Awarding Compound Interest in International Arbitration

Few, if any, international arbitrators choose to tackle the equation P[n] = P[0.](1 i/m) 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.