss of its use.²⁵ The respondents thus should pay the opportunity cost of the money withheld to the claimants.²⁶

The third reason for awarding interest is that it promotes efficiency.²⁷ Without interest, claimants will not be fully compensated for their loss. As a result, respondents may be insufficiently deterred, may not try to avoid future litigation, and, indeed, may even take steps to delay the resolution of the dispute because respondents profit from the use of claimants' money while the dispute is being resolved.²⁸ This possibility may also cause claimants to be over-deterred and to take excessive precautions to avoid future litigation.²⁹ Thus, interest awards encourage parties both to avoid disputes and, if they do occur, to resolve them in a timely manner.³⁰

There are two principal forms of interest: simple interest and compound interest.³¹ An award of compound interest means that the interest payment for a certain period is added to the principal sum owed and that sum is treated as a new principal for calculating the interest for the next period.³² In other words, the creditor-claimant receives interest upon interest.³³ By contrast, when only simple interest is awarded, the interest is calculated only on the principal owed; the interest owed for a certain period does not merge with the principal and become part of the base upon which future interest is calculated.³⁴ As more fully explained below, there has been a tendency to award only simple interest.³⁵

III. National Laws and Compound Interest

Most countries, either by statute or by judicial decision, permit awards of interest as “compensation for the use or detention of money.”³⁶ A few countries prohibit the payment of interest, primarily because it is inconsistent with their religious beliefs.³⁷ However, even some of these countries have allowed it in certain commercial transactions.³⁸ Indeed, the practice has become so widespread, it can be said that the liability to pay interest as part of an award of damages is an accepted international legal principle.³⁹ This unanimity does not, however, extend to awards of compound interest. Many countries either prohibit the payment of compound interest or limit the circumstances in which it may be awarded.

The following survey examines the laws in various countries on the payment of interest to make two determinations: (1) what countries permit an injured party entitled to damages to receive compound interest; and (2) under what circumstances an injured party may receive such interest.

A. Europe

1. Common Law System (England)

Awards of interest in England are governed by both statute and common law. Originally, the power to award interest was constrained to Lord Tenterden's Act. This statute provided that interest was payable on “all [d]ebts or [s]ums certain, payable at a certain [t]ime or otherwise ...by virtue of some written [i]nstrument” or otherwise if there was a demand of payment in writing giving notice to the debtor that interest will be claimed.⁴⁰ In 1934, the power to award interest was modified in the Law Reform (Miscellaneous Provisions) Act.⁴¹ The 1934 Act provided that “[i]n any proceedings tried in any court of record for the recovery of any debt or damages, the court may, if it thinks fit, order that there shall be included in the sum for which judgment is given interest at such rate as it thinks fit on the whole or any part of the debt or damages for the whole or any part of the period between the date when the cause of action arose and the date of the judgment.”⁴² However, interest on interest was not authorized.⁴³ In 1982, the Administration of Justice Act removed any application of the 1934 Act to the Supreme Court and County Courts with respect to the awarding of interest⁴⁴ and added a section on interest to the Supreme Court Act, 1981.⁴⁵ The Supreme Court Act, 1981 now provides only for simple interest awards.⁴⁶

In general, there are four exceptions to the statutory prohibitions on compound interest. The first two exceptions have been recognized in England since the 1983 decision in London, Chatham & Dover Railway Co. v. South Eastern Railway Co.⁴⁷ In that case, the House of Lords recognized that compound interest can be awarded: (1) when the contract provides for it to be paid;⁴⁸ and (2) when the course of dealing or usage of trade creates an implied term for payment of compound interest.⁴⁹

The third exception is that compound interest may be awarded in equity.⁵⁰ Equity awards compound interest whenever a fiduciary, such as an executor or a trustee, misuses money under his or her control and benefits from it.⁵¹ Compound interest is also awarded in equity when “a wrongdoer deprives a company of money which it needs for use in its business.”⁵²

The fourth exception, set forth in Wadsworth v. Lydall, allows awarding compound interest as special damages.⁵³ In Wadsworth, the plaintiff agreed to sell a farm to the defendant, and the plaintiff was to use the proceeds from the sale to purchase another property.⁵⁴ The defendant breached its obligations and the plaintiff sued for the principal owed as well as for interest that the plaintiff incurred as additional financing charges.⁵⁵ The court noted that the claim for interest did not fall within the exceptions set forth in London, Chatham & Dover.⁵⁶ However, the court said that case applied only to claims for general damages and thus did not prohibit awards of interest as special damages. The court explained:

[T]he House of Lords [in London, Chatham & Dover] was not concerned with a claim for special damages. The action was an action for an account. The House was concerned only with a claim for interest by way of general damages. If a plaintiff pleads and can prove that he has suffered special damage as a result of the defendant's failure to perform his obligation under a contract, and such damage is not too remote on the principle of Hadley v. Baxendale ... , I can see no logical reason why such special damage should be irrecoverable merely because the obligation on which the defendant defaulted was an obligation to pay money and not some other type of obligation.⁵⁷

The court held that, “since the defendant knew or ought to have known that the plaintiff would need to acquire another farm or smallholding, using the £10,000 payable under the contract for the purpose, and that if the £10,000 was not paid the plaintiff would be compelled to incur expense in arranging alternative finance and paying interest, the claims ... were not too remote and were payable by the defendant.”⁵⁸ The House of Lords approved of this approach in President of India v. La Pintada Cia Navegacion S.A.,⁵⁹ where the court held that, in the absence of an agreement between the parties regarding the payment of interest due on a debt, a creditor could not claim interest as general damages when the debt was paid late, but before proceedings for its recovery commenced.⁶⁰ However, if special damages were proved, such as interest paid on an overdraft, a creditor could recover those damages.⁶¹

While English law carefully limits the authority of judges to award compound interest, it permits arbitrators greater discretion. Section 49(3) of the Arbitration Act of 1996 provides:

The tribunal may award simple or compound interest from such dates, at such rates and with such rests as it considers meets the justice of the case -

(a) on the whole or part of any amount awarded by the tribunal, in respect of any period up to the date of the award;

(b) on the whole or part of any amount claimed in the arbitration and outstanding at the commencement of the arbitral proceedings but paid before the award was made, in respect of any period up to the date of payment.⁶²

Thus, an arbitral tribunal has considerable latitude when it comes to the question of interest.

It should also be noted that The Late Payment of Commercial Debts (Interest) Act, 1998, provides for simple interest on debts owed “for the supply of goods or services where the purchaser and the supplier are each acting in the course of a business.”⁶³ This Act was originally designed to protect only small businesses against the late payment of commercial debts. In 2002, the scope of the Act was broadened to comply with a 2000 European Union Directive requiring member states to introduce measures to protect commercial creditors against late payment. It now applies to claims for interest by all commercial creditors who are owed money by commercial organizations.⁶⁴ The applicable interest rate is 8% above the Bank of England base rate and interest accrues at a simple, as opposed to compound, rate.⁶⁵ There were two reasons for allowing only the payment of simple interest. First, simple interest is easier to calculate than compound interest. Second, the “Act is meant to protect businesses that have been deprived of their money for months, rather than years, so in most cases the difference between simple and compound rates would be minimal.”⁶⁶

2. Civil Law Systems

Whether compound interest is permitted and, if so, when it may be paid, varies greatly among civil law countries in Europe. Some codes prohibit it,⁶⁷ others allow it in certain circumstances,⁶⁸ and some do not explicitly address the issue.⁶⁹

France. In France, damages are limited to foreseeable losses or to the actual loss sustained or benefit deprived.⁷⁰ Article 1153 of the French Civil Code provides “[i]n obligations which are restricted to the payment of a certain sum, the damages resulting from delay in performance shall consist only in awarding interest at the statutory rate, except for special rules for commerce and suretyship. Those damages are due without the creditor having to prove any loss.”⁷¹ However, article 1153 further provides that where a debtor in delay has caused, by his or her bad faith, harm independent of such delay, the creditor may recover damages and interest independent of the interest accruing on overdue payments.⁷² Thus, in such circumstance, a creditor may be able to recover interest exceeding the legal rate (which may include interest on interest), provided that the creditor can prove this loss.

The legal rate of interest is equal to the discount rate set by the Bank of France on December 15th of the preceding year.⁷³ Ordinarily, interest is not paid on interest.⁷⁴ However, under article 1154 of the French Civil Code, “[i]nterest due upon capital may produce interest either by judicial demand or by special agreement, provided that, either in the demand or in the agreement, the interest in question has been due for at least a whole year.”⁷⁵ This article has been held to authorize the payment of compound interest in the circumstances set forth in the statute.⁷⁶

Germany. In Germany, the failure to perform a duty arising under an obligation may give rise to a claim for compensation for the loss resulting from this breach.⁷⁷ The circumstances under which a creditor may be entitled to interest on damages are set forth in both the Civil Code and the Commercial Code.

