Originally from American Review of International Arbitration - ARIA

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I. INTRODUCTION

Few, if any, international arbitrators choose to tackle the equation Pn = P0.(1+ i/m)mn 1 in their arbitral awards. In fact, few international arbitral awards explicitly address the issue of whether an award of interest should attract compound, rather than simple, interest. While there is little consensus on approaches to awarding interest generally in international arbitration, the issue of compound interest is especially problematic. This is due to the fact that compound interest is often singled out for prohibition in domestic legal systems, yet it is the commercial norm in calculating interest in modern financial transactions.

The practices of financial institutions mean that a party with surplus funds can invest those funds to earn compound interest. Equally, those who are kept out of their money and are forced to borrow from banks pay compound interest. This article attempts to demystify compound interest, and to identify the sources of hostility to compound interest in international arbitral awards.

Restrictions on compound interest in domestic cases often advance a “public policy for the protection of the weak and ignorant debtor against extortion and oppression by the grasping creditor who, by an apparent indulgence is enabled to delude his victim into certain ruin.”2 In international arbitrations, however, the parties, their level of business sophistication, and the amounts of money at stake give rise to quite different concerns. The paradigm case of the necessitous consumer borrower is unlikely ever to present itself before an international arbitrator.