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CHAPTER 18. PAYMENT OF INTEREST

     In the modern world, interest generally acts as compensation for the loss of use of money. The importance of this loss, however, must not be understated. In certain disputed international transactions, involving parties from countries with high interest rates, the interest awarded to a debtor can substantially add to an award or even exceed the original amount sought. Thus, unless there is an equitable calculation of interest, the damages sought in an international proceeding could reflect only a fraction of a total debt a party in default may encounter. The determination of interest, therefore, is not an issue to be simply resolved after the establishment of liability, but a question that deserves the strictest scrutiny.[1]

18.1 INTRODUCTION

The modern institution of interest dates to Roman law, where it was a sum due from a debtor who delayed or defaulted in repayment of a loan. The measure of the amount due for the default or delay was the difference between the claimant's current position and what it would have been had the loan been timely and fully repaid. In other words, interest existed as a penalty due from a debtor who delayed or defaulted in repayment of a loan. The measure of interest due for the delay or default was id quod interest.[2]

In the modern world, interest generally acts as compensation for the loss of use of money:

However, as stated at the outset, the determination of interest is not an issue to be simply resolved after the establishment of liability, but a question that deserves the strictest scrutiny. The provisions on interest were the subject of great controversy and differences of opinion both in ULIS and at the Vienna Convention: "Art. 78 is new and was added at Vienna at the request largely of various European delegates who felt keenly that the convention would be seriously incomplete without some provision on an aggrieved party's entitlement to interest. However, there were sharp differences of opinion about the content of such a provision and art. 78 represents an uneasy compromise between those who were altogether opposed to an interest provision and those who wanted a statement, however bland, at least recognizing the right."[4] The purpose of Art. 78, as a result of its general language and the prior rejections of specific formulas for calculating damages, may be limited -- simply to authorizing interest damages and to leaving to the courts the task of formulating a method of determining the rate of interest.

Nonetheless, Art. 78 CISG clearly provides that if a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, it is confirmed in the two Principles. In other words, the general entitlement to interest is established under each of the three instruments (infra. 18.2). In addition, the corresponding provisions indicate that any interest awards will not affect damages recoveries (infra. 18.3). However, whether interest on damages may be available is controversial and will be discussed separately (infra. 18.4). With regard to the calculation of interest, two aspects are involved: the period for accrual and applicable rate of interest. According to the prevailing view, interest accrues from the time when payment is due to the time of payment (infra. 18.5). However, Art. 78 CISG fails to stipulate how to determine what rate of interest to apply. Thus, it remains questionable in determining the applicable rate of interest, which seems to be appropriately resolved by referring to the similar approaches adopted both under the UNIDROIT Principles and the European Principles (infra. 18.6). Finally, it is to be noted that Art. 78 CISG does not apply to interest payments on interest and, thus, gives no right to compound interest; neither do the interest regulations under the two Principles take stand on the question of compound interest. One reason for this restriction is that compound interest, which in some national laws is subject to rules of public policy limiting compound interest with a view to protecting the non-performing party, does not appear to be widely accepted in international business transactions and therefore will not discussed in this Chapter.

18.2 GENERAL ENTITLEMENT TO INTEREST

Considering the commercial fact that the failure to receive funds is always a loss, for the very frequent case of delay in payment of money, most countries, either by statute or judicial decision, provide for the awarding of compensatory interest when a debtor has defaulted on a money payment. A few countries have laws that prohibit the payment of interest, primarily because it is inconsistent with their religious beliefs. Even in some of these countries, however, exceptions allow interest in certain commercial transactions.[5] On the other hand, the practice of allowing interest in international arbitration is generally recognized. Furthermore, there is no cogent reason for objecting to awarding interest in international law because of the absence of a settled rule as to the rate of interest or the date from which it begins to run. And it is usually the special reasons that are adduced by arbitrators in those cases in which interest is disallowed --- for instance, if the claimants are guilty of delay in the prosecution of their claim, or if the award of interest is expressly excluded by the arbitration convention.[6]