Civil Code section 246 fixes a statutory rate of interest at four percent per annum for debts that bear interest by virtue of a statute or a legal transaction.⁷⁸ Where a debtor is delayed in payment, section 288 of the Civil Code provides instead a default rate of five percent per annum above the basic interest rate during the period of default, and, in cases where a consumer is not a party, a claim for remuneration bears interest at a rate of eight percent above the basic rate.⁷⁹ Section 288 further provides that an injured party “may claim higher interest on a different legal basis” and that “the right to claim additional loss is not excluded.”⁸⁰ Commercial Code section 352 fixes the statutory rate of interest at five percent per year in commercial transactions.⁸¹ Both codes bar compound interest⁸² with three notable exceptions. First, “[c]redit institutions which have been authorized to issue interest-bearing bearer bonds in the amount of loans made by them, may demand in advance on such loans payment of interest on arrears of interest.”⁸³ Second, compound interest can be claimed as damages “if the claimant has actually paid compound interest to his bank.”⁸⁴ Third, compound interest may be paid if the claimant “would have received compound interest had he invested the principal sum claimed.”⁸⁵

Italy. In Italy, article 1224 of the Civil Code provides that interest is due from the date that a debtor defaults on the payment of a sum of money and accrues at the legal rate,⁸⁶ which is ten percent per annum.⁸⁷ However, if greater damages are proven, additional compensation may be awarded.⁸⁸ As in France, compensation is limited to those damages that were foreseeable at the time the obligation arose.⁸⁹ Compound interest is available when there has been prior usage or a prior agreement as long as interest has been due for at least six months.⁹⁰

Switzerland. The legal rate at which interest accrues in Switzerland is five percent per annum in the absence of an agreement, law, or custom to the contrary.⁹¹ However, where a debtor defaults on the payment of a money debt, the debtor must pay five percent interest despite a lower contractual rate.⁹² The Swiss Code of Obligations explicitly provides that “interest for default is not chargeable on interest for default.”⁹³ For loans of money in commercial transactions, interest is payable even if the agreement fails to provide for interest; however, in noncommercial transactions, interest is payable only if the agreement provides for it.⁹⁴ Unless agreed upon in the contract, the interest rate for loans of money “correspond[s] to the usual rate of interest customary for loans of [that type] at [that] time and place.”⁹⁵ Article 314 of the Code provides that “[a]greements stipulating in advance that the interest shall be added to the capital and shall bear compound interest are invalid; commercial rules, however, regarding current account and similar commercial customs where compound interest is computed, especially in the case of savings-banks, shall not be affected hereby.”⁹⁶

Spain. In Spain, liability for non-payment of money includes interest, either at an agreed upon rate or the legal rate.⁹⁷ Compound interest is permitted if judicially demanded, “even if the obligation is silent on this point.”⁹⁸

Belgium. In obligations that are limited to a sum certain, Belgian law provides that interest is due at the legal rate.⁹⁹ Compound interest may be paid pursuant to the parties' agreement or judicial summons so long as the interest has been due for at least one year.¹⁰⁰

3. European Union

“The European Economic Community constitutes a new legal order of international law for the benefit of which the states have limited their sovereign rights, albeit within limited fields, and the subjects of which comprise not only the Member States but also their nationals.”¹⁰¹ The European Court of Justice has been accorded the responsibility “to ensure that in the interpretation and application of [the] Treaty the law is observed.”¹⁰² The Court has jurisdiction over two main types of cases: (1) actions against Member States; and (2) actions against Community institutions.¹⁰³ And, in particular, the Court is authorized to serve as an arbitrator pursuant to dispute settlement clauses of contracts concluded by or on behalf of the Community.¹⁰⁴ As contractual liability is governed by the law applicable to the contract in question, the national law of a Member State is usually applied to resolve issues of contract law, including the application of statutory interest rates.¹⁰⁵ Where national law is not used to resolve contractual issues, the Court will generally resolve such issues according to general principles of Member States, often arbitrarily choosing a rate of 6% or 8% as a fair rate.¹⁰⁶ Interest rates are also set by reference to the prevailing rate at a European financial institution, such as the European Central Bank.¹⁰⁷ Usually, simple interest is awarded, but the European Court of Justice has noted “it does not appear that the legal systems of the Member States include in general a fundamental principle opposed to the charging of compound interest.”¹⁰⁸

B. Oceania

1. Australia

In Australia, courts in each territory may award interest on money recovered as debt or damages.¹⁰⁹ Interest upon interest is expressly prohibited in all territories except Tasmania.¹¹⁰ However, there is a significant exception to this rule: it does not “apply in relation to any debt upon which interest is payable as of right by virtue of an agreement or otherwise.”¹¹¹ Thus, compound interest may be available as of some other right, such as by express agreement or special damages.

The High Court of Australia discussed this exception in Hungerfords v. Walker.¹¹² In that case, the claimant sought the return of overpaid taxes and compound interest as damages for the loss of the use of money.¹¹³ The court held that, under the circumstances, compound interest could be awarded even though section 30c of the Supreme Court Act of South Australia expressly prohibited such interest.¹¹⁴ The court explained that section 30c was not the exclusive authority for the awarding of interest and did not preclude the development of any common law principle permitting the recovery of damages for the loss of the use of money.¹¹⁵ The court ruled that an award of compound interest was needed because simple interest would not fully compensate the claimant for the loss of the use of the money owed.¹¹⁶

This result is similar to the practice in England.¹¹⁷ However, in Hungerfords, the court declined to adopt a distinction between allowing recovery of compound interest as special damages and not permitting it as general damages unless the statutory requirements were satisfied (which is the practice in England).¹¹⁸ The court in Hungerfords viewed such a distinction as illogical and instead stated that compound interest could be awarded whenever the loss of the use of money was foreseeable.¹¹⁹

Compound interest is also available if the respondent's breach of its obligations caused the claimant to borrow at compound interest rates. J.A.D. International Pty. Ltd. v. International Trucks Australia Ltd. illustrates this exception.¹²⁰ There, the claimant sought compound interest on damages resulting from the respondent's rescission of a contract.¹²¹ The court ruled that it was appropriate to award compound interest because the respondent's actions forced the claimant to incur third-party financing on a compound basis.¹²²

As with statutes on the payment of interest in judicial proceedings, the arbitration acts of the various territories allow for the payment of compensatory interest, but expressly prohibit compound interest.¹²³ However, at least one court has ruled that the exceptions in court proceedings that allow compound interest also apply to arbitrations.¹²⁴

2. New Zealand

In New Zealand, awards of interest are governed by the Judicature Act of 1908.¹²⁵ The Act provides:

In any proceedings in the High Court or the Court of Appeal for the recovery of any debt or damages, the Court may, if it thinks fit, order that there shall be included in the sum for which judgment is given interest at such rate, not exceeding the prescribed rate, as it thinks fit on the whole or any part of the period between the date when the cause of action arose and the date of the judgment.¹²⁶

The statutory rate of interest is seven and a half percent.¹²⁷ As in Australia, the statute prohibits the payment of interest upon interest.¹²⁸ However, it does not apply to debts where interest is payable as a matter of right, including interest that is due under other rules of law.¹²⁹ Thus, compound interest is available if it is agreed upon.¹³⁰ Additionally, compound interest is available as special damages¹³¹ and, in some circumstances, in equity.¹³²

C. Asia

1. Japan

The Civil Code of Japan provides that if a party does not perform its obligations in a timely manner, it is responsible to the other party for the resulting damages.¹³³ The Code sets the rate of interest at five percent per annum unless the parties have agreed to a different rate of interest.¹³⁴ If interest has accrued for more than one year and the debtor has failed to pay it despite being given a demand for payment by the injured party, it may added to the principal and, therefore, compounded.¹³⁵

2. China and Hong Kong

In China, if a party breaches a contract, that party is liable for any resulting damage, including interest.¹³⁶ A tribunal will ordinarily award interest at the contractually agreed rate.¹³⁷ However, in the absence of an agreement between the parties it is unclear what rate of interest would apply because the relevant statutory provisions do not prescribe a rate of interest to be paid in the event of a default or set forth a procedure to calculate such interest.¹³⁸

In Hong Kong, compound interest may be awarded in equity, including, for example, where the respondent has breached its fiduciary duties. In addition, Hong Kong's Arbitration Act gives arbitrators the discretion to award compound interest.¹³⁹

3. Taiwan

In Taiwan, in the absence of an agreed upon rate, the rate of interest on a debt is five percent per annum.¹⁴⁰ The rate of interest may not exceed twenty percent.¹⁴¹ In addition, compound interest is prohibited, except when “the parties have agreed upon in writing that the creditor may add to the capital the interest which has been in arrears for more than one year but has not been paid notwithstanding the demand of the creditor.”¹⁴²

4. Korea

In Korea, damages for failing to pay a monetary debt on time incur interest at the legal rate.¹⁴³ The legal rate of interest in commercial activities is six percent per annum.¹⁴⁴ Otherwise, the legal rate of interest is five percent per annum.¹⁴⁵ Parties may agree to a different rate of interest, so long as it does not exceed the statutory ceilings.¹⁴⁶

5. India

In India, courts are given the authority to award interest pursuant to the Code of Civil Procedure. It provides:

