The Challenges of Statutory Rates, Commercial Benchmarks, and Compound Interest
THE AUTHOR:
Naimeh Masumy, Research Fellow at Deakin University & PhD Candidate at Maastricht University, Deakin University
Explore our comprehensive series examining the challenges of applying statutory rates, commercial benchmarks, and compound interest in international disputes. Through case law and evolving practices, it examines how statutory rates often misalign with market realities, the uncertainty of commercial floating rates post-LIBOR, and the contentious application of compound interest with unclear doctrinal foundations.
While conflict of law analysis may be deemed as a useful approach, it comes with clear limitations on three fronts. First, this analysis often endorses the use of national laws. The national statutory interest rate, which is usually fixed or capped, may not represent actual market realities, especially if the interest rate relates to an international dispute. Furthermore, public international law rules, which are intended to fill the gaps fall short due to the lack of precise guidelines for calculating damages. The reliance on national and international law poses difficulties on two accounts. Finally, the commercial floating rate, presented as an ideal rate, fails to convey the fluctuating nature of inflation across different countries and sectors.
The Pitfalls of Statutory Interest: Domestic Law Standards and Their Implications
Domestic regimes governing interest rates vary widely, relying on statutory laws, regulations, and case law. Tribunals often face the choice between applying statutory rates or opting for a “reasonable” rate.
Statutory interest rates often come with notable caveats that affect how interest is calculated:
· Fixed or capped rates: Some jurisdictions set fixed or capped statutory interest rates, ensuring predictability but often misaligning with market conditions. For example, Japan’s Interest Rate Restriction Act caps rates at 20% for certain loans, with excess interest unenforceable.
· Prohibition on compound interest: Some legal frameworks only allow simple interest, significantly reducing total interest in long-running disputes.
· Accrual periods: Statutory laws may delay interest accrual until after judgment, limiting interest amounts in cases with lengthy pre-trial periods.
· Mismatch with economic realities: Statutory rates may not align with market conditions, prompting tribunals to favor commercially reasonable rates, like LIBOR or EURIBOR, to ensure fair compensation. For instance, in Marion Unglaube v. Costa Rica (2012), a tribunal used a conservative 5-year U.S. Treasury rate to reflect economic realities.
· Outcome inconsistencies: Relying on statutory rates can lead to inconsistent results. In ConocoPhillips v. Venezuela (2019), the tribunal rejected Venezuela’s proposed 4% statutory rate, opting for the U.S. Treasury bill rate to ensure fair compensation aligned with international standards.
The table below displays the statutory interest rates across various jurisdictions
| Country | Statuary Interest Rate | Additional Notes |
| Republic of Korea | 5% per annum (statutory) | |
| Taiwan | 5% per annum (statutory) | Contract Interest Rate may not exceed 20% |
| Japan | 5% per annum (statutory) | 6% for commercial contracts; Contract interest rate must not exceed the maximum rate established by the Interest Rate Restriction Act |
| India | No Statuary Prescribed | Tribunal awards a reasonable rate unless parties have agreed to a particular rate |
| China | Tribunal awards interest at the contractually agreed rate; No clear statutory rate if not agreed upon | |
| Egypt | 4% per annum (civil matters) | 5% per annum (commercial matters); Contract rate may not exceed 7%; No compound interest allowed |
| Iran | Interest generally prohibited by Shari’a law | Exception for transactions between Iranian nationals and foreigners where foreign law permits interest |
| Brazil | 6% per annum (unless otherwise agreed) | |
| Panama | Up to 7% for commercial debts | |
| United States | Typically 6% to 12% | Varies by state; some federal courts use the fifty-two-week Treasury bill rate; others use state statutes or principles of reasonableness and fairness |
| Canada | Varies by province | Some provinces determine by the Registrar of the Supreme Court; others give tribunal discretion; others award based on claimant’s potential loan rate |
Interest Rates in Arbitration: Procedural v. Substantive Dimensions
There are two main types of interest: simple and compound. Compound interest means that the interest for a period is added to the principal, and this new total is used to calculate interest for the next period. Although the payment of interest as part of a compensation is broadly accepted as an international legal principle, the same consensus has not been reached for compound interest.
The following provide a brief analysis of five different jurisdictions and their treatment of interest rates:
- England:
- Statutory and Common Law Exceptions:
- Special Damages: Compound interest can be awarded as special damages, particularly when a party incurs additional financing charges due to the other party’s breach (Wadsworth v. Lydall [1981] 1 WLR 598 (CA)). Arbitration Act 1996 (Section 49 (3)) has granted tribunals discretion to award compound interest in and equitable fashion.