Under the Convention, two specific references to interest are contained respectively in Arts. 78 and 84(1). Art. 78 provides that: "If a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under article 74." Art. 84(1) further states: "if the seller is bound to refund the price, he must also pay interest on it, from the date on which the price was paid." While Art. 84(1) refers solely to interest that can be collected by the buyer on the price (a liquidated amount), Art. 78 refers to interest that can be collected by the seller or the buyer and to interest on the price or any other sum that is in arrears. Under the UNIDROIT Principles, Art. 7.4.9 reaffirms the widely accepted rule according to which the harm resulting from delay in the payment of a sum of money is subject to a special regime, and Art. 7.4.9(1) provides in part that "[i]f a party does not pay a sum of money when it falls due the aggrieved party is entitled to interest upon that sum [...]". Thus, interest is payable whenever the delay in payment is attributable to the non-performing party, without any need for the aggrieved party to give notice of the default.[7] Similarly, PECL Art. 9:508 provides for interest and damages on failure to pay money and Art. 9:508(1) reads in part: "If payment of a sum of money is delayed, the aggrieved party is entitled to interest on that sum [...]".

These regulations make it clear that interest is to be paid. It is also clear that interest can be recovered with or without demonstration of actual damages. Moreover, from CISG Art. 74, UPICC Arts. 7.4.1, 7.4.2 or PECL Art. 9:502, it is clear that breach of contract damages cover the loss suffered by the party as a foreseen or foreseeable consequence of the breach, including lost profits. Thus, in general, there is no problem in awarding interest under the heading of damages.[8] Indeed, it is "a long-standing practice of international arbitrators" to consider the interest claim as part of the general claim for damages.[9] Moreover, the reference in CISG Art. 78 to "any ... sum ... in arrears" intimates that parties may seek interest in a broad spectrum of situations. However, it is said that interest as part of damages must be distinguished from legal interest. This is because in many countries legal interest rates are very low, and are independent from market developments.[10] Therefore, under the CISG, interest is addressed by Art. 78 while damages are governed by Art. 74. Thus, the CISG takes the position of those countries in which interest is not necessarily a component of damages when Art. 78 states that interest is recoverable "without prejudice to any claim for damages recoverable under Article 74". Similar approaches are adopted under the two Principles by providing separate rules for damages and interest (although generally grouped under the same heading "Damages"). "The purpose of this provision is to make a distinction between interest and damages and to give compensation for the financial loss due to the mere fact that delay in payment has a financial cost" and "to prevent the debtor from taking advantage of the funds withheld."[11]

In this respect, one of the main ideas of Art. 78 CISG is the general entitlement to interest which is rather far-reaching in substance. In the view of Enderlein & Maskow, the entitlement to interest under the CISG is characterized above all by two features: its normativity and its absoluteness, and the absoluteness means that the impediments under Art. 79 (force majeure) do not free from the obligation to pay interest. "A point in favour of this is that the entitlement to interest is not mentioned in Article 79, paragraph 5, but could be explained with the genesis of the Convention. We believe, however, that the economic background is also justification for such a solution. The party who does not pay a debt that is due, disposes of the sum of money required for it and/or does not have to procure it. He thus has an advantage vis-à-vis the other party which is compensated by the entitlement to interest of that party. This applies, in particular, to restrictions in the transfer of currency, often cited as an example, which shall not have the effect of a reason for exemption here."[12] Flambouras also holds the absoluteness of interest as: It is accepted that interest is owed even if the delay in the payment of price (or any other monetary obligation in general) is due to a force majeure event, since payment of interest is one of the rights that are referred to in CISG Art. 79(5).[13]

Indeed, UPICC Art. 7.4.9(1) expressly states in part that "the aggrieved party is entitled to interest [...] whether or not the non-payment is excused". Furthermore, the force majeure provision of the UNIDROIT Principles clearly provides: "Nothing in this article prevents a party from exercising a right to [...] request interest on money due." (UPICC Art. 7.1.7(4)). However, the Official Comment points out that: "If the delay is the consequence of force majeure (e.g. the non-performing party is prevented from obtaining the sum due by reason of the introduction of new exchange control regulations), interest will still be due not as damages but as compensation for the enrichment of the debtor as a result of the non-payment as the debtor continues to receive interest on the sum which it is prevented from paying."[14] On the other hand, although in general, there is no problem in awarding interest under the heading of damages, it does not necessarily follow that the obligation to pay interest may be always classified as damages. This is because that (a) the three instruments clearly distinguishes between interest payment obligation and damages and (b) the obligation to pay interest commences where payment has been delayed even if the creditor of the payment obligation has not suffered any damage from such delay and the debtor is not liable.[15] The Official Comment on the PECL even states that: "Interest is not a species of ordinary damages. Therefore the general rules on damages do not apply. Interest is owed whether or not non-payment is excused under Article 8:108. Also, the aggrieved party is entitled to it without regard to any question whether it has taken reasonable steps to mitigate its loss."[16]

