Originally from World Arbitration And Mediation Review (WAMR)

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INVALID ROUND TRIPS IN SETTING

PRE-JUDGMENT INTEREST IN
INTERNATIONAL ARBITRATION
Manuel A. Abdala, Pablo D. López Zadicoff, Pablo T. Spiller*

In spite of its crucial role in damage compensation, there
is not a well-developed set of generally accepted principles
of pre-judgment interest (“PJI”) by arbitration tribunals.
A typical mistake in international arbitration awards is
the granting of PJI that is significantly lower than the rate
used to discount cash flows. This often results in what we
call “invalid round-trips” (“IRTs”) in damage assessment.
We also show that, from an economic perspective, full
compensation requires in most cases that PJI be linked to
the cost of capital of the affected business. Such rate
would, under most circumstances, promote efficiency in
the conflict resolution system.

I. INTRODUCTION

Pre-judgment interest (PJI), a key determinant of value in
damage awards, is often overlooked by both tribunals and
damage experts alike. Despite all the warnings in the literature,
PJI still ranks last in tribunals’ pecking order of decisions,1 while
the perception that it is purely a legal issue, and its seeming
relative simplicity, leads damage experts to not pay too much
attention to this issue either. This has led to a multiplicity of PJI
criteria, with choices often contradicting the underlying economics
of the case, resulting not only in under-compensation, but also
rewarding opportunistic behavior and providing incentives to
delay both decision and payments of awards.

The longer the time between the breach and the final award,
the more crucial the correct assessment of PJI becomes. The
complexities and uniqueness of international arbitration cases
often call for extended proceedings. For example, as of September
2010, of the 124 treaty cases in progress under ICSID jurisdiction,
roughly half were started before 2008, and 30 before 2005.2 To
the length of time cases take to reach final resolution we must add
the fact that normally cases arise from events that occurred well
before the date of filing – if awards are calculated following the
date of the breach approach3 – PJI may accrue for a period of
several years, becoming an important component of the overall
compensation amount.