Where and in so far as a decree is for the payment of money, the Court may, in the decree, order interest at such rate as the Court deems reasonable to be paid on the principal sum adjudged, from the date of the suit to the date of the decree, in addition to any interest adjudged on such principal sum for any period prior to the institution of the suit, with further interest at such rate as the Court deems reasonable on the aggregate sum so adjudged, from the date of the decree to the date of payment, or to such earlier date as the Court thinks fit.¹⁴⁷

The payment of interest is also governed by the Interest Act of 1978, which states that, “[i]n any proceeding for the recovery of any debt or damages or in any proceedings in which a claim for interest in respect of any debt or damages already paid is made, the court may, if it thinks fit, allow interest to the person entitled to the debt or damages or to the person making such claim, as the case may be, at a rate not exceeding the current rate of interest, for the whole or part of the following period ... .”¹⁴⁸ In addition, the Act prohibits the payment of compound interest.¹⁴⁹ However, like English courts, the Supreme Court of India, in Renusagar Power Co. v. General Electric Co., has ruled that this statutory prohibition on interest upon interest does not preclude awards of compound interest under contractual provision, usage, or statute.¹⁵⁰ There, the court relied on this exception to uphold an arbitral award of compound interest because it was “common knowledge that provision is made for the payment of compound interest in contracts for loans advanced by banks and financial institutions and the said contracts are enforced by courts.”¹⁵¹

D. The Americas

1. Mexico

In Mexico, the Civil Code provides that if a party is obligated to perform and does not, that party is liable for resulting damages and losses.¹⁵² When the performance is an obligation to pay a specific amount, damages and losses may not exceed the legal interest on the principal unless agreed.¹⁵³ In addition, if a buyer delays in the payment for goods, the “buyer owes interest for the lapse of time between delivery and payment of the purchase price in the following situations: I. If it was so agreed; II. If the subject-matter of a sale was delivered and generates profits or income; or, III. If, [inter alia,] the purchaser defaults in payment [due at a certain time].”¹⁵⁴

Mexico's Commercial Code governs interest for the late payment of debt. In the absence of an agreement, the rate of interest for the late payment of debt is six percent per annum.¹⁵⁵ Compound interest is prohibited unless agreed upon.¹⁵⁶

2. Argentina

The Argentine Civil Code provides that a debtor is not liable for damages that are due to a fortuitous event unless the debtor has assumed that liability or the liability (default) was due to the negligence of the debtor.¹⁵⁷ Obligations to pay a sum of money bear interest at the rate agreed to by the parties.¹⁵⁸ If there exists no such agreement, the obligation bears legal interest or, if no legal interest is determined, the judge will fix the interest.¹⁵⁹ Compound interest may be awarded if its payment has been agreed to by the parties or “when the debt having been judicially liquidated with interest, the judge orders the resulting sum paid, and the debtor defaults in payment.”¹⁶⁰ In contracts for the sale of goods, both a defaulting seller and a defaulting buyer must pay interest, either on the sum of money received by the seller or on the sum of money owed by the purchaser, respectively.¹⁶¹

Commercial loans are governed by the Argentine Commercial Code.¹⁶² Any delay of payment results in interest commencing from the date of the demand.¹⁶³ In the absence of stipulation, the parties are presumed to be bound by the rate of interest charged by public banking institutions.¹⁶⁴ In addition, the Commercial Code provides that a debtor “who litigates without a valid reason, shall be condemned to pay interest up to two and a half times that which the public banks are collecting, the courts duly adjusting the increase of the rate in the decision attending to the greater or lesser malice with which the debtor has litigated.”¹⁶⁵ The Commercial Code also provides that “interest due may produce interest, by action at law, or special agreement. In the case of an action it is necessary that interest should be due for at least a year.”¹⁶⁶

3. Canada

In Canada, awards of interest are governed by the applicable statute, judicial law, or both. The Federal Court Act states that “the laws relating to prejudgment interest in proceedings between subject and subject that are in force in a province apply to any proceedings in the Court in respect of any cause of action arising in that province.”¹⁶⁷ The Federal Court Act gives the power to award interest to a “person who is entitled to an order for the payment of money in respect of a cause of action arising outside any province or in respect of causes of action arising in more than one province.”¹⁶⁸ Although interest on interest is prohibited, the section does not apply “where interest is payable by a right other than under this section.”¹⁶⁹

The territories and provinces also have individual statutes allowing for compensatory interest.¹⁷⁰ Most prohibit the award of compound interest.¹⁷¹ However, the prohibition on compound interest typically does not apply when the payment of interest or similar compensation is otherwise provided by law.¹⁷² In general, compound interest may be awarded pursuant to a court's equitable jurisdiction.¹⁷³ Courts have construed this authority narrowly, awarding compound interest where fraud is apparent or where the wrongdoer is a fiduciary who has stolen funds or wrongfully profited from the retention of trust money.¹⁷⁴ In addition, like in England, Canadian courts allow compound interest as special damages.¹⁷⁵ In Quebec, interest is governed by the Civil Code, which allows compound interest only “where that is provided by agreement or by law or where additional interest is expressly demanded in a suit.”¹⁷⁶

4. United States

Unlike most other countries, the United States has no federal statute governing the payment of compensatory interest in all judicial actions.¹⁷⁷ Individual states, however, have enacted laws providing for the payment of interest.¹⁷⁸ Most states either prohibit or limit awards of compound interest.¹⁷⁹ For example, in New York and California, compensatory interest is calculated as simple interest.¹⁸⁰ Nevertheless, in both states, there are exceptions to the general rule. In New York, compound interest may be awarded if the authority to do so is expressly provided by statute or agreement of the parties.¹⁸¹ It may also be awarded when a fiduciary has acted in bad faith.¹⁸² Similarly, in California, compound interest may be awarded pursuant to statute or the parties' agreement.¹⁸³ In addition, pursuant to section 3288 of the California Civil Code, a jury may award compound interest in actions not arising from a contract.¹⁸⁴ Under this provision, compound interest has been awarded in actions involving a willful breach of fiduciary duty.¹⁸⁵

Delaware courts similarly follow the traditional rule that, absent either a contract or express statutory provision authorizing compound interest prior to judgment, only simple interest may be awarded.¹⁸⁶ One such statute, section 262(i) of the Delaware Code, gives courts the discretion to award compound interest in actions when shareholders seek the fair value of their shares in a merger.¹⁸⁷ Pursuant to this provision, some Delaware courts have recently begun to award compound interest on the grounds that the practice is consistent with market realities.¹⁸⁸ The rationale for this practice was explained by the Delaware Chancery Court in Onti, Inc. v. Integra Bank, Inc.:¹⁸⁹

It is simply not credible in today's financial markets that a person sophisticated enough to perfect his or her appraisal rights would be unsophisticated enough to make an investment at simple interest – in fact, even passbook savings accounts now compound their interest daily. This fundamental economic reality strongly indicates to me that, our litigants typically being at least as financially sophisticated as passbook savings holders and seeking at least the same return, interest on appraisal cases should be compounded daily, not monthly. As for the defendant company in an appraisal action, it is even harder to imagine a corporation today that would seek simple interest on the funds it holds. One cannot imagine that a sophisticated businessman ... would invest his companies' funds in instruments yielding simple rates of interest. Nor is it conceivable that [a businessman's] lenders w[ould] provid[e] his companies with capital at simple rates of interest.¹⁹⁰

Courts also have allowed compound interest on the ground that the respondent unjustly benefited from what amounted to an interest free loan by failing to fulfill its obligations,¹⁹¹ or that the respondent's action deprived the claimant from being able to invest the money and earn such interest.¹⁹²

In federal courts, absent specific statutory authority, issues concerning the payment of compensatory interest are typically resolved pursuant to the applicable state law.¹⁹³ In diversity actions,¹⁹⁴ the United States Supreme Court has ruled that, to determine which state's compensatory interest law applies, a federal court must use the choice of law rules that would be used by a state court in which the federal court sits.¹⁹⁵ Even in many federal question suits, state law influences the resolution of compensatory interest issues.¹⁹⁶

When federal courts approach compensatory interest issues without consulting state law, district courts exercise broad discretion in resolving claims for compensatory interest.¹⁹⁷ As a result, compound interest has been awarded more frequently.¹⁹⁸ For example, federal courts often award compound interest in admiralty actions.¹⁹⁹ Further, they commonly award compound interest when calculating compensatory interest on back pay in successful employment discrimination suits.²⁰⁰ In addition, compound interest has been awarded in patent infringement actions, although the courts deciding such cases are not unified in their approach.²⁰¹ Federal courts have also awarded compound interest when the claimant incurred interest at a compound rate because of the respondent's delay in paying the underlying obligation.²⁰²

In In re Oil Spill by the Amoco Cadiz off the Coast of France on March 16, 1978, the United States Court of Appeals for the Seventh Circuit justified awarding compound interest as the best way to compensate a claimant for the lost use of money.²⁰³ The court explained:

By committing a tort, the wrongdoer creates an involuntary creditor. It may take time for the victim to obtain an enforceable judgment, but once there is a judgment the obligation is dated as of the time of the injury. In voluntary credit transactions, the borrower must pay the market rate for money. (The market rate is the minimum appropriate rate for prejudgment interest, because the involuntary creditor might have charged more to make a loan.) Prejudgment interest at the market rate puts both parties in the position they would have occupied had compensation been paid promptly.²⁰⁴