However, regulations on interest under CISG are at the same time very clear and very unsatisfactory. The interest issue in the CISG itself is very brief and perhaps vague. Art. 78 CISG "only sets forth the obligation to pay interest as a general rule" but it does not "set forth a time starting from which interests may be calculated" nor does it "stipulate the rate of interest or how the rate is to be determined by a tribunal in the absence of explicit guidance from the Convention."[17] Some court decisions have deemed it so vague, that in fact, it is seen as a gap. Nevertheless, interest is a remedy under the CISG.[18] As Schlechtriem states: "The present version of Article 78 is the result of a compromise reached at the Plenary session and based upon a proposal submitted by a working group. It conceives the obligation to pay interest as a general rule, so that a debtor still remains liable for interest payments even if his default is due to an impediment beyond his control and he is, therefore, not liable for damages under Article 79. On the other hand, the details of the obligation to pay interest - in particular, the amount - are governed by the applicable domestic law chosen by conflicts rules. Damage claims under CISG remain unaffected even if they exceed the relevant interest rate."[19]

In sum, this separation of interest from damages will allow a party to recover interest when there is no other evidence of damage suffered or when impediments under Art. 79 CISG (as well as UPICC Art. 7.1.7 and PECL 8:108) have excused the other party from being liable for damages.[20] Thus, the obligation to pay interest as a general rule is conceived under CISG Art. 78, UPICC Art. 7.4.9 and PECL Art. 9:508.

18.3 ADDITIONAL DAMAGES

As stated in the previous section, under the CISG neither the exemptions of Art. 79 nor other requirements necessary to invoke the right to damages apply to Art. 78. On the other hand, Art. 78 CISG gives the creditor a right to recover interest "without prejudice to any claim for damages recoverable under Article 74".

In other words, Arts. 78 and 74 of CISG allow claims for damages when a claimant incurs additional interest costs and when losses are incurred because capital is tied up in the transaction at issue. It is also noted that "Article 84(1) contains a provision corresponding to Article 78 for the case of the seller's obligation to refund the purchase price after avoidance of the contract. Although it is not explicitly stated, the creditor should also - on the basis of Article 7 in conjunction with Article 78 - be able to claim damages for a violation of the duty to refund the price and measure his damages from the time the refund was due and in the amount of his own credit costs."[21] This clarification that the entitlement to interest does not preclude claims for damages indicates that damage which exceeds interest can be claimed, hence interest can be counted towards the damages even when the two claims have different features.[22] If the requirements of Art. 74 are fulfilled, the creditor, thus, may claim the full interest under Art. 74 CISG. Art. 78 CISG, therefore, mainly becomes important if the requirements for a damage claim are not fulfilled.[23]

Anyway, while the provisions of Art. 78 do not mean much to many, on the other hand, others consider them to be useful since they enable the creditor to claim not only interest but also compensation under Art. 74, which is not possible in some countries. This approach is followed under the UNIDROIT Principles, where Art. 7.4.9(3) reads: "The aggrieved party is entitled to additional damages if the non-payment caused it a greater harm." Subject to this provision, interest is intended to compensate the harm normally sustained as a consequence of delay in payment of a sum of money. Such delay may however cause additional harm to the aggrieved party for which it may recover damages, always provided that it can prove the existence of such harm and that it meets the requirements of certainty and foreseeability.[24] Similarly, PECL Art. 9:508(2) provides that: "The aggrieved party may in addition recover damages for any further loss so far as these are recoverable under this Section." This provision makes it clear that the aggrieved party's remedy for non-payment or delay in payment is not limited to interest. It extends to additional and other loss recoverable within the limits laid down by the general provisions on damages (see Chapter 14). This might include, for example, loss of profit on a transaction which the aggrieved party would have concluded with a third party had the money been paid when due; a fall in the internal value of the money, through inflation, between the due date and the actual date of payment, so far as this fall is not compensated by interest under Art. 9:508(1).[25]

