Title

VII.6 - Duty to pay interest

Content

No. VII.6 - Duty to pay interest

(a) If the parties have not agreed otherwise, the debtor, who does not pay a sum of money when it falls due has to pay to the creditor interest on that sum from the time when payment was due.

(b) The rate of interest is to be determined on the basis of the average bank short-term lending rate to commercial borrowers prevailing for the currency of payment at the place of payment. The average bank long-term lending rate to commercial borrowers may be applied in cases in which a significant amount of time has elapsed from the date of the breach or maturity date of the debt to the date of the award.

(c) If the creditor's actual costs of borrowing are higher, he may recover the costs which exceed the rate of interest determined pursuant to subsection (b) as damages pursuant to Principle VII.1 and Principle VII.2, provided that he has exercised reasonable efforts in securing competitively priced financing.

Commentary

1 A claim for interest on a sum of money can be qualified either as a damage claim, because the creditor has to borrow the money he does not receive from his debtor elsewhere and has to pay interest for this money, which constitutes his damage. Alternatively, a claim for interest can be characterized as a claim for restitution because the debtor, while withholding the money and investing it, is unjustifiably enriched because it would have been the right of the creditor to invest the sum owed to him or to use it for other purposes. From a functional perspective, the first approach is to be preferred because in business life, there is a general presumption that businesses work with bank credit for money they do not have or that is due to them but that they have not yet received. With this credit-oriented perspective derived from commercial reality, the view that the damage calculation for interest claims should rather be based on lost investment opportunities of the creditor (treasury bill rates or similar reference rates) is rejected.

2 Consequently, interest for sums in arrears are regularly awarded by international arbitral tribunals to compensate for the damage resulting from the fact that the creditor is deprived for a certain period of time of the use of and disposition over the sums to which he is entitled. Based on what has been stated above in para. 1, the damages must fully compensate the creditor for is actual costs of replacing the sum owed to him.

3 The interest rate must be reasonable and must be fixed taking into account all relevant circumstances, in particular all relevant contractual stipulations, the nature of the facts which have caused the damage, the interest rates in force on the markets for the relevant currency, the inflation rate of that currency and the time that has elapsed between the breach of contract leading to the damage claim or the maturity date of a claim not honored by the debtor and the time of the award. Given that the interest rate to be paid for a loan depends to a large extent on the term of the loan and increases with the term of the loan, it could be punitive to the creditor to assume that he would have loaned the substitute funds on a short term basis if the time until the award is rendered is significant. For these reasons and depending on the time that has elapsed between the moment of breach or maturity date of the debt and the time of the award, the reasonable rate would be the average short- or long-term bank lending rate to commercial borrowers for the currency of payment at the place of payment. This means that, in order to determine the proper interest rate, a tribunal would have to determine how much time has elapsed between the moment of breach or the maturity date and the date of the award and then assess what the longest-term loan in that period would have been.

4 The creditor may of course always prove that his costs for borrowing substitute funds were higher than the costs calculated pursuant to Subsection b) of the Principle. The creditor may, however, not shift the increased economic burden arising out of the fact that he did not pursue a reasonable search for competitive interest rates to his debtor. That would mean a violation of his duty to mitigate damages pursuant to Principle VII.4.

5 In light of the significance of the duty to pay interest under this Principle, the parties' agreement not to allow for a claim for interest must be clear and unequivocal.