Recently, in McKesson Corp. v. Iran, the United States District Court for the District of Columbia refused to award compound interest to a minority shareholder of an Iranian dairy company after Iran had expropriated the shareholder's interest in the company.²⁰⁵ Relying on commentary and Iran-U.S. Claims Tribunal decisions, the district court found that only simple interest is awarded as a matter of customary international law.²⁰⁶ Although it noted that international tribunals have awarded compound interest in a number of cases, the court stated that it was “constrained to follow the custom, not the rare exception.”²⁰⁷

On appeal, the United States Court of Appeals for the District of Columbia Circuit stated that the district court had erred in concluding that only simple interest may be awarded under international law.²⁰⁸ The D.C. Circuit stated that “most contemporary sources ... take the view that 'although compound interest is not generally awarded under international law or by international tribunals, special circumstances may arise which justify some element of compounding as an aspect of full reparation.'”²⁰⁹ Nevertheless, the court upheld the award of interest because the district court had not abused its discretion in awarding only simple interest.²¹⁰

Finally, federal courts have generally enforced foreign awards of compound interest.²¹¹ Under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention),²¹² arbitral awards rendered in signatory countries are enforceable in all other signatory countries. This rule is subject to a narrow list of defenses, the most relevant of which is that an award need not be recognized and enforced if it “would be contrary to the public policy of that country.”²¹³ In general, domestic courts have rejected claims that an award of interest is not enforceable on public policy grounds simply because the award was made under foreign law, the rate of interest exceeded municipal rates, or compound interest was awarded even though local law prohibits the payment of such interest.²¹⁴

* * *

As this survey discloses, very few countries that allow awards for interest absolutely prohibit compound interest. It is true that in most countries the payment of simple interest is the norm. Perhaps some of these laws originate from the days when disputes were resolved quickly and, therefore, the difference between simple and compound interest would not have been significant.²¹⁵ In addition, it may have been difficult for courts to award compound interest without the use of calculators and computers.

In any event, the survey also shows that many countries allow for awards of compound interest in limited circumstances. For example, the laws of many countries permit compound interest if the contract between the parties provides for it.²¹⁶ In addition, compound interest may be available when the respondent's actions forced the claimant to borrow money at compound rates.²¹⁷ Furthermore, compound interest may be awarded if it is part of the course of dealing or usage or trade, or otherwise can be proven as special damages.²¹⁸ Some countries also allow awards of compound interest when a party has breached a fiduciary duty.²¹⁹ Finally, a few countries expressly allow arbitral tribunals to award compound interest.²²⁰

IV. Tribunal Decisions

Tribunals typically use one of three methods to resolve claims for interest. Ordinarily, they will turn first to the agreement for guidance. When the agreement contains a provision addressing the payment of interest, the tribunal usually resolves the interest claim accordingly.²²¹ However, agreements usually fail to deal with the payment of interest and, when they do, the provision is often ambiguous.²²² In such circumstances, the tribunal may turn to the second method: it can select a law to resolve the interest claim by applying one of numerous choice-of-law rules.²²³ Finally, the tribunal can decide the issue in accordance with general principles of law²²⁴ or on the basis of fairness and reasonableness.²²⁵

Tribunals deciding disputes between transnational contracting parties traditionally have awarded only simple interest.²²⁶ For example, in R.J. Reynolds Tobacco Co. v. Iran, the Iran-U.S. Claims Tribunal noted “[t]here are few rules within the scope of the subject of damages in international law that are better settled than the one that compound interest is not allowable.”²²⁷

Society of Maritime Arbitrators (“SMA”) panels also typically award only simple compensatory interest.²²⁸ SMA panels have awarded compound interest when the contract expressly provided for it.²²⁹ They have also granted it in a few cases without providing reasons for the award.²³⁰

Recently, four arbitral panels deciding cases under the auspices of the International Centre for the Settlement of Investment Disputes (“ICSID”) departed from tradition and awarded compound interest to the successful parties. In Metalclad Corp. v. United Mexican States, the claimant sought damages for the breach of certain articles of the North American Free Trade Agreement (“NAFTA”) and compound interest on any monetary award. The tribunal awarded claimant a total of U.S.$16,685,000.²³¹ With respect to the claim for interest, the tribunal noted that the authority to award interest was conferred by article 1135(1) of NAFTA, which states that a tribunal may award “monetary damages and any applicable interest.”²³² The tribunal determined that an award of six percent interest, compounded annually, was appropriate because it would restore the claimant to a “reasonable approximation of the position in which it would have been if the wrongful act had not taken place.”²³³ The Supreme Court of British Columbia later set aside the award of interest on the ground that the tribunal had erred in selecting the date from which it calculated the amount of compensatory interest. The Court, however, did not discuss the award of compound interest.²³⁴

In Maffezini v. Spain, the claimant sought the return of money lent to a corporation affiliated with the Kingdom of Spain as well as compound interest.²³⁵ The tribunal awarded in principal damages 30 million Spanish Pesetas and in compound interest 27.6 million Spanish Pesetas.²³⁶ The tribunal explained that interest should be compounded on an annual basis “[s]ince the funds were withdrawn from [the claimant's] time-deposit account,” which would have enabled the claimant to earn compound interest.²³⁷

In Compania del Desarrollo de Santa Elena v. Costa Rica, the claimants sought damages and compound interest after Costa Rica expropriated its property in 1978.²³⁸ The tribunal first determined that the property was worth U.S.$4.15 million when it was expropriated. With respect to the claim for compound interest, the tribunal acknowledged that there exists “a tendency in international jurisprudence to award only simple interest.”²³⁹ After surveying the cases and commentary on compound interest, the tribunal determined that an award of such interest was not prohibited by international law.²⁴⁰ In fact, the tribunal recognized that other tribunals deciding disputes between transnational parties had awarded compound interest.²⁴¹ In addition, it noted that international tribunals tended to award only simple interest in cases of injury or simple breach of contract,²⁴² but they have awarded compound interest in cases relating to the valuation of property or property rights.²⁴³ The tribunal awarded claimants approximately U.S.$11.85 million in compound interest, concluding that this award was needed to provide the claimants with the full present value of the property that was taken twenty-two years ago.²⁴⁴

In Wena Hotels Ltd. v. Arab Republic of Egypt, an ICSID tribunal ruled that the respondent expropriated the claimant's property and failed to protect the claimant's investment and, as a result, it awarded the claimant U.S.$8,061,896.55 in damages.²⁴⁵ Although the claimant sought interest on this amount, it neither specified the interest rate at which interest should accrue nor addressed whether the interest should be compounded. Nevertheless, the tribunal determined that: (1) it was appropriate to award interest, (2) interest should accrue at a rate of 9%, and (3) the interest should be compounded quarterly.²⁴⁶ The tribunal explained the reasons for the award of compound interest, which totaled U.S.$11,431,386.88:

[A]n award of compound (as opposed to simple) interest is generally appropriate in most modern, commercial arbitrations. ... “[A]lmost all financing and investment vehicles involve compound interest. ... If the claimant could have received compound interest merely by placing its money in a readily available and commonly used investment vehicle, it is neither logical nor equitable to award the claimant only simple interest.”²⁴⁷

In Final Award in Case No. 1930 of 12 October 1999, a Netherlands Arbitration Institute (NAI) panel issued an award that included compound interest.²⁴⁸ There, the panel ruled that the claimant was entitled to damages based on respondent's deceit in the misappropriation of funds.²⁴⁹ Turning to the claim for interest, the tribunal noted that the substantive law was Dutch law, but that the law governing arbitration was the law of the place of arbitration, London, England. Applying England's Arbitration Act of 1996, which gives arbitral tribunals the power to award compound interest,²⁵⁰ and Dutch law, which allows interest upon interest, ²⁵¹ the NAI panel awarded the claimant interest at the statutory rate in the Netherlands, compounded annually.²⁵²

* * *

In sum, the traditional practice is not to award compound interest in international arbitrations. However, in recent years, tribunals have sometimes departed from this practice and have granted successful claimants compound interest.

V. Should Compound Interest Ever Be Awarded?

This study confirms that most countries and tribunals deciding transnational disputes follow the traditional practice of awarding only simple interest. However, this practice may not fully compensate the claimant and may result in an inefficient dispute resolution process.

The practice of awarding interest as an element of damages has become so widespread that it is an accepted international legal principle.²⁵³ And, as noted in section II, one of the primary purposes of awarding interest is to make the claimant whole by compensating “for the delay with which the payment to the successful party is made.”²⁵⁴ Awarding only simple interest as a general rule undermines this goal because a business engaged in transnational activities is likely to be sophisticated in financial matters and would have done one of two things had the respondent not caused a monetary loss to the claimant: (1) it would have paid off any debt used to finance its operations, which may have included a finance charge of compound interest; or (2) it would have invested the sum owed in a financial vehicle that would have had a compounding effect.