18.4 INTEREST ON DAMAGES

Another important aspect on interest is to clarify whether interest on damages can be claimed. As stated above, Art. 78 CISG grants the right to interest on the purchase price or "any other sum that is in arrears". It is questionable whether this language also extends to claims for damages. Case law on this issue is very rare since most published decisions in which interest has been sought seem to deal with actions for the purchase price. Legal scholars, on the other hand, seem to agree that one has a right to interest on damage claims under Art. 78 if the amount in question has been liquidated vis-à-vis the other party. In this context, however, the question arose among authors from the Anglo-American legal family whether other sums were only meant to be such which are already liquidated, for which interest could be claimed under that legal system, or sums that have not yet been specified.[26]

One could argue that the language of Art. 78 ("sum that is in arrears") indicates that a right to interest on damages only exists if the amount in question is liquidated at the time it becomes due. However, Thiele doesn't believe this textual argument is persuasive. Even if the amount of damages to be paid is not fixed yet, the claim for damages is still a claim for a "sum". In case of a breach of contract, the breaching party has to compensate the other party for the loss which that party has suffered. When it fails to do so, this "sum" may be considered as being "in arrears". Therefore, the textual interpretation may not be used as an argument against the application of Art. 78 to unliquidated damages. Thiele further submits that the pertinent question, thus, does not appear to be if Art. 78 applies to damages at all, but rather when damages can be considered as being "in arrears" under Art. 78. If one party breaches the contract, the other party is entitled to damages. Regardless of whether the exact amount of damages has been specified yet, the breaching party still owes compensation to the other party from the time of the breach. Accordingly, the breaching party should be prevented from retaining the benefit from the sum owed to the creditor from that time until payment. Similarly, had the breaching party not breached the contract, the other party would not have suffered any loss. The basis for this loss, however, accrues at the moment of the breach of contract when the initial loss occurs. Therefore, the aggrieved party is deprived of the use of the money from the moment of the loss, even though that amount has not been specified yet. Accordingly, the non-breaching party should be entitled to interest payments on the loss from the time of the breach.[27]

Damages under Art. 78, therefore, become due at the moment the contract is breached and the initial loss occurs. Consequently, Art. 78 applies not only to liquidated but also to unliquidated damages. Unfortunately, the Official Comment to PECL Art. 9:508 states that Art. 9:508(1) confers a general right to interest on primary contractual obligations to pay; the provision does not cover interest on secondary monetary obligations, such as damages or interest.[28] However, although takes no stand on the question of compound interest, UPICC Art. 7.4.10 clearly grants the right to interest on damages and gives further guidance by providing that: "Unless otherwise agreed, interest on damages for non-performance of non-monetary obligations accrues as from the time of non-performance."

UPICC Art. 7.4.10 determines the time from which interest on damages accrues in cases of non-performance of obligations other than monetary obligations. In such cases, at the time of non-performance the amount of damages will usually not yet have been assessed in monetary terms. The assessment will only be made after the occurrence of the harm, either by agreement between the parties or by the court. The present article fixes as the starting point for the accrual of interest the date of the occurrence of the harm. This solution is that best suited to international trade where it is not the practice for businesspersons to leave their money idle. In effect, the aggrieved party's assets are diminished as from the occurrence of the harm whereas the non-performing party, for as long as the damages are not paid, continues to enjoy the benefit of the interest on the sum which it will have to pay. It is only natural that this gain passes to the aggrieved party. However, when making the final assessment of the harm, regard is to be had to the fact that damages are awarded as from the date of the harm, so as to avoid double compensation, for instance when a currency depreciates in value.[29]

18.5 ACCRUAL OF INTEREST

When discussing above whether interest on damages is granted, the pertinent question appears to be rather the accrual of interest on damages. Without being able to enter into detail in respect of each concrete claim, I will examine below both the starting point and ending point for the accrual of interest from a general perspective.

