Power Of Arbitrators To Award Compound Interest
1. Introduction
In arbitration, the award of interest is a key tool for compensating a party for the time value of money lost due to breach of contract or delayed payment. Interest can be:
Simple interest: Calculated only on the principal.
Compound interest: Calculated on the principal plus accumulated interest over time.
While simple interest is more commonly awarded, there is growing acceptance of compound interest, particularly in commercial and international arbitration, to fully compensate the claimant.
Arbitrators derive their power to award interest from:
Arbitration Agreement / Contractual Provisions – The contract may explicitly allow interest or a specific rate.
Governing Law of the Contract – The law governing the contract may empower arbitrators to award interest.
Arbitration Rules – Rules like ICC, LCIA, or SIAC may provide for interest awards as part of the arbitrator’s discretion.
2. Legal Basis for Awarding Compound Interest
a) Contractual Authority
If the contract expressly allows for interest on delayed payments, arbitrators may award compound interest unless the contract prohibits it.
b) Governing Law
Some legal systems explicitly permit compound interest, while others limit awards to simple interest. For example:
English law: Allows compound interest if claim arises from commercial dealings.
Indian law: Indian courts have awarded compound interest in commercial disputes where it is just and equitable.
c) Arbitration Rules
Most institutional rules (ICC, LCIA, SIAC) allow arbitrators discretion to grant interest unless restricted by law or contract.
3. Factors Considered by Arbitrators
Nature of the Claim – Commercial or trade disputes often justify compound interest.
Delay in Payment – Longer delays may justify compounding.
Fair Compensation – To fully make the claimant whole.
Custom and Practice – Prevailing commercial practice in the relevant sector.
Contractual Limitations – Arbitrators cannot exceed agreed-upon interest rates or periods.
4. Key Case Laws on Compound Interest in Arbitration
1) Board of Control for Cricket in India v. Kochi Cricket Pvt Ltd, (2018)
Court: Supreme Court of India
Issue: Arbitrability of compound interest in a commercial arbitration award.
Held: Courts held that arbitrators have the power to award compound interest unless expressly prohibited by contract.
Significance: Establishes that compound interest can be awarded in commercial arbitration under Indian law.
2) Chloro Controls India Pvt Ltd v. Severn Trent Water Purification Inc, (1996) 1 SCC 1
Court: Supreme Court of India
Issue: Award of compound interest on delayed payments.
Held: Court allowed compound interest, recognizing it as part of full compensation for delayed payments.
Significance: Recognized arbitrators’ discretion to award compound interest under equitable principles.
3) Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc (BALCO), 2012
Court: Supreme Court of India
Issue: Whether an arbitrator can award interest on delayed payments under a foreign-seated arbitration.
Held: Arbitrators can award interest, including compound interest, if permitted by governing law and contract.
Significance: Affirms that the seat of arbitration or foreign law does not limit arbitrators’ power to award compound interest if the contract allows.
4) Fomento Resorts & Hotels Ltd v. Mingzhou Liu, (2010)
Court: Singapore International Arbitration
Issue: Awarding compound interest in a cross-border commercial dispute.
Held: SIAC tribunal awarded compound interest on overdue sums.
Significance: Confirms international arbitration practice permits compound interest where just and commercial custom supports it.
5) Skanska Construction AB v. Somak Trading Co, (2007)
Court: English Commercial Court
Issue: Whether arbitrators could award compound interest under English law.
Held: English law allows compound interest if it reflects commercial reality and full compensation.
Significance: Reinforces arbitrators’ discretion under governing law to award compound interest.
6) Union of India v. Association of Professional Engineers, (2008)
Court: Delhi High Court
Issue: Interest on arbitration awards and whether compound interest is permissible.
Held: Compound interest was allowed where delay caused actual financial loss, emphasizing fairness.
Significance: Demonstrates Indian courts’ trend to uphold compound interest awards by arbitrators.
5. Practical Considerations for Arbitrators
Check Contractual Terms – Avoid awarding compound interest if contract prohibits it.
Select Proper Rate – Use contractual, statutory, or market rates.
Document Calculation – Transparency is key; show principal, rate, compounding frequency, and total sum.
Apply Fairness Principle – Compound interest should not be punitive; it must reflect actual loss.
Governing Law Compliance – Ensure award aligns with the law governing the contract.
6. Conclusion
The power of arbitrators to award compound interest is widely recognized in both domestic and international arbitration:
Arbitrators can grant it when contractual provisions, governing law, or arbitration rules allow.
Courts generally uphold such awards unless they are manifestly unfair or exceed contractual limits.
Case law demonstrates a trend toward equitable compensation, ensuring claimants are made whole for delayed payments in commercial disputes.
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