As Iran-U.S. Claims Tribunal Judge Howard Holtzmann pointed out in his dissent in Starrett Housing Corp. v. Iran, many businesses today “operate[] on the basis of back-to-back loans and a substantial line of credit with their banks. It is normal commercial practice that banks customarily charge compound interest.”²⁵⁵ An award of compound interest in this circumstance would be necessary to make the claimant whole as respondent's delayed payment would have increased on a compounded basis the claimant's financing costs. Moreover, there is no unfairness to the respondent in requiring it to pay compound interest in this situation, provided that the claimant can show that it is entitled to receive such interest because it incurred additional costs. It is well accepted that “parties dealing knowingly and rationally at arm's length provide compensation for the use of money in every deferred payment transaction, and compute the amount of this compensation by the techniques of interest compounding.”²⁵⁶

Alternatively, if the respondent had paid punctually, the claimant could have invested the money in an investment vehicle, such as a certificate of deposit or a money market account, that paid compound interest.²⁵⁷ Thus, awarding the claimant only simple interest would result in the claimant receiving less than it could have earned by investing the funds owed in an established commercial investment vehicle.²⁵⁸ Furthermore, simple interest fails to achieve the goal of restoring claimant to its pre-injury condition by compensating it for the opportunities lost by not being able to earn a return on the sum owed by the respondent.

It is important to point out that the difference between awards of compound interest and simple interest can be significant.²⁵⁹ For example, in Kuwait v. American Independent Oil Co. (AMINOIL),²⁶⁰ the arbitral tribunal awarded interest, compounded annually, at a rate of seventeen and one half percent for a period of five years.²⁶¹ This amounted to U.S.$96.7 million in interest on an award of U.S.$83 million. If the tribunal had awarded simple interest instead of compound interest, the total amount of interest would have been U.S.$72.6 million. Thus, an award of simple interest would have resulted in the claimant receiving U.S.$24.1 million less than it did.²⁶²

The tribunal's decision in Compania del Desarrollo de Santa Elena, S.A. v. Costa Rica²⁶³ provides another example where the difference between awards of simple and compound interest is significant. There, the tribunal ruled that the claimant was entitled to a total of U.S.$16 million for property that it determined had a value of U.S.$4.15 million when it was expropriated by the respondent twenty-two years earlier. The tribunal noted that it calculated the U.S.$11.85 million interest award based on a rate that was compounded semi-annually.²⁶⁴ By contrast, if the tribunal had awarded simple interest, it would have totaled U.S.$5.7 million, which is less than half the actual interest award.²⁶⁵

Because the payment of compound interest can result in a large award of interest, and, as was the case in Compania del Desarrollo de Santa Elena, even exceed the principal awarded, some tribunals have been reluctant to award such interest.²⁶⁶ This concern was expressed by Chamber III of the Iran-U.S. Claims Tribunal in Anaconda-Iran, Inc. v. Government of Iran:

The mathematical result of a full application of [compound interest], particularly in view of delays that any adjudication of a dispute involves, is that interest due could, by far, exceed the principal awards awarded. ... Consequently, to [award compound interest] would cause a benefit, and indeed a profit, to accrue to the successful party, which would be wholly out of proportion to the possible loss that the successful party might have incurred by not having the amounts due at its disposal.²⁶⁷

The payment of compound interest, however, does not result in a windfall to the claimant – it simply restores the claimant to the position it would have been in had it been paid in a timely manner. As Professor F.A. Mann pointed out:

[I]t is completely wrong to attach any significance to the fact that the award of interest or compound interest may lead to the payment of a sum exceeding the capital due from the wrongdoer. This may happen in many cases as a result of the wrongdoer's delaying tactics or the court's work load. But during that period the wrongdoer has enjoyed the fruits of the money withheld.²⁶⁸

Moreover, the claimant has been deprived of the opportunity to invest the money owed. In view of the readily available investment vehicles paying compound interest²⁶⁹ and the accepted practice of investing in them,²⁷⁰ it is inconceivable that if the claimant had been timely paid, it would have placed the money in an investment vehicle paying only simple interest.²⁷¹

It also is important to recognize that some businesses choose not to invest profits earned in investment vehicles offered by financial institutions, such as certificates of deposits. Instead, they may put these funds back into the business itself or distribute the money to their shareholders.²⁷² In both situations, there would be a compounding effect.

If the claimant business chooses to pay dividends, the dividends would compound for both the payee and the payor. The payee (investor) has the immediate earning capacity of the money and can reinvest the dividend payment into any common commercial savings device that would pay a compound rate of return.²⁷³ The payor (business) would earn a compound rate of return because it would be increasing the intrinsic value of the business and be increasing its stock price.

If, however, the business chose to reinvest its earnings in its own company, a compound rate of return would still result. This is because the business would be accelerating its growth, which would also increase the business' intrinsic value and increase its stock price.²⁷⁴

In short, in the modern world of international commerce, almost all financing and investment vehicles involve compound, as opposed to simple, interest. Thus, it is neither logical nor equitable to award a claimant only simple interest when the respondent's failure to perform its obligations in a timely manner caused the claimant either to incur finance charges that included compound interest or to forego opportunities that would have had a compounding effect on its investment.²⁷⁵

VI. Circumstances Warranting Awards of Compound Interest

Ordinarily, compensatory interest is recoverable without proof of actual loss; damages are presumed because the delay in payment deprives the claimant of the ability to invest the sum owed.²⁷⁶ As shown by the study in Part III, however, this practice appears to apply only to claims for simple interest. The laws of many countries provide for the awarding of compound interest if the claimant can prove that it is entitled to such interest. This is also the approach used by some arbitral tribunals.²⁷⁷ There appears to be no consensus, however, on what claimants need to show in order to be entitled to an award of compound interest.²⁷⁸

There are three situations when it would be appropriate for a tribunal deciding a transnational dispute to award compound interest: (1) when the parties have expressly agreed to the payment of compound interest; (2) when the respondent's failure to fulfill its obligations caused the claimant to incur financing costs in which it paid compound interest; and (3) when the claimant can prove that it would have earned compound interest in the normal course of business on the money owed if it had been paid in a timely manner.²⁷⁹

A. Enforcing the Parties' Agreement on the Payment of Compound Interest

When the agreement between the parties addresses the subject of the payment of interest (or precludes it), the tribunal ordinarily should enforce that contractual provision. This approach is consistent with the laws of many countries.²⁸⁰ It is also in accord with the general practice of arbitral tribunals.²⁸¹ Moreover, it gives effect to the intent of the parties and furthers one of the fundamental characteristics of international commercial arbitration—the parties' freedom to agree upon the rules that will govern the resolution of their dispute.²⁸² In addition, it encourages parties to predetermine the consequences of a breach of the agreement and facilitates settlements because the parties will be able to forecast accurately the amount of interest that an arbitrator would award. If arbitration is necessary, it also eliminates the need to engage in the often lengthy and complex process of determining which national law should be applied to the interest claim and thus reduces the cost of the proceedings.

When the parties contract for a rate of interest in the event of a breach, tribunals are more willing to apply the agreed rate rather than a legal rate.²⁸³ For example, in Petra Jamaica v. Ocean Logistics Corp., a dispute arose over the charter of a vessel, and an SMA panel awarded the owners of the vessel approximately $58,000.²⁸⁴ The owners sought interest pursuant to the contract between the parties. The SMA panel noted that the contract provided:

Interest on any amount due but not paid on the due date shall accrue from the day after that date up to and including the day when payment is made, at a rate per annum which shall be 1% above the U.S. Prime Interest Rate as published by the Chase Manhattan Bank in New York at 12:00 New York time on the due date, or, if no such interest rate is published on that day, the interest rate published on the next preceding day on which such rate was so published, computed on the basis of a 360 day year of twelve 30-days months, compounded semi-annually.²⁸⁵

Applying this provision, the panel awarded the owners approximately U.S.$15,000 in interest.²⁸⁶

It should be noted that a tribunal should not enforce a clause calling for the payment of compound interest if to do so would violate an applicable fundamental public policy rule, or be clearly against the parties' true intentions, or result in extreme prejudice or injustice to one party.²⁸⁷ It does not appear that awards of compound interest would violate a fundamental public policy rule of a country that allows awards of interest generally.²⁸⁸

B. Awarding Compound Interest When Respondent Caused Claimant to Incur Charges of Such Interest

A claimant should also be entitled to an award of compound interest if the respondent's failure to fulfill its obligations caused the claimant to incur financing costs on which it paid compound interest.