As for the starting point, the significant condition in Art. 78 CISG is to be noted that the amount in question is "in arrears". "Although the language of Article 78 CISG expressly states this requirement only for 'any other sum', it likewise applies to the payment of the purchase price. In this context, Article 58 CISG determines the time of payment of the purchase price."[30] However, it is less clear when most of the other claims become due. In this respect, Enderlein & Maskow further submit that: "Without being able to enter into detail in respect of each concrete claim, we believe that in regard to claims for damages, reimbursement of expenses and reduction of the price, hence secondary claims which emerge only when primary obligations under the contract are breached, from the aspect of interest, one should proceed on the assumption that they become due when they have been liquidated vis-à-vis the other party and in the amount in which later they turn out to be justified. Another aspect is that they should have accrued at the time when they were charged and were not just expected in the future."[31]

In other words, all other claims become due when they arise. From the formulation that interest is to be paid on sums in arrears the conclusion can be drawn that interest is to be paid from the time when the respective sum is due. For lack of deviating agreements the becoming due is, in the event of price claims, determined by Art. 58.[32] Furthermore, Art. 84(1) CISG expressly stipulates that on a price to be refunded, interest must be paid from the date on which the price was paid. This rule proceeds on the assumption that the seller, within the period in which he has disposal over the price, has a benefit from it, at least in the form of interest, and, therefore, sets the date of the payment as the date from which on interest begins to run. This is the day when the payment is actually made according to the contractually or legally (Arts. 57 and 58) provided procedure; also in cases where the seller in individual cases had disposal of the means only later.[33]

As for the ending point, the obligation to pay interest ends with the time of payment which is relatively uncomplicated. The same rules apply for the payment of interest as for the payment of the principal claim. To the latter in turn Arts. 56, 57 and 58 should apply directly or by analogy. Since the payment in many cases is considered as effected only at a later date than that on which the debtor has caused it, a guess will have to be made as to the actual time of payment in calculating interest if the transfer of the principal claim and the interest is made simultaneously.[34] Similarly, under CISG Art. 84(1), interest runs until the demand for the restitution of the price lapses, in particular by performance or effective setting off.[35]

The position discussed above is convincingly supported by the two Principles: UPICC Art. 7.4.9(1) provides in part that "the aggrieved party is entitled to interest [...] from the time when payment is due to the time of payment"; the PECL adopts the same position by stating identically that "the aggrieved party is entitled to interest [...] from the time when payment is due to the time of payment".

18.6 RATE OF INTEREST

As stated above, CISG recognizes the duty to pay interest (Arts. 78, 84(1)), which exists under most legal systems and several international instruments such as the UPICC and the PECL. Contrary to all other instruments and statutes, CISG does not, however, fix a rate of interest because it proved impossible to agree upon a standard: the discount rate was thought to be inappropriate for measuring credit costs; nor could agreement be reached on whether the credit costs in the seller's or the buyer's country were to be selected.[36]

Since the amount of interest is not determined under CISG, this shortcoming is to be compensated above all by agreement between the parties.[37] A contract clause that clearly spells out the method for calculating the rate of interest and those scenarios in which interest may be included in a damages award should eliminate much of the uncertainty surrounding this provision.[38] When the parties have agreed the amount of interest, only in regard to specific claims for payment, e.g. delay in paying the price, it is in the view of Enderlein & Maskow recommendable, because of the difficulties in determining the amount of interest to apply this solution analogously to other financial claims. Hence, the agreements between the parties should, so to speak, serve as the general basis for taking a decision by analogy, insofar as there are no other clues.[39] However, where the parties have agreed nothing, it is to some extent complex on what basis the amount of interest under the CISG will have to be calculated.

Finding no clear guidance in CISG Arts. 78 and 84(1), many have referred to as a gap in the Convention with regard to which rate of interest judges and arbitrators should award to injured parties. However, in filling this gap in the Convention, one must above all ascertain whether the gap is considered lacuna intra legem, i.e., when the matter is outside the scope of the Convention, as opposed to a lacuna praeter legem, i.e., when the Convention applies to the issue but does not expressly resolve it.[40] Although a majority of scholars considers the question of determining the interest rate as being intra legem, or outside the scope of the Convention since it does not expressly fix a rate of interest and is therefore governed by the domestic law applicable to the sales contract, there is merit to the view of other authorities who consider the gap lacuna praeter legem, and believe that the question should be resolved within the Convention itself. Their thesis is that interest payment is itself not excluded from the Convention (matter governed by the Convention), but rather the method of accomplishing it is not expressly resolved. The present author holds the latter view, i.e. the question should be resolved within the Convention itself.

