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Pre-award interest – How do arbitrators figure it out in an International Arbitration?

One issue that frequently arises in arbitration is determining what rules apply, both procedurally and substantively. An example of this issue is figuring out the rate at which the arbitrator(s) will calculate pre-award interest, if any. At the beginning of any arbitration, or litigation for that matter, the parties and their counsel never fully appreciate the possibility of pre-award interest since it is almost always included in the claim's ad damnum clause, but the exact amount is not usually spelled out. This gives a respondent the false impression as to the true amount in controversy.

Pre-award interest is supposed to compensate a party due to the delay between the time when the damage was caused and the date of the award. If the amount in controversy is substantial, and the harm alleged to have occurred was years before the claim was filed, then the pre-award interest may be significant, especially if the rate is compounded.

There are several factors in assessing whether an arbitration panel can and will order pre-award interest in an international arbitration and what interest rate they will use in the calculation. These factors include: (1) an arbitral tribunal's rules or code, (2) the parties' agreement, (3) the laws governing the claims in dispute (4) the laws of the applicable country and/or region/state of arbitration's situs, and (5) principles of equity.

Arbitral entity's rules

Each arbitral entity has its own rules, but often times they do not provide very good guidance and predictability as to what law the arbitrators will use in deciding certain issues.

The same is true with regard to the calculation of pre-award interest. The most popular arbitral bodies give broad discretion to the arbitrator in evaluating whether pre-award interest is warranted in a given case. If pre-award interest is given, the decision may not include an explanation of how the pre-award interest was calculated. It depends entirely on the arbitral body, the arbitrator(s), and whether the parties jointly consented to a reasoned decision.

For example, the American Arbitration Association's ("AAA") Commercial Arbitration Rules and Mediation Procedures provide that an arbitration award may include "interest at such rate and from such date as the arbitrator(s) may deem appropriate."

JAMS International Arbitration Rules and the International Centre for Dispute Resolution ("ICDR"), a division of the AAA, both provide that "...the Tribunal may award such pre-award and post-award interest, simple or compound, as it considers appropriate, taking into consideration the contract and applicable law."

The Financial Industry Regulatory Authority's ("FINRA") Dispute Resolution Rules do not specifically address pre-award interest, but that has not stopped numerous arbitration panels from making such an award in customer cases. Interestingly, however, the rules do provide for post-award interest if, absent a motion to vacate, the award is not paid within thirty days of receipt or as specified by the panel in the award. In those cases, "[i]nterest shall be assessed at the legal rate, if any, then prevailing in the state where the award was rendered, or at a rate set by the arbitrator(s)." FINRA claimants have argued that the same state interest rate applies to pre-award interest as well.

The parties' agreement

Of course, in order to arbitrate in the first place the parties must have an agreement to arbitrate. The agreement will usually provide for the situs of and choice of law for the arbitration. In rare cases, it also will provide the rate at which pre-award interest is calculated or it may provide that the parties waive their right to receive pre-award interest in the event either prevails in an arbitration.

While pre-award interest may not be specifically mentioned in the agreement, the arbitrators may use rates referred to in the agreement for the purpose of calculating pre-award interest. For example, an agreement between a Brazilian subway wheel manufacturer and a New York vendor provides that the company is required to purchase and deliver 10,000 wheels to an end-user on a given date from New York Harbor and is responsible for making sure the wheels pass through customs. The vendor is required to pay the manufacturer 10 % of wheels' purchase price per day on a compounded basis for each day it delays in the delivery. The manufacturer shipped the wheels, but the vendor never effected delivery. The wheels sit on a barge in the harbor incurring shipping and custom fees. The manufacturer then sues the vendor in arbitration pursuant to the agreement for breach of contract and for specific performance. The arbitrators in this case would mostly likely award damages calculated at the 10 % interest rate per day compounded based on the parties' agreement.

Even without an express agreement between the parties regarding pre-award interest, courts have explicitly held that an arbitration award may include pre-award interest so long as the amount of the underlying liability can be ascertained with some certainty.