Most businesses do not possess an unlimited amount of operating capital.²⁸⁹ As noted, many companies today finance their operations through lines of credit from financial institutions or through other third-party financing arrangements, which typically charge compound interest.²⁹⁰ If the claimant operated on such a basis and was paying compound interest, the claimant should be entitled to the cost of any additional financing charges caused by the respondent's breach of its obligations because such payments directly resulted from respondent's actions.²⁹¹ Similarly, an unexpected loss that results from the respondent's failure to fulfill its obligations may cause the claimant to borrow money to cover its loss. This will likely be either in the form of a loan or an extension in the business' line of credit.²⁹² In some situations, a business utilizes other resources to finance its operations. For example, a business may issue equity to gain the financing it requires because of the loss.²⁹³ In any case, if a claimant borrows to cover its loss, then the most appropriate way to fully compensate it is to award the claimant its cost of borrowing. Furthermore, if that cost amounted to claimant paying compound interest, the claimant should receive that amount.²⁹⁴

The arbitral tribunal's decision in Award of May 30, 1979 in ICC Case Nos. 3099 and 3100 illustrates the practice of allowing the claimant to recover interest paid to a third-party on money that the claimant had to borrow because respondent failed to fulfill its obligations.²⁹⁵ There, claimant sold the respondent refined oil products and crude oil and the respondent failed to pay some of the invoices for the goods delivered. The arbitral tribunal ruled that the respondent was liable to the claimant for the principal sum owed, as well as interest that accrued pursuant to the rates set forth in the various contracts.²⁹⁶ The claimant also asserted that, because the respondents failed to pay the invoices in a timely manner, it had to borrow U.S.$26 million from an American bank, bearing interest that totaled 8.273% per annum.²⁹⁷ The tribunal recognized that the respondent's action caused this loss to the claimant, but it also noted that the claimant was entitled to receive interest under the contract. To make the claimant whole (and to avoid overcompensating the claimant), the tribunal awarded claimant, inter alia, the interest due under the contracts and the difference between the interest paid to the bank and the interest due under the contracts.²⁹⁸

In short, awarding a claimant compound interest is appropriate if it can show that it incurred the interest as a result of the respondent's action. This proposal is based on the principle of fully compensating the claimant for all damages directly resulting from the respondent's wrongful actions. It is a well accepted practice that is recognized both in many national laws and by international tribunals.²⁹⁹

C. Awarding Compound Interest Based on the Claimant's Lost Opportunity Cost

Even if the claimant did not incur finance charges of compound interest to cover its loss from the respondent's breach of its obligations, the claimant still may be entitled to an award of compound interest. The claimant must show that, if it had been timely paid, it would have invested the money owed in a vehicle that would have had a compounding effect.

It is a settled principle that a respondent is liable to repair all damages that have accrued naturally as a result of the failure to perform its obligations.³⁰⁰ This includes the obligation to pay the claimant interest for its lost opportunity cost, which may be in the form of interest.³⁰¹ However, the opportunity cost in a commercial enterprise is a forgone investment opportunity.³⁰² Thus, awarding compound interest at the claimant's opportunity cost would be the most appropriate way to compensate it for the loss of the use of its money.

A business has a vast number of investment opportunities that can consist of, for example, an investment in a standard financial investment like a certificate of deposit or other interest bearing account. If a claimant can prove that in its regular course of business it would place funds, such as those owed by the respondent, into such vehicles and that it would have earned compound interest from this investment, it should be entitled to such interest.³⁰³

As noted above, businesses also may reinvest their earnings in their business or pay the excess cash out to their shareholders in the form of dividends.³⁰⁴ This reinvestment may have a compounding effect. The claimant should be entitled to this amount if it can prove its lost opportunity cost. How a claimant does so may be a difficult, but not insurmountable task.³⁰⁵ For example, a claimant could produce historical financial records and expert testimony to show the rate of its return on investment during the relevant time period.³⁰⁶ In appropriate cases, this could provide the basis for the compound rate because it illustrates profit the business could have earned if it been paid the money owed in a timely manner.³⁰⁷

The problems with this approach include: (1) it could be speculative, (2) it could increase the cost to resolve interest issues, and (3) it could result in awards of interest being unpredictable.³⁰⁸ These potential problems may be minimal. First, the problem of speculative awards could be reduced by requiring the claimant to provide sufficient evidence to prove that it would have earned compound interest on the principal owed.³⁰⁹ If the claimant cannot prove this, it still should be entitled to simple interest (unless there are other circumstances that would preclude an award of interest altogether). Second, it is true that this approach could be expensive and time consuming. As noted above, however, in some cases, the difference between simple and compound interest may be millions of dollars, and, thus, a thorough examination of the issue may be justified.³¹⁰ Also, if it is not significant, a claimant may decide that it is not worth the effort to pursue compound interest. Third, awards of interest are already very unpredictable and this approach will not significantly add to an already chaotic situation.³¹¹ More importantly, however, an award at the claimant's opportunity cost more accurately approximates a full and fair compensation for delay damages.³¹² It may also facilitate settlements because it would remove the incentive for the respondent to delay the resolution of the dispute.³¹³

Finally, awarding compound interest in this circumstance would be consistent with the various approaches that tribunals use to award interest, including relying on procedural rules or substantive laws, general principles of law, and the principles of fairness and reasonableness.³¹⁴

If arbitral rules give the tribunal broad discretion to award interest, then the tribunal clearly has the authority to award compound interest unless to do so would violate some fundamental rule of public policy. For example, the rules for the arbitration of international disputes of the London Court of International Arbitration Rules,³¹⁵ the American Arbitration Association,³¹⁶ the Center for Public Resources Institute for Dispute Resolution Rules for Non-Administered Arbitration of International Disputes,³¹⁷ and the World Intellectual Property Organization Arbitration Rules³¹⁸ expressly grant tribunals the authority to award compound interest; thus, it would be appropriate for a tribunal deciding a case under any of those rules to award such interest.³¹⁹ Even when the rules are silent on the awarding of compound interest, they rarely prohibit it and instead give tribunals broad authority in issuing awards.³²⁰

Awarding compound interest when the claimant can prove that it would have been able to earn a compound rate of return on the principal had it had the opportunity to do so would be consistent with the laws of many countries. As illustrated in part III, civil law systems, while providing for the payment of simple interest without any proof of loss where damage results from delay in performance, often allow the recovery of compound interest if the claimant is able to prove that that it would have received such money independent of the delay.³²¹ In common law countries, awarding compound interest in this circumstance would essentially be awarding the claimant a form of special damages to compensate it for its loss.³²² This would mean that the party claiming interest would have the burden of proof on the issue, including the burden in some countries to show that compound interest was in the contemplation of the parties.³²³ In view of the sophistication of businesses engaging in transnational commerce and modern financial practices, it is clear that the delay in payment would result in the loss of compound as opposed to simple interest.³²⁴ Moreover, because the practice of awarding compound interest in this circumstance would result in making the claimant whole for its loss, it would accord with the principles of fairness and reasonableness.

VII. Conclusion

Most legal systems award simple interest to compensate a claimant for the loss of the use of money. By contrast, today most financing and investment vehicles available to parties in transnational business involve compound interest. Thus, if the goals of interest are to promote compensation and restitution, then simple interest falls short of attaining those goals. Fortunately, there is no rule of international law prohibiting compound interest. Furthermore, many legal systems and rules under which parties often resolve international commercial disputes allow for awards of compound interest in certain circumstances. These circumstances include awarding compound interest when the parties have agreed for it to be paid, when the respondent's breach of its obligations causes the claimant to incur financing costs at a compound rate, and when the claimant proves that it would have earned compound interest if the money had been paid in a timely manner. Applying these principles would better compensate a claimant for the loss of the use of money than the traditional practice of awarding only simple interest. Such an approach would also reconcile the practice of awarding interest with modern economic practices.

Endnotes

i This article revises and develops my previous article published in 34 Law & Policy in International Business 393 (Winter 2003).

ii Associate Dean for Faculty Research, Professor of Law, and Director, J.D./M.B.A. Program, Villanova University School of Law.

1 Onti, Inc. v. Integra Bank, 751 A.2d 904, 926-27 (Del. Ch. 1999).

2 See, e.g., Am. Bell Int'l Inc. v. Iran, 12 Iran-U.S. Cl. Trib. Rep. 170, 229-32 (1986) (awarding approximately $28 million in interest on damages of approximately $50 million); Gov't of Kuwait v. Am. Indep. Oil Co., Mar. 24, 1982, 21 I.L.M. 976, 1042 (awarding $97 million in interest on $83 million in damages).

3 See Compañía del Desarrollo de Santa Elena v. Costa Rica, 15 ICSID (W. Bank) 169, 200, 202 (2000).

4 See R.J. Reynolds Tobacco Co. v. Iran, 7 Iran-U.S. Cl. Trib. Rep. 181, 191-93 (1984); Marjorie M. Whiteman, 3 Damages in International Law 1997 (1943).

5 See McKesson Corp. v. Iran, 116 F. Supp. 2d 13, 41 (D.D.C. 2000).

6 See McKesson HBOC, Inc. v. Iran, 271 F.3d 1101, 1111-12 (D.C. Cir. 2001).

7 See id. at 1112.

8 See F.A. Mann, Further Studies in International Law 377 (1990) [hereinafter Further Studies] (“[T]he problem of compound interest apparently has never been fully analysed. Most learned writers ignore it or fail to give any reason for their conclusions that compound interest is or is not payable.”).

9 Whiteman, supra note 4, at 1997; Charles Rousseau, Droit International Public V § 242 (1983).

10 See Further Studies, supra note 8, at 384-85.

11 See McCollough & Co. v. Ministry of Post, Tel. & Tel., 11 Iran-U.S. Cl. Trib. Rep. 3, 29 (1986); Green Haywood Hackworth, 5 Digest of International Law 735 (1943) (citing Illinois Central Railroad Co. (United States v. Mexico), Opinions of the Commissioners (1927) 187, 189); Dan B. Dobbs, 1 Dobbs Law of Remedies § 3.6(1) (2d ed. 1993). This article concerns the awarding of compensatory or pre-award interest, as opposed to moratory or post-award interest, which is interest on the award.