References

Arbitral Awards

Ad Hoc-Award of July 23, 1981, YCA 1983, at 89, 94 et seq.Ad Hoc-Award of October 27, 1883, Owners of M/S Parthenia (Mssrs. Houlder Bros and Co.) v. The Executors of the Late Ralph FirbankAlabama Claims Arbitration 1872, in John Bassett Moore (ed.), History and Digest of the International Arbitrations to which the United States has been a Party, 1898Banque Arabe et Internationale D'Investissement (BAII) et al. v. The Inter-Arab Investment Guarantee Corporation (IAIGC), 11 Mealey's Int'l Arb. Rep., April 1996, at 1 et seq.CMS Gas Transmission Company v. The Argentine Republic, ICSID Case No. ARB/01/8, at: http://ita.law.uvic.ca/documents/cms.pdf, at p. 7 et seq.France v. Venezuela: Award of the President of the Swiss Confederation in the Case of Fabiani (30th Dec. 1896), in: Moore, John Bassett, History and Digest of the International Arbitrations to which the United States has been a Party, Washington 1898, Vol. V, at p. 4878ICC Award No. 12745, YCA 2010, at 40 et seq.ICC Award No. 14748, Clunet 2016, at 623 et seq.ICC Award No. 15913, Clunet 2015, 216 at seq.ICC Award No. 1930, YCA 2001, at 181 et seq.ICC Award No. 3226, Clunet 1980, at 959 et seq.ICC Award No. 5835, 10 ICC Bull. No. 2, 1999, at 33 et seq.ICC Award No. 6219, Clunet 1990, at 1047 et seq.ICC Award No. 6527 of 1991, YCA 1993, at 44 et seq.ICC Award No. 6653, Clunet 1993, at 1040 et seq.ICC Award No. 6962 of 1992, YCA 1994, at 184 et seq.ICC Award No. 7197, Clunet 1993, at 1028 et seq.ICC Award No. 7331, Clunet 1995, at 1001 et seq.ICC Award No. 7575, Clunet 2010, at 1378 et seq.ICC Award No. 8128, Clunet 1996, at 1024 et seq.ICC Award No. 8769, 10 ICC Bull. No. 2, 1999, at 75 et seq.ICC Award No. 8874, ICC Bull. 10/No. 2 (1999), at 82 et seq.ICC Award No. 8908, ICC Bull. 10/No. 2 (1999), at 83 et seq.ICC Award No. 9333, 10 ICC Bull. No. 2, 1999, at 102 et seq.ICC Final Award No. 11849, YCA 2006, at 148 et seq.ICSID Award, Asian Agricultural Products Ltd. v. The Republic of Sri Lanka, YCA 1991, at 106 et seq.ICSID Award, Maritime International Nominees Establishment (MINE) v. The Republic of Guinea, YCA 1989, at 82 et seq.ICSID Award, Southern Pacific Properties (Middle East) Ltd. v. Arab Republic of Egypt, YCA 1994, at 51 et seq. (also published in: ICSID Rev.-FILJ 1993, at 328 et seq.; ICSID Rep. 1995, at 189 et seq.; ILM 1993, at 933 et seq.; Clunet 1994, at 121 et seq.)Internationales Schiedsgericht der Bundeskammer der gewerblichen Wirtschaft in Österreich, SCH-4318 of June 15, 1994, RIW 1995, at 590 et seq.Internationales Schiedsgericht der Bundeskammer der gewerblichen Wirtschaft in Österreich, SCH-4366 of June 15, 1994, RIW 1995, at 590 et seq.Iran-US Claims Tribunal, McCollough & Company, Inc. v. Ministry Of Post, Telegraph and Telephone, 11 IRAN-U.S. C.T.R., at 3 et seq.Iran-US Claims Tribunal, Starrett Housing Corp. v. Iran, 16 IRAN-U.S. C.T.R., at 112 et seq.Iran-US Claims Tribunal, Sylvania Technical Systems, Inc. v. Iran, 8 IRAN-U.S. C.T.R., at 298 et seq.Norway v. United States of America (Norwegian Shipowner‘s Claims), Permanent Court of Arbitration, available at http://www.pca-cpa.org/upload/files/Norwegian%20Shipowners%20award%20only.pdf .PCA Case No. 2011-17, Guaracachi America & Rurelec vs. BoliviaPermanent Court of Arbitration, Case No. 95, of Januray 11, 1912 concerning Russian-Turkish War Claims, Digest of the Decisions of the Permanent Court of ArbitrationPermanent Court of Arbitration, Norway v. United States of America (Norwegian shipowner‘s claims), Permanent court of arbitration, www.pca-cpa.orgSCC Award of March 29, 2005, Petrobart Limited v. The Kyrgyz Republic, Arbitration No. 126/2003Sir Alexander Cockburn's dissenting opinion in the Alabama Claims Arbitration of September 14th, 1872, in: Papers Relating to the Treaty of Washington (1872), at 230 et seq.UNCITRAL Award of March 30, 2012, Dr. Carl A. Sax v. The City of St. Petersburg