The text of Art. 7(2) is clear in that it requires, where a matter is governed by the Convention, that the text of the Convention and the principles on which it is based have priority over any reference to rules of law applicable by virtue of the conflicts provisions of private international law. Only if the resolution of the problem cannot be found in the text of the Convention or its general principles should one consult the domestic law applicable to the contract. Therefore, since it is beyond dispute that payment of interest is a matter governed by the Convention, judges and arbitrators in deciding on an applicable rate of interest in a decision should only refer to the applicable domestic law by virtue of the rules of private international law if there is an absence of general principles within the Convention to provide a solution. The first step in using the general principles of the CISG to fill a gap in the Convention is to determine what general principles, if any, are applicable. The Convention does not provide a list of these principles, nor does it indicate where any are to be found. However, it is said that close scrutiny of the underlying themes of the articles of the Convention provide a significant number of general principles with which one could fill the interest rate gap. They include principles derived from Arts. 74, 84, 55, 57, 75 and 76. In short, it is apparent that a number of general principles do exist which could assist one in the determination of an applicable rate of interest. Arbitrators and judges should feel free to select such principles in tailoring their interest awards for each factually sensitive situation. The general principles afford judges and arbitrators latitude to ensure that a fair and just award is reached without being constrained by national laws and procedures.[41]

Even though many solutions which differ greatly from each other can be found both in scholarly writing and judicial practice, there seems to be the tendency to apply the lex contractus, i.e., the law which would be applicable to the sales contract if it were not subject to the Convention. Thus, in respect of the formula to calculate the rate of interest, the interest rate of the country of the seller generally applies, at least where the rules of private international law of the forum are based upon criteria comparable to those set forth by the 1980 EEC Convention on the Law Applicable to Contractual Obligations. Absent a choice of law, this Convention makes applicable the law with which the contract has the closest connection, as already mentioned above. This is presumed to be the law where the party who is to effect the "characteristic performance"' has its habitual residence, and since the characteristic performance has to be effected by the seller, it is the interest rate of the country where the seller has its place of business which generally is applicable. Quid iuris, however, where the seller's law does prohibit the payment of interest? In this line of cases, the claim does not become unenforceable as suggested by several authors. It is here suggested, that Art. 78 remains enforceable even in this line of cases, but that in order to calculate the rate of interest recourse should be had to the level of interest generally applied in international commerce in the particular trade concerned.[42]

Alternatively, an ICC award,[43] which suggests that the interest gap should be answered by the general principles on which the CISG is based, as Art. 7(2) stipulates, derives its solution not from the text of the Convention but instead by referring to UNIDROIT Principle Art. 7.4.9 and PECL Art. 9:508 (ex Art. 4:507) as the general principles on which the CISG. Such an approach, however, creates possible distortions in the application of the Convention by resorting to the UNIDROIT Principles as a component of the general principles referenced in Art. 7(2). It is worth noting at this point, however, that the two Principles provide clear guidance as to the rate of interest after all. The weight of all current judicial authority is to the effect that it is inappropriate to use the UNIDROIT Principles as an aid to the interpretation of CISG Art. 78. However, there is arbitral authority to the effect that it is appropriate to so use the UNIDROIT Principles.[44] The present author believes that the European Principles may function to the same effect in this point.

UPICC Art. 7.4.9(2) provides that: "The rate of interest shall be the average bank short-term lending rate to prime borrowers prevailing for the currency of payment at the place for payment, or where no such rate exists at that place, then the same rate in the State of the currency of payment. In the absence of such a rate at either place the rate of interest shall be the appropriate rate fixed by the law of the State of the currency of payment." This Article fixes in the first instance as the rate of interest the average bank short-term lending rate to prime borrowers. This solution seems to be that best suited to the needs of international trade and most appropriate to ensure an adequate compensation of the harm sustained. The rate in question is the rate at which the aggrieved party will normally borrow the money which it has not received from the non-performing party. That normal rate is the average bank short-term lending rate to prime borrowers prevailing at the place for payment for the currency of payment. No such rate may however exist for the currency of payment at the place for payment. In such cases, reference is made in the first instance to the average prime rate in the State of the currency of payment. For instance, if a loan is made in pounds sterling payable at Tunis and there is no rate for loans in pounds on the Tunis financial market, reference will be made to the rate in the United Kingdom. In the absence of such a rate at either place, the rate of interest will be the "appropriate" rate fixed by the law of the State of the currency of payment. In most cases this will be the legal rate of interest and, as there may be more than one, that most appropriate for international transactions. If there is no legal rate of interest, the rate will be the most appropriate bank rate.[45]