12 See Sidney Homer & Richard Sylla, A History of Interest Rates 73 (3d ed. 1991). The authors explain that interest and usury are separate concepts:

[The ancient and biblical] prohibition[s] [were] against usury, “where more is asked than is given.” The Latin noun usura means the “use” of anything, in this case the use of borrowed capital; hence, usury was the price paid for the use of money. The Latin verb intereo means “to be lost”; a substantive form interisse developed into the modern term “interest.” Interest was not profit but loss.

Id.

13 Id.

14 See Catholic Encyclopedia: Usury, available at http://www.newadvent.org/cathen/15235c.htm (last visited Nov. 2, 2002) (stating that Plato and Aristotle “considered interest as contrary to the nature of things”).

15 In particular, the Book of Deuteronomy prohibits loans with interest to brothers but not to strangers. Deuteronomy 23:19-20 (“Thou shalt not lend upon usury to thy brother; usury of money; usury of victuals, usury of any thing.... Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury.”); see also Benjamin Nelson, The Idea of Usury 3-4 (2d ed. 1969) (examining the biblical prohibition against charging interest in certain situations).

16 See Clyde G. Reed & Cliff T. Bekar, Religious Prohibitions Against Usury 9 (Aug. 18, 1999) (unpublished manuscript, at http://www.lclark.edu/~bekar/usury.pdf) (stating that usury prohibitions were under theological attack and prohibition ended in 1830); see also Homer & Sylla, supra note 12, at 70-72 (describing the Catholic Church's restrictions on usury from the first century to the twelfth century). For example, St. Thomas Aquinas disapproved of usury, stating that “'[t]o take usury from any man is simply evil ... .'” Id. at 71.

Over the years, this restriction has been subjected to inconsistent and evolving interpretations. See Nelson, supra note 15, at xix-xxv (noting how Deuteronomy's restriction has been interpreted throughout history); see also Homer & Sylla, supra note 12, at 71 (describing how groups interpreted Deuteronomy's usury prohibition). During the Protestant Reformation, Martin Luther campaigned against usury. See generally Nelson, supra note 15, at 29-72 (describing Luther's campaign against usury). On the other hand, John Calvin reasoned that usury was not inherently evil and was “permissible only if it is not injurious to one's brother.” Homer & Sylla, supra note 12, at 80 (describing Calvin's interpretation of biblical rules regarding usury).

17 Library of Cong. v. Shaw, 478 U.S. 310, 315 n.2 (1986) (citations omitted).

18 See Richard B. Lillich, Interest in the Law of International Claims, in Essays in Honor of Voitto Saario and Toivo Sainio 53 (1983); Restatement (Second) of Contracts § 354 cmt. a (1981); see also Dobbs, supra note 11, § 3.6(1).

19 See McCollough & Co., 11 Iran-U.S. Cl. Trib. Rep. at 29; Wena Hotels Ltd. v. Arab Republic of Egypt, 41 I.L.M. 896, 919 (2002). See also Dobbs, supra note 11, § 3.6(3); Whiteman, supra note 4, at 1991-92. While interest is commonly awarded for the loss of the use of money, there is no consensus as to the time from which interest is calculated and the rates at which interest should accrue, and whether the interest awarded should be compounded. See John Y. Gotanda, Awarding Interest in International Arbitration, 90 Am. J. Int'l L. 40, 55 (1996).

20 Spalding v. Mason, 161 U.S. 375, 396 (1896) (quoting Curtis v. Innerarity, 47 U.S. 146, 154 (1848)).

21 See generally John C. Keir & Robin C. Keir, Opportunity Cost: A Measure of Prejudgment Interest, Bus. Law., Nov. 1983, at 129; Karin L. Kizer, Minding the Gap: Determining Interest Rates Under the U.N. Convention for the International Sale of Goods, 65 U. Chi. L. Rev. 1279 (1998); Michael S. Knoll, A Primer on Prejudgment Interest, 75 Tex. L. Rev. 293 (1996); Robert L. Haig, 3 Bus. & Com. Litig. Fed. Cts. § 39.3; Restatement (Second) of Contracts § 344(a) (1981) (defining the creditor's expectation interest as “his interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed”).

22 See Robert Sergesketter, Interesting Inequities: Bringing Symmetry and Certainty to Prejudgment Interest Law in Texas, 32 Hous. L. Rev. 231, 240-41 (1995) (recognizing that an inequitable result will occur between plaintiffs if one plaintiff financially recovers immediately after injury and another plaintiff must litigate to recover); see also Keir & Keir, supra note 21, at 133 (recognizing that the fundamental principle of damages is that compensation be adequate and full and that interest is allowed in order that damages be adequate in light of the delay in payment by the defendant). In one case, the award of interest was justified on the grounds that the claimant was forced to “borrow money to finance its current expenses on wages, operating and administrative costs or to use its own cash and incur an opportunity cost.” Award of January 30, 1984, summarized in 10 Y.B. Com. Arb. (Int'l Council for Com. Arb.) 39, 41 (1985).

23 See Prejudgment Interest as Damages: New Application of an Old Theory, 15 Stan. L. Rev. 107, 109 (Dec. 1962) (“To divest defendant of this unjustified benefit is not to penalize him, for it has been determined by the trial that it was never rightfully his.”).

24 See Sergesketter, supra note 22, at 240-41 (recognizing that “defendants are paying 'yesterday's debt with tomorrow's dollars'” by delaying payment to plaintiff).

25 See Keir & Keir, supra note 21, at 136 (recognizing that the defendant has had the earning capacity of the money at his disposal, the injured party has not had use of the money owed during the delay before the trial, and while the delay might not be the fault of either party, the defendant is clearly receiving a benefit by having use of the money).

26 In general, a claimant is entitled to receive in damages and interest only the amount that would restore it to the position in which it would have been had the respondent fulfilled its obligations in a timely manner. See Susan K. Freund, William E. McDonnell, Jr. & Hugh J. Cadden, Prejudgment Interest in Commodity Futures Litigation, 40 Bus. Law. 1267, 1268-69 (1985) (recognizing that the theory behind unjust enrichment is often applied when punishing defendants in breach of trust cases involving fiduciary misconduct).

27 See Knoll, supra note 21, at 296-97.

28 See id. at 297 (stating that without prejudgment interest, “defendants would have a powerful incentive to stretch out litigation.”); see also Sergesketter, supra note 22, at 240-41.

29 See Knoll, supra note 21, at 296 (recognizing that prejudgment interest will encourage both parties to take the appropriate level of precaution before engaging in a contractual relationship).

30 See id. at 296-97; see also Louis B. Sohn & Richard R. Baxter, Convention on the International Responsibility of States for Injuries to Aliens § 83(1), Explanatory Note, at 242 (Draft No. 12 with Explanatory Notes, 1961) (“[R]unning of interest from the date of injury offers an inducement to the [respondent] to make prompt settlement of legitimate claims or to comply speedily with any award.”).

31 Other types of interest include, inter alia, conventional interest, gross interest, nominal interest, ordinary interest, and penalty interest.

32 See Eugene F. Bringham & Joel F. Houston, Fundamentals of Financial Management 207 (8th ed. 1998). Compound interest is calculated through the use of the following formula: FV = PV (1+i)ⁿ, where FV is the future value of the total award, including interest, PV is the present value of the award (i.e., not including interest), i is the interest rate per compounding period, and n is the number of compounding periods.

33 See Stovall v. Ill. Cent. Gulf R.R. Co., 722 F.2d 190, 192 (5th Cir. 1984); Mariculture Prod. Ltd. v. Lloyd's of London, No. CV980163762S, 2002 WL 1446763, at *5 (Conn. Super. Ct. June 4, 2002); Richard A. Brealey & Stewart C. Meyers, Principles of Corporate Finance 36 (3d ed. 1988).

34 See Spodek v. Park Prop. Dev. Assoc., 759 N.E.2d 760, 761 (N.Y. 2001); Brigham & Houston, supra note 32, at 675.

35 See, e.g., Compañía del Desarrollo de Santa Elena v. Costa Rica, 15 ICSID (W. Bank) 169, 200 (2000) (noting the tendency in international law “to award only simple interest . ... in relation to cases of injury or simple breach of contract”); McKesson Corp. v. Iran, 116 F. Supp. 2d 13, 41 (D.D.C. 2000) (finding that “international courts have over a period of decades followed the custom of granting only simple interest”); 2 Chitty on Contracts 619 (27th ed. 1994) (“Compound interest is payable either by agreement or custom, but not otherwise.”); Further Studies, supra note 8, at 378 (stating that international tribunals generally do not grant compound interest); Paolo Cerina, Interest as Damages in International Commercial Arbitration, 4 Am. Rev. Int'l Arb. 255, 261 (1993) (assuming that the majority of arbitral tribunals do not “award compound interest in order to avoid engaging in presumably complex (and expensive) calculations and the substantial sums involved”); Knoll, supra note 21, at 306 (“The traditional, common-law rule is that prejudgment interest is not compounded.”).