- Statutory and Common Law Exceptions:
- France:
- Civil Code (Article 1154): Compound interest may be awarded if it is judicially demanded or based on a special agreement, provided interest has been due for at least one year. Damages are limited to foreseeable losses and compound interest is not usually awarded unless explicitly agreed or demanded judicially.
- Germany:
- Civil and Commercial Code: Compound interest is generally prohibited.
- Italy:
- Civil Code (Article 1124): Compound interest is permitted when there is prior usage or a prior agreement, provided that interest has been due for at least six months.
- Switzerland:
- Swiss Code of Obligations (Article 314): Generally prohibits compound interest, except in cases of commercial rules, especially in current accounts and savings banks.
The treatment of compound interest varies across jurisdictions, reflecting differing legal traditions and priorities. Whether interest is deemed substantive or procedural significantly impacts its applicability. As a substantive element, interest depends on case merits and public policy, while a procedural view gives tribunals more discretion to tailor awards. For example, under the Arbitration Act 1996, arbitrators can award compound interest at their discretion (Sections 49(3) and (4)).
The Discretion of Arbitrators and Public Law Considerations
The extent to which arbitrators are empowered to award compound interest remains a subject of ongoing debate. This debate largely stems from the unsettled nature of interest and the applicable governing rule. ICC Rules may reflect a growing recognition that these rules are primarily procedural and were not intended to address the merits of the case or the potential award of compound interest. However, this position has been countered by the lack of uniformity regarding the power to award compound interest in most global arbitration rules.
Nevertheless, several international model laws and arbitration rules recognize the tribunal’s authority to award interest, (simple or compound). For example, the UNCITRAL Arbitration Rules 2010 (Article 34(4)) and the ICSID Arbitration Rules 2006 (Rule 47(1)(i)) grant tribunals broad discretion to award interest at rates and for periods deemed appropriate, allowing the possibility of compound interest where necessary. Similarly, the ICC Arbitration Rules (Article 36(4)) and LCIA Arbitration Rules (Article 26.4) empower tribunals to decide on the applicable interest rate, reflecting the need for full compensation without explicitly limiting the type of interest. The SIAC Arbitration Rules 2016 (Rule 32.9) go further, explicitly allowing tribunals to award both simple and compound interest, offering clear guidance on this issue. Additionally, the WIPO Arbitration Rules 2020 (Article 60(b)) provide similar discretion, reinforcing the tribunal’s ability to tailor interest awards to the specific circumstances of the case.
International tribunals often treat interest as a substantive matter governed by the law of the contract (lex causae), determining the award of compound interest. The law of the enforcement jurisdiction (lex fori) also plays a crucial role, as it may impose distinct rules or limits on recognizing compound interest.
There are two key difficulties with respect to interest being treated as a substantive component:
- Divergent National Laws: Substantive laws on interest vary widely, with some jurisdictions imposing strict usury laws or banning compound interest, leading to inconsistent outcomes, especially in cross-border disputes. For example, Hong Kong’s Appeal Court rejected compound interest, citing the lack of the word “simple” in Section 22A of the Arbitration Ordinance to justify discretion. Some arbitrators feel unnecessarily restricted by domestic laws on interest, including compound interest, and suggest that statutes fixing statutory rates of interest, because they impose unreasonable rigidity, should be construed narrowly.
- Enforcement Challenges: When the aptitude of compound interest is examined via Lex fori , the law of the place of enforcement may impose limits or rules that would be in contradiction of lex causa. This could result in awards being modified or refused, complicating the enforcement process and undermining legal certainty. For example, under Shari’a law, compound interest is prohibited, as it can lead to rapidly escalating debt, seen as exploitative and against fairness or public policy. Courts have criticized it as “oppressive” and “draconian,” with interest on large obligations often viewed as punitive.
The Existing Practice of Arbitral Tribunals
The absence of uniformity makes it difficult, if not impossible, to predict in advance whether an arbitral tribunal will grant compound interest. This is coupled with the fact that compound interest is rarely discussed in international arbitral awards. It is often rejected or dismissed without further substantive discussion. The Iran-United States Claims Tribunal’s dismissal of compound interest without any discussion prompted arbitrator Richard Allison to express his dissent regarding the awarding of simple interest. He called for “a more careful and reasoned treatment” of the issue in future cases.
One way to escape narrow statutory provisions that fail to meet the objectives of international business is through the application of general principles of law. The new paradigm in investment tribunals reaffirms the shift from domestic rules and embracing public international law standards. In LG&E v. Argentina, Award, 25 July 2007 the tribunal clearly stated that simple interest would not suffice to fully compensate the claimant because it would fail to account for the compounded opportunity cost, thus embracing a principle more aligned with economic realities. Similarly, in Enron v. Argentina, Award, 22 May 2007 the tribunal rejected Argentina’s reliance on its domestic laws that generally disfavor compound interest, instead invoking the international law doctrine of ‘full reparation’ to justify the award of compound interest. In Sempra, LG&E, and Enron, the tribunals opted for compound interest, recognizing that in the commercial world, interest is generally compounded, and denying this would result in unjust enrichment of the state at the investor’s expense. This approach reflects the understanding that the economic harm suffered by the investors is best repaired public international law standards that reflect real-world financial dynamics, where funds grow over time through reinvestment or accumulation of interest. Thus, compound interest is seen as necessary to reflect the true economic loss.
The Inherent Ambiguity Within the Fabric of Public International Law Principles
In several ICSID cases, tribunals have consistently applied public international law principles, particularly the principle of full reparation, to award interest as part of compensation. The general principles of international law have emerged as a key foundation in addressing issues related to the recognition of compound interest. However, general principles of contract law, and general principles of transnational commercial law, while distinguishable, often overlap in this context. This general principle of law has been described as “the totality of principles and rules, whether customary, conventional, contractual or derived from any other source, which is common to a number of legal systems.”
However, despite its gap-filling role, it remains conspicuously ambiguous on the following accounts:
· International conventions like the United Nations Convention on Contracts for the International Sale of Goods often don’t specify interest rates, leading to varying judicial interpretations and disputes. The role of lex mercatoria, based on customary practices rather than codified rules, adds further complexity in arbitration.
· The interplay of international conventions, general principles of law, and lex mercatoria creates a complex legal framework for determining interest rates in international disputes.
· Arbitrators often turn to domestic laws or general principles, like full compensation, from conventions when clear contractual terms or international guidelines are absent.
Limitations of Libor as a Benchmark for Commercial Interest Calculations
The absence of international law instruments has lead arbitrators’ considerable discretion. This could, in turn, lead to unexpected outcomes. For instance, in National Grid v. Argentina, the tribunal rejected both the proposed interest rate and LIBOR-based rate. Instead, they applied LIBOR plus 2% per year, compounded semi-annually, based on the respondent’s suggestion. The tribunal’s choice of a reasonable rate, however, lacked clarification on how it reflected market conditions like currency or loan usage. Identifying a “reasonable rate” holds significant implications for tribunals and requires careful evaluation from both parties. Historically, Libor was widely endorsed as a reliable benchmark for calculating interest in commercial practices due to its global acceptance. However, its viability began to diminish as concerns over manipulation and transparency issues emerged, undermining its credibility. This led to a gradual phase-out in investment tribunals, with many transitioning to alternative interest rate benchmarks.
Factors such as manipulation scandals and reliance on estimated rather than actual lending rates and to adopt more reliable transaction-based benchmarks have led to LIBOR’s dissolution. This is compounded by the inability of this rate to address regional and sector differences, as well as failure to account for inflation. In the case of Kuntur Wasi and Corporación América v. Peru, Award, 9 May 2024. The tribunal calculated interest based on the average U.S. dollar lending rate in Peru rather than LIBOR, ensuring the rate reflected economic realities and inflation fluctuations in Peru. This demonstrates LIBOR’s inadequacy in addressing local inflation dynamics. Similarly, in Naftogaz and others v. Russia, Final Award, 12 April 2023 the tribunal replaced LIBOR with EURIBOR, showing the need for a rate that reflects regional financial markets, as LIBOR is not well-suited to non-U.S. jurisdictions like the Eurozone. The shift towards more suitable rate can be seen in JSC Tashkent v. Krygzstan. The tribunal opted for U.S. treasury rates instead of LIBOR, acknowledging that secured credit practices require a more reliable and risk-averse benchmark, such as treasury rates.
This piece discusses the challenges of inconsistent interest rate frameworks in domestic and international law. Outdated benchmarks like LIBOR, varying compensation interpretations, and lack of clear international guidelines lead to unpredictable outcomes. Cases such as National Grid v. Argentina and Naftogaz v. Russia highlight tribunals’ struggles with diverse methods, pointing to the need for transparent, tailored solutions. This analysis sets the stage for a series exploring innovative approaches to create a more cohesive framework.
ABOUT THE AUTHOR
Naimeh Masumy is a PhD Candidate at Maastricht University and a Research Fellow at Deakin University. In her professional capacity, she advises on international trade, regulatory compliance, and arbitration under ICC and UNCITRAL rules. Naimeh serves on the International Transnational Arbitration Advisory Board and the editorial board of ITA in Review. She holds an LLM in international banking and finance law from University College London and a degree in international legal studies from the University of Pennsylvania.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
