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Gotanda, John Yukio, Compound Interest in International Disputes, Georgetown L. and P. Int‘l Bus. 2003, 393

Gotanda, John Yukio, Compound Interest in International Disputes, Georgetown L. and P. Int‘l Bus. 2003, 393
Table of Contents




If, however, the business chose to reinvest its earnings in its own Company, a compound rate of return would still result. This is because the business would be accelerating its growth, which would also increase the business' intrinsic value and its stock price.261

In short, in the modern world of international commerce, almost all financing and investment vehicles involve compound, as opposed to simple, interest. Thus, it is neither logical nor equitable to award claimant only simple interest when the respondent's failure to perform its obligations in a timely manner caused the claimant either to incur finance charges that included compound interest or to forego opportunities that would have had a compounded effect on its investment.262



Ordinarily, compensatory interest is recoverable without proof of actual loss; damages are presumed because the delay in payment deprives the claimant of the ability to invest the sum owed..263 As shown by the study in section III, however, this practice appears to apply only to claims for simple interest. The laws of many countries provide for the awarding of compound interest if the claimant can prove that it is entitled to such interest. This is also the approach used by some arbitral tribunals.264

There are three situations when it would be appropriate for a tribunal deciding a transnational dispute to award compound interest: (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 it had been paid in a timely manner.265




Most legal systems award simple interest to compensate a claimant for the loss of the use of money. By contrast, today most financing and investment vehicles available to parties in transnational business involve compound interest. Thus, if the goals of interest are to promote compensation and restitution, then simple interest fans short of attaining those goals. Fortunately, there is no rule of international law prohibiting compound interest. Furthermore, many legal systems and rides under which parties often resolve international commercial disputes allow for awards of compound interest in certain circumstances. These circumstances include awarding compound interest when the parties have agreed for it to be paid, when the respondent's breach of its obligations causes the claimant to incur financing costs at a compound rate, and when the claimant proves that it would have earned compound interest if the money had been paid in a timely manner. Applying these principles would better compensate a claimant for the loss of the use of money than the traditional practice of awarding only simple interest. Such an approach would also reconcile the practice of awarding interest with modern economic practices.

261Cf. Carl Loomis, Warren Buffet ou the Stock Market, FORTUNE, Dec. 10, 2001, 80, 86 88 ("Well-managed industrial companies, do not as a rule, distribute to shareholders the whole of their earned profits. In good years, if not in all years, they retain a part of their profits and put them back in the business. Thus there is an element of compound interest operating in favor of a sound industrial investment.").
262See Decision of the High Court of Bombay dated Oct. 21, 1988, reprinted in XV Y.B. Com. Arb. 465, 488 (1990); F.A. Mann,On Interest, Compound Interest and Damages, 101 L.Q. Rev. 30, 44 (1985); J. Gillis Wetter, Interest as an Element of Damages in the Arbitral Process, INT'L FIN. L. Rev., Dec. 1986, at 22. Prohibiting awards of compound interest also would thwart one of the important goals of interest to promote an efficient dispute resolution process. Awarding only simple interest would provide an incentive for the respondent to delay the resolution of the dispute because it likely would be unable to obtain a loan from a third party on a simple interest basis or it could place the money owed in an investment vehicle that would provide compound returns in excess of what it would have to pay in simple interest.See Keir and Keir, supranote 20, at 145; Knoll, supranote 20, at 308. Thus, if simple interest is awarded, the respondent bas no incentive to pay the claim and settle the case. See Sergesketter, supranote 21, at 241. Compound interest would also protect expectation interests, thereby promoting efficiency. If the claimant could not receive compound interest and, thus, not be fully compensated for its tosses in the event of a breach, it "might find it necessary to expend rime and money to arrange other kinds of assurance, [such as] by investigating prospective contractors intensively or by securing expensive collateral, or by dealing only with persons inside the promisee's intimate circle," or by securing insurance. 3 Dobbs, supranote 11, at § 12.2(1). See Robert Cooter and Melvin Aron Eisenberg, Damages for Breach of Contract, 73 CAL. L. Rev. 1432, 1468 (1985) (stating that when expectation and reliance damages diverge, "expectation damages are preferable because they better assure that reliance will be compensated, better facilitate planning, provide better incentives for efficient performance and precaution and provide no worse incentives for over-reliance); E. Allan Farnsworth,Legal Remedies for Breach of Contract, 7O COLUM. L. REV. 1145, 1147 (1970) (stating that the American legal system encourages parties to keep promises by protecting injured parties' expectation interests-that is to put promisees in the position in which they would have been had promise been performed).
263See McCollough and Co. Inc., 11 Iran-U.S. Cl. Trib. Rep. at 29. However, in order for interest to accrue, the amount in dispute generally must be liquidated or capable of being ascertained through computation of the data presented. See Whiteman, supranote 4, at 1991-92.
264See Christopher S. Gibson,Awards and Other Decisions, 9 AM. REV. INT'L. ARB. 181, 191 (1998) (stating that international arbitral tribunals may award compound interest when the party seeking interest shows that "[it] has actually paid compound interest to [its] bank - or would have received compound interest had [it] invested the principal amount claimed.");see also ITT Corp., 17 Cl. Ct. at 242 (stating that "compounding may only be appropriate if the record reflects facts and circumstances justifying its application").
265See Westdeutsche Landesbank Girozentrale v. Islington London Borough Council, [1996] A.C. 669, 732 (H.L.). It also may be appropriate to award compound interest where a fiduciary acts in bad faith. See China Everbright - IHD Pac. Ltd, v. Çh'ng Poh [2002] HKEC 218 (H.K.); Bank of Am. Can. v. Mut. Trust Co., [2000] 184 D.L.R. (4th) 1,13 (Ont. Ct. App.).

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