36 See generally John Yukio Gotanda, Supplemental Damages in Private International Law 12 (1998) [hereinafter Supplemental Damages] (containing a survey of countries on the awarding of compensatory interest).

37 See Samir Saleh, The Recognition and Enforcement of Foreign Arbitral Awards in the States of the Arab Middle East, in Contemporary Problems in International Arbitration 340, 348-49 (Julian DM Lew ed., 1986) (noting that interest is prohibited in Qatar, Oman, and North Yemen).

38 See Gotanda, supra note 19, at 48-50 (discussing circumstances where interest may be awarded under Iranian law).

39 See Asian Agric. Prod., Ltd. v. Sri Lanka, June 27, 1990, 30 I.L.M. 580, 625; see also McCollough & Co.v. Ministry of Post, Tel. & Tel., 11 Iran-U.S. Cl. Trib. Rep. 3, 26-31 (1986); Lillich, supra note 18, at 55.

40 Civil Procedure Act, 1833, 3 & 4 Will. 4, c. 42, § 28 (Eng.).

41 See Law Reform (Miscellaneous Provisions) Act, 1934, 24 & 25 Geo. 5, c. 41, § 3 (Eng.).

42 Id. § 3(1).

43 See id. § 3(1)(a).

44 See Administration of Justice Act, 1982, c. 53, § 15(5)(a) (Eng.).

45 See id. § 15(1).

46 See Supreme Court Act, 1981, c. 54, § 35A (Eng.). The Act reads:

Subject to rules of court, in proceedings ... before the High Court for the recovery of a debt or damages there may be included in any sum for which judgment is given simple interest, at such rate as the court thinks fit or as rules of court may provide, on all or any part of the debt or damages in respect of which judgment is given, or payment is made before judgment, for all or any part of the period between the date when the cause of action arose and [the date of the payment or judgment, whichever came first].

Id.

47 London, Chatham & Dover Ry. Co. v. S. E. Ry. Co., [1893] A.C. 429, 440 (H.L.).

48 See id. at 440; see also Page v. Newman, 109 Eng. Rep. 140 (K.B. 1829); President of India v. La Pintada Cia Navegacion S.A., [1984] All E.R. 773, 778 (H.L.); Tim Lawson-Cruttenden & Nicholas Phillips, Compound Interest, 146 New L.J. 1391 (1996).

49 See London, Chatham & Dover Ry. Co., [1893] A.C. at 440; see also Nat'l Bank of Greece S.A. v. Pinios Shipping Co. (No. 1), [1990] 1 AC 637 (H.L.) (holding that bank was entitled to capitalize interest due to implied usage of bankers); Lawson-Cruttenden & Phillips, supra note 52, at 1391.

50 See Westdeutsche Landesbank Girozentrale v. Islington London Borough Council, [1996] A.C. 669, 702 (H.L.); Wallersteiner v. Moir, [1975] 1 Q.B. 373 (Eng. C.A.).

51 The rationale for this principle is that one in a fiduciary position must not be allowed to profit from the trust. Wallersteiner, [1975] 1 Q.B. at 388.

52 Id. (explaining that an award of compound interest in this situation is appropriate because it is presumed that wrongdoer benefited from use of the plaintiff's money and that, had the plaintiff been paid, the plaintiff would have made the most beneficial use out of it).

53 Wadsworth v. Lydall, [1981] 1 W.L.R. 598, 603 (Eng. C.A.).

54 See id. at 599-601.

55 See id. at 601.

56 See id. at 603.

57 Id. (internal citation omitted).

58 Id. at 598-99.

59 President of India v. La Pintada Cia Navegacion S.A., [1984] All E.R. 773, 787 (H.L.); see also President of India v. Lips Mar. Corp., [1987] 3 W.L.R. 572, 576 (H.L.) (stating that “interest could be recovered as damages for late payment if it was special damage which could be brought within the second part of the rule in Hadley v. Baxendale”).

60 See La Pintada, [1984] All E.R. at 774.

61 See id. One commentator stated that there is a three-part test for awarding compound interest as special damages: (1) the claim for interest must be based on the actual loss sustained by the plaintiff; (2) the defendant must have had special knowledge before the contract was entered into; and (3) because of the special knowledge, the defendant ought to have foreseen that the loss claimed was likely in the event of a breach of contract. See Lawson-Cruttenden & Phillips, supra note 52, at 1391.

62 Arbitration Act, 1996, c. 23, § 49(3) (Eng.). The Law Commission of England and Wales notes that this is the “only statute to provide specifically for compound interest.” LAW COM No. 287, supra note 50, § 2.44, at 16.

63 Late Payment of Commercial Debts (Interest) Act, 1998, c. 20, § 2(1) (Eng.).

64 Late Payments of Commercial Debts Regulations 2002, Statutory Instrument 1674 (Eng.), available at http://www.legislation.hmso.gov.uk/si/si2002/20021674.htm. The new regulations apply only to contracts made on or after August 7, 2002. Id.

65 Late Payment of Commercial Debts (Rate of Interest) (No. 3) Order 2002, Statutory Instrument 2002 No. 1675 (Eng.), available at http://www.legislation.hmso.gov.uk/si/si2002/20021675.htm.

66 Law Comm'n, LAW COM No. 287, Pre-Judgment Interest on Debts and Damages § 2.38, at 15 (Feb. 23, 2004), available at http://www.lawcom.gov.uk/files/lc287.pdf [hereinafter LAW COM No. 287].

67 See Handelsgesetzbuch [HGB] § 353 (Ger.), translated in Simon L. Goren, The German Commercial Code 152 (2nd ed. 1994) (“Merchants are entitled among themselves to demand interest for claims arising from mutual commercial transactions from the date they fall due. Compound interest may not be demanded by virtue of this provision.”); Polgári Törvénykönyv [Ptk] § 232(1) (Hung.), translated in Ministry of Justice of the Hungarian People's Republic, Civil Code of the Hungarian People's Republic 130 (1982) (“Unless exception is made by a provision of law in contractual relationships, interest is due. In contractual relationships of private persons among themselves interest is due only when it was stipulated. Compound interest cannot be validly stipulated.”).

68 See Code Civil [C. civ.] art. 1154 (Fr.), translated in George A. Bermann & Vivian Grosswald Curran, French Law: Constitution and Selective Legislation 4-70 (1998) (stating that in France “[i]nterest due upon capital may produce interest either by judicial demand or by special agreement, provided that, either in the demand or in the agreement, the interest in question has been due for at least a whole year”); Civil Code art. 482(1) (Pol.), translated in The Polish Civil Code 87 (Danuta Kierzkowska et al. eds., Olgierd A. Wojtasiewicz trans., 2000) (“One may demand interest for delay from the interest due only from the moment of filing the suit for it unless after the interest in arrear had become due the parties agreed to add the interest to the sum of the debt.”).

69 See Interest Act §§ 5 (Swed.) (stating that, in Sweden, interest accrues upon debts due to breach of contract at a rate established by the Central Bank of Sweden plus two percentage points), 6 (stating that interest accrues on other overdue debts and debts for damages at a rate established by the Central Bank of Sweden plus eight percentage points), translated in Swedish Commercial Legislation § 5 RteL:1-3 (1995); The Finnish Legal System 128 (Jaakko Uotila ed., Leena Lehto trans., 2d ed. 1985) (stating that, under the Interest Act of 1982, interest accrues on debts due to breach of contract at a rate established by the Bank of Finland; interest on overdue payments or interest for default is 16% unless the rate of interest paid before the due date had been higher); Grazhdanskii Kodeks RF [GK RF] art. 395(1) (Russ.), translated in Civil Code of the Russian Federation 186 (W.E. Butler trans., 1997) (“For the use of another's monetary means as a consequence of unlawful withholding, avoidance of the return thereof, other delay in the payment thereof or the unjustified receipt or savings thereof at the expense of another person interest shall be subject to payment on the amount of these means.”). The Civil Code of Russia further provides:

The amount of interest shall be determined as the rate of bank interest on the day of performance of the monetary obligation or respective part thereof which existed at the place of residence of the creditor, and if the creditor is a juridical person, at the place of its location. In the event of the recovery of a debt in a judicial proceeding the court may satisfy the demand of the creditor by proceeding from the bank interest rate on the date of presenting the suit or on the date of rendering the decision. These rules shall apply unless another amount of interest has been established by a law or by the contract.

GK RF art. 395(1) (Russ.).

70 See C. civ. arts. 1150, 1151 (Fr.), translated at http://www.legifrance.gouv.fr/html/codes_traduits/code_civil_textA.htm (“The obligor is liable only for the damages foreseen or which could have been foreseen at the time of the contract, so long as it is not due to his fraud that the obligation has not been performed. Even in the case where nonperformance of the agreement is due to the fraud of the obligor, the damages may include only that portion of the loss sustained by the obligee and of the benefit of which he was deprived, which is the immediate and direct consequ