This paper addresses approaches for arbitral tribunals to use in the award of interest. We address various aspects of this from both a legal and financial perspective, including the appropriate interest rate, the period over which interest should be calculated, the question of simple or compound interest, pre-award and postaward interest and the interaction between the discount rate used to reduce future cash flows to their present value and the interest rate used to augment past amounts to bring them to present-day values.
Because justice necessarily lags the events for which that justice is sought — often times by many years — tribunals routinely face questions about the amount of interest needed to fully compensate a claimant. Historic practice has varied widely, with resulting uncertainty. We hope to suggest approaches that may help to reduce the variability and its resultant uncertainty in the future.
In doing so we will first look at the legal principles underpinning the grant of interest by arbitral tribunals in the hope of receiving guidance as to the purpose behind the award of interest, and then turn to the financial and economic theory in the award of interest — with the aim of discovering how best to meet the legal goal of its award.