National and/or State law

Arbitrators are guided by federal and state law in determining pre-award interest. In the United States, federal law does not proscribe a pre-judgment interest. It does, however, set the post-judgment interest rate at the fifty-two week Treasury bill rate. Courts have held that "[t]he interest rate prescribed for post-judgment interest in 28 U.S.C. § 1961(a) is 'appropriate for fixing the rate of prejudgment interest unless the equities of a particular case demand a different rate.'"

Each state has its own statute regarding pre-judgment interest, which is tied to either a fixed rate or index. In New York state court, for example, pre-judgment interest is governed by CPLR Article 50, which has set the rate at nine percent per year since 1981. New York courts have held that statutory interest under New York law is calculated on simple, non-compounded basis.

Article 50 provides that pre-verdict interest is recoverable in contract and property damage. In equity actions, a court may award pre-verdict interest but the "interest, and the rate and date from which it shall be computed shall be in the court's discretion." Id. Courts have held that pre-verdict interest is not recoverable in personal injury actions or on punitive damages.

In federal court, where there is diversity jurisdiction the federal courts have held that state law governs the award of prejudgment interest. Post-judgment interest, however, is determined under federal law. Courts have explained the difference as follows: "Unlike pre-judgment interest, which 'forms part of the actual amount of a judgment on a claim,' post-judgment interest 'serves to reimburse the claimant for not having received the money in hand on that day.'"

Some parties in arbitration have argued that New York's CPLR only applies to court actions in the state, and not to arbitrations in the state. This argument may be persuasive as the CPLR states that the rules "shall govern the procedure in civil judicial proceedings in all courts of the state and before all judges, except where the procedure is regulated by inconsistent statute."

If the situs of the arbitration or choice of law in the parties' agreement is outside of the United States, it is crucial that the parties and their counsel understand how that jurisdiction views pre-award interest.

Most countries permit pre-award interest and have statutes that set the rate or allow the parties to modify the rate by agreement. In Ontario, Canada, for example, the law provides a schedule of pre-judgment interest rates by quarter for each year from October 1989 to the present. Some countries, such as Qatar, Oman, and North Yemen, prohibit pre-award interest because of their religious beliefs.

Interest based on claims in dispute

The arbitrators' determination as the rate at which pre-award interest is calculated may depend on the claims in dispute.

In a collection case, the pre-award interest may be calculated based on the rate at which the debtor borrowed from the creditor. The rate also may be tied to prime or LIBOR plus a premium, for example.

In a case brought by an investor against a broker-dealer involving unauthorized securities trading and suitability claims, an arbitrator may deny pre-award interest but instead use the rate of return applicable to a suitable investment during a particular period to determine damages. For instance, if the investor was conservative and should have invested only in sovereign bonds, then an arbitration panel may calculate pre-award interest based on an index of sovereign bonds during the relevant period of time. This method of calculation is frequently called the "properly managed account" method because it is tries to put the claimant in a position he or she would have been in had the account been invested in appropriate products. A claimant's lawyer will argue that the rate should be calculated on a compound basis since that is how interest is calculated on financial transactions and will therefore make the claimant whole.

Principles of equity

In practice, arbitrators have been notoriously known for "splitting the baby," meaning that if it is a close case and the equities are balanced on either side, the arbitrators may give the claimant around half of the relief sought. The same may be true with respect to the pre-award interest rate.


These factors are merely a guide for an arbitration panel. Arbitrators may rely on any one of these factors in determining pre-award interest and not one factor is dispositive. Since most arbitration awards are not explained, it is hard to ascertain the exact reasons why panels arrive at their method of pre-award interest calculation. In the end, most arbitrators decide pre-award interest based on what is fair and equitable. We do know, however, that courts are extremely hesitant to set aside such awards and do so only on very rare occasions. This is precisely why it is important to fully understand your pre-award interest liability at the very outset of the arbitration.

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