Arbitration Rules

London Court of International Arbitration (LCIA) Rules

Court Decisions

LG Hamburg, IPRax 1991, at 400 et seq.

Doctrine

Ali, Osama Mohamed, Making sense of Islamic banking, IFLR, June 1992, at 30 et seq.Arnaldez, Jean-Jacques, note to ICC Award No. 6653, Clunet 1993, at 1047 et seq.Asam, Herbert, UN-Kaufrechtsübereinkommen im deutsch-italienischen Rechtsverkehr, RIW 1989, at 942 et seq.Berger, Klaus Peter, Der Zinsanspruch im internationalen Wirtschaftsrecht, 61 RabelsZ 1997, at 313 et seq.Berger, Klaus Peter, International Economic Arbitration, Deventer, Boston 1993Bianca, C. Massimo/ Bonell, Michael Joachim, Commentary On The International Sales Law, Art. 7, Milan 1987Bishop, R. Doak, International Arbitration of Petroleum Disputes: The Development of a Lex Petrolea, YCA 1998, at 1131 et seq.Cerina, Paolo, Interest as Damages in International Commercial Arbitration, Am.Rev.Int'l Arb. 1993, at 255 et seq.Dasser, Felix, Internationale Schiedsgerichte und Lex Mercatoria, Zürich 1989Derains, Bertrand, note to ICC Award No. 14748, Clunet 2016, at 627 et seq.Domingo, Ortega, Rodriguez-Antolin, Zambrana, Principios de Derecho Global, Navarra, 2006Drobnig, Ulrich, General Principles of European Contract Law, in: Volken/ Sarcevic (eds.), International Sale of Goods - Dubrovnik Lectures, New York, London, Rome 1986, at 305 et seq.Ferrari, Franco, Das Verhältnis zwischen den Unidroit-Grundsätzen und den allgemeinen Grundsätzen internationaler Einheitsprivatrechtskonventionen, JZ 1998, at 9 et seq.Ferrari, Franco, The CISG's Interpretative Goals, Its Interpretative Method and Its General Principles in Case Law (Part II), IHR 5/2013, at 181 et seq.Flessner, Axel, Geldersatz bei Zahlungsverzug- Eine Skizze zum europäischen Vertragsrecht, in: J.-F. Gerkens, H. Peter, P. Trenk- Hinterberger, R. Vigneron (Hrsg.), Mélanges Fritz Sturm, Éditions Juridiques de l‘Université de Liége, 1999Fouchard Gaillard Goldman on International Commercial Arbitration (edited by Emmanuel Gaillard and John Savage) The Hague 1999Fouchard, Philippe, L'Arbitrage Commercial International, Paris 1965Gotanda, John Y., Awarding Interest in International Arbitration, 90 AJIL 1996, at 40 et seq.Gotanda, John Yukio, Damages in Private International Law, 326 (2007) Recueil des cours 83Gotanda, John Yukio, Supplemental Damages in Private International Law, Kluwer Law International, The Hague 1998Gotanda, John Yukio, Supplemental damages in private international law: the awarding of interest, attorneys' fees and costs, punitive damages and damages in foreign currency examined in the comparative and international context, The Hague / Boston 1998Guggenheim, Paul, Lehrbuch des Völkerrechts, Basel 1948Hascher, Dominique, note to ICC Award No. 7197, Clunet 1993, at 1037 et seq.Hascher, Dominique, note to ICC Award No. 7331, Clunet 1995, at 1006 et seq.Hascher, Dominique, note to ICC Award No. 8128, Clunet 1996, at 1028 et seq.Heuzé, Vincent, La Vente Internationale de Marchandises, Paris 1992Hobe, Stephan, Enteignung zu Zwecken des Umweltschutzes, Iprax 02, 249Honnold, John, Uniform Law for International Sales, Deventer, Antwerp, Boston, Frankfurt a.M. 1987Horn, Norbert, Zinsforderung und Zinsverbot im Kanonischen-Islamischen und Deutschen Recht - Eine rechtsvergleichende Problemskizze, in: Festschrift Lange, Stuttgart 1991, at 769 et seq.Hutchison, Dale (Ed.) / Pretorius, Chris (Ed.),  The Law of Contract in South Africa, Oxford University Press Southern Africa, 2018Jenks, Edward et al., A Digest of English Civil Law, London, Sydney, Calcutta, Winnipeg, Wellington 1921.Karrer, Pierre, Transnational Law of Interest in International Arbitration, in: Gaillard (ed.), Transnational Rules in International Commercial Arbitration (ICC Publ Nr. 480,4), Paris 1993, at 223 et seq.Krüger, Hilmar, Zum islamischen Zinsverbot in Vergangenheit und Gegenwart, Wien 2004Lange, Hermann, Schadensersatz und Privatstrafe in der Mittelalterlichen Rechtstheorie, Münster, Cologne 1955Langen, Eugen, Transnationales Recht, Heidelberg 1981.Lauterpacht, Hersch, Private Law Sources and Analogies of International Law, New York, Toronto 1927Lew, Julian D.M., Interest on Money Awards in International Arbitration, in: Making Commercial Law, Essays in Honour of Roy Goode, Oxford 1997, at 543 et seq.Magnus, Ulrich, Die allgemeinen Grundsätze im UN-Kaufrecht, 59 RabelsZ 1995, at 469 et seq.Neumayer, Karl H., Offene Fragen zur Anwendung des Abkommens der Vereinten Nationen über den internationalen Warenkauf, RIW 1994, at 99 et seq.Neumayer, Karl H./Ming, Catherine, Convention de Vienne sur les Contrats de Vente Internationale de Marchandises, Commentaire, Lausanne 1993Ortscheidt, Jérôme, La réparation du dommage dans l'arbitrage commercial international, Paris 2001.Reinhart, Gert, Fälligkeitszinsen und UN-Kaufrecht, 11 IPRax 1991, at 376 et seq.Ripert, Georges, Les Règles du Droit Civil Applicables aux Rapports Internationaux (Contribution à l'Etude des Principes Généraux du Droit Visés au Statut de la Cour Permanente de Justice Internationale), 44 Rec.Cours 1933-II, at 569 et seq.Schlechtriem, Peter (ed.), English Commentary on the UN Convention on the International Sale of Goods (CISG), Comment on Art. 78 by Hans Hermann Eberstein and Klaus Bacher, Oxford 1998Schlechtriem, Peter, Einheitliches Kaufrecht - wissenschaftliches Modell oder praxisnahe Regelung, Heidelberg, Karlsruhe 1978Schönle, Herbert, Intérêts Moratoires, Intérêts Compensatoires et Dommages-Intérêts de Retard en Arbitrage International, in: Festschrift Pierre Lalive, Basel, Frankfurt a.M. 1993, at 649 et seq.Seckelmann, Robert, Zinsrecht, Baden-Baden 1992Secomb, A Uniform, Three-Step Approach to Interest Rates in International Arbitration, in: Kröll et al. (eds.), International Arbitration and International Commercial Law: Synergy, Convergence and Evolution - Liber Amicorum Eric Bergsten, pp. 431 et seq.Smit, Hans, Substance and Procedure in International Arbitration: The Development of a New Legal Order, 65 Tul.L.Rev. 1991, at 1309 et seq.Treitel, G.H., Remedies for Breach of Contract, in: David/ von Mehren (eds.), International Encyclopedia of Comparative Law, Bd. VII, Tübingen 1976, at 121 et seq.van Houtte, Hans, Les Principes UNIDROIT et lArbitrage Commercial International, in: ICC (ed.), The UNIDROIT Principles for International Commercial Contracts - A New Lex Mercatoria?, Paris 1995, at 181 et seq.Wöss, Rivera, Spiller, Dellepiane, Damages in International Arbitration Under Complex Long-Term Contracts, Oxford 2014Wetter, J.Gillis, Interest as an Element of Damages in the Arbitral Process, 5 IFLR, Dec. 1986, at 20 et seq.Whose Arbitration is it anyway: The parties or the Arbitration Tribunal - an interesting question?, in: Newman, Lawrence W. / Hill, Richard D. (ed.), The Leading ArbitratorsWühler, Norbert, Application of General Principles of Law, in van den Berg (ed.), Planning efficient Arbitration Proceedings - The Law Applicable in International Arbitration, p. 553 et seq.

International Legislation

Art. 13 Energy Charter TreatyFontaine, Marcel, OHADA Uniform Act On Contract Law Preliminary DraftOrganization for the Harmonization of Business Law in Africa (OHADA), Uniform act relating to general commercial lawUnited Nations Convention on Contracts for the International Sale of Goods (CISG)

Miscellaneous

Message of the Swiss Bundesrat concerning the Vienna Sales Convention, of January 11, 1989, Bbl. 1989, No. 235.3Report and Recommendations Made by the Panel of the Commissioners Concerning the First Instalment of Claims for Departure From Iraq or Kuwait (Category "A" Claims), S/AC.26/1994/2, 21 October 1994

Miscellaneous Legislation

United Nations, Responsibility of States for Internationally Wrongful Acts, 2001.

Model Laws

A Contract Code: Drawn up on Behalf of the English Law CommissionPrinciples of Latin American Contract Law (PLACL)Uniform Law on the International Sale of Goods

Model Terms

FIDIC 1999 Conditions of Contract for Construction (Red, Yellow, Silver)Orgalime General Conditions for the Supply of Mechanical, Electrical and Electronic Products; Brussels, August 2000

National Legislation

Contract Law of the People's Republic of ChinaEthiopian Civil CodeIndonesian Civil Code (excerpts)Japanese Civil Code 2020
Act No. 89 of 1896
Amendment of Act No. 44 of 2017Louisiana Civil Code 2015Philippines Republic Act 386 (Civil Code)Russian Civil CodeScottish Arbitration Bill 2009

Principles / Restatements

Principles of European Contract Law - PECLThe Most Recent Legal Principles Adopted by the Arbitral Tribunals under the Auspices of the Cairo Centre, CRCICA-Newsletter, Jan. 1997, page 2 et seq.UNIDROIT Principles of International Commercial Contracts 2016

Contract Clauses

1. Contractual Clause Foreseeing Payment of Interest following an Event of DefaultEmployment Contract

In the event a default is not cured within the grace period, the Administrator may direct the Trustee to report the outstanding principal balance of the loan and accrued interest thereon as a taxable distribution to the Participant.


2000Sales & Purchase ContractLate Payment

If either Party owing an amount to the other Party fails to pay in accordance with this Contract, that Party shall pay interest on any overdue amount at a rate equal to the lesser of: (i) the posted prime rate in The Wall Street Journal as listed under "Money Rates", plus two percent (2%), or (ii) the maximum rate allowed by law, from the due date until such principal amount and interest thereon are paid.


2000Claims, Pre-Estimated Damages

In the case of any delay in payment hereunder respectively, the Buyer or the Seller, shall pay to the other Party interest for each day of delay at LIBOR for 1 month deposits in USD plus 1% (one per cent), calculated on the basis of 360 day-year.


2002Payment of the Purchase Price

Without prejudice to any other contractual or statutory rights and remedies of the sellers arising from a default on the part of the Purchaser, if the Purchase Price or part of the Purchase Price is not credited to the accounts (...) interest at a rate of 17,5% (Default Interest) shall become due and payable by the Purchaser on any outstanding amounts of the Purchase Price (...) whereby such Default Interest shall in each case be calculated daily on the basis of a year of 360 days and the actual number of days elapsed.


2004Invoicing and Settlement of Costs

(...) each Party agrees to pay all of the Service Costs on or before {X} days after the date on which an invoice for Service Costs is delivered to such Party by check or wire transfer of immediately available funds; provided that the Parties may agree to a net amount owed by one Party to the other. If a Party fails to pay any monthly payment on or before the Payment Date, such Party shall be obligated to pay, in addition to the amount due pursuant to such invoice, interest on such amount at the prime rate published in The Wall Street Journal (as of the applicable Payment Date) plus {X} percent per annum, compounded monthly from the relevant Payment Date through the date of payment (...)


2007Services ContractValidity Period and Breach of Agreement

Party B should timely make bottom-line payments to Party A for the exclusive advertisement agency fee. In the case of a late payment, for the delay per day, Party B should pay a late fee at 0.1% of the amount of the late monthly payment.


2006Accounts Receivable AgreementDefault Rate

If any Obligation is not paid when due, the amount of such unpaid Obligation bears interest at the Applicable Rate plus five percent until the earlier of (a) payment in good funds or (b) entry of a final judgment when the principal amount of any money judgment will accrue interest at the highest rate allowed by law.


2003Loan ContractDefault Rate; Usury

During any period in which an Event of Default has occurred and is continuing, Company shall pay interest on the unpaid principal balance hereof at a rate per annum equal to the rate otherwise applicable hereunder plus two percent (2%). If any interest is paid on this Bridge Note is deemed to be in excess of the then legal maximum rate, then that portion of the interest payment representing an amount in excess of the then legal maximum rate shall be deemed a payment of principal and applied against the principal of this Bridge Note.


2002Interest after Default

Upon the occurrence of any Event of Default, including, but not limited to, (i) any material adverse change in the business assets, affairs, prospects or financial condition of Borrower or any guarantor, (ii) failing to provide financial statements, copies of Federal tax returns and other information relating to the financial condition, properties and affairs of the Borrower, any guarantor or grantor, as provided for in this Note and/or any Related Document, or (iii) failure to pay upon final maturity, Lender may, at Lender's option and if permitted by applicable law, a) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note, including any increased rate, and/or b), increase the interest rate on this Note by X percentage points (the "Default Rate Margin"). The Default Rate Margin shall also apply to each succeeding interest rate change that would have applied had there been no Event of Default. However, in no event will the interest rate exceed the maximum interest rate allowed under applicable law.


20122. Interest Due Following Late PaymentEmployment ContractInterest on Late Payment

In addition to its other liabilities under this deed the Surety will pay to the Landlord on demand interest at the rate of 4% above the base rate from time to time of Lloyds TSB Bank Plc compounded with quarterly rests (before and after judgment) on any amount payable by the Surety pursuant to this deed for the period from the date when the payment became due until the date on which it is paid.


2009Sales & Purchase ContractLate Payment

If either Party owing an amount to the other Party fails to pay in accordance with this Contract, that Party shall pay interest on any overdue amount at a rate equal to the lesser of: (i) the posted prime rate in The Wall Street Journal as listed under "Money Rates", plus two percent (2%), or (ii) the maximum rate allowed by law, from the due date until such principal amount and interest thereon are paid.


2000