Compound Interest in International Disputes

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. It is unclear why tribunals hearing disputes between transnational contracting parties have traditionally awarded only simple interest. Perhaps misunderstandings over the availability of compound interest stem from the lack of comparative study of the issue. Indeed, some commentators have simply presumed that compound interest may not be paid, because it is generally prohibited in many legal systems. This has led one noted authority to argue that laws simply have not kept pace with modern financial practices and that tribunals should not apply them when awarding interest. In this article, I undertake a thorough study of compound interest. I examine the laws of various countries in Europe, Oceania, Asia, and North and South America to learn whether compound interest may be awarded. My comparative study finds a divergent practice concerning awards of compound interest; some prohibit it, others allow it in certain circumstances, and a number statutes are silent on the issue. In addition, I review the decisions of international tribunals on compound interest and find that these tribunals have traditionally awarded only simple interest, but that recently a few tribunals have granted compound interest. I conclude that there are three situations where an award compound interest is appropriate: (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.