This formula, although similar to the "joint proposal" raised at the Diplomatic Conference, is distinctly different. The main concern of the socialist and developing nation delegations was that by fixing the rate of interest in the seller's country, socialist and developing nations who used their foreign export earnings to pay for their imports would be disadvantaged. This occurred since they would normally have to resort to credit on foreign markets well above what they would be compensated for under their own interest rates. UNIDROIT Principle Art. 7.4.9 remedies this concern by fixing the applicable interest at a rate equal to the lending rate prevailing for the currency of payment at the place of payment. Thus, socialist and developing nations, that maintain foreign accounts to pay for their imports and must resort to credit on those markets if a party defaults on the payment of the purchase price, are assured that they will receive adequate protection and an equal return of interest. However, one problem could arise for nations that do not maintain foreign accounts for imports and require payment in their own States. These States would undoubtedly be duly compensated by a rate of interest fixed at the place of payment, i.e., their own State, but Art. 7.4.9 does not guard against a debtor's purposeful delay in payment so as to obtain cheap credit or accrue extra sums. Thus, if the UNIDROIT Principles are to be applied to fix an interest rate, judges and arbitrators must prevent buyers from taking advantage of such situations. By applying the general principle of "unjust enrichment" in Art. 84 in conjunction with Art. 7.4.9, the aggrieved party would be made whole and the party in bad faith disgorged of all unduly received benefits.[46]

In a more general manner, PECL Art. 9:508(1) reads in pertinent part that the applicable rate is "the average commercial bank short-term lending rate to prime borrowers prevailing for the contractual currency of payment at the place where payment is due". The rate of interest is fixed by reference to the average commercial bank short-term lending rate. This rate applies also in the case of a long delay of payment since the creditor at the due date cannot know how long the debtor will delay payment. Since interest rates differ, the lending rate for the currency of payment (Art. 7:108) at the due place of payment (Art. 7:101) has been selected because this is the best yardstick for assessing the creditor's loss. Unless otherwise agreed, interest is to be paid in the same currency and at the same place as the principal sum. The parties are free to exclude or modify para. (1) e.g. by fixing the rate of default interest and/or its currency in their contract.[47]

To conclude, it is to be noted that although the issue of applicable rate under the CISG has been examined very often not only in legal writing, but in many court decisions and several arbitral awards as well, it still creates difficulties. The absence of a specific formula to calculate the rate of interest on sums in arrears has led some courts as well as several legal writers to consider, as already mentioned above, the question of whether the lack of a formula fixing the rate of interest must be dealt with as a lacuna praeter legem or as a lacuna intra legem. This had necessarily to lead to diverging solutions, since under the CISG, the aforementioned kinds of gaps have to be dealt with differently. In particular, different solutions have been adopted in a number of courts. These different solutions can mainly be divided into two categories: those favoring the view that the rate of interest has to be calculated on the basis of the domestic law; and those holding that the issue de quo must be resolved by resorting to the "need to promote uniformity in the application" of the CISG and, thus, to the general principles of the Convention. On the other hand, it is to be noted that the rates of statutory interest and the methods of computing them vary considerably. It is therefore recommended that the parties insert in their contracts a clause that clearly spells out the method for calculating the rate of interest and those scenarios in which interest may be included in a damages award should eliminate much of the uncertainty surrounding this provision.

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FOOTNOTES: Chapter 18

* Chengwei, Liu. LL.M. of Law School of Renmin University of China, P.O. Box 9-01 No. 1 (International Law), Law School of Renmin University of China, 59 Zhongguancun Street, Beijing 100872, China. E-mail: Genes@263.net.

1. See Alan F. Zoccolillo, Jr. in "Determination of the Interest Rate under the 1980 United Nations Convention on Contracts for the International Sale of Goods: General Principles vs. National Law": 1 Vindobona Journal of International Commercial Law and Arbitration (1997); pp. 3-43. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/zoccolillo.html>.

2. Ibid.

3. See Gotanda, John Y. in "Awarding Interest in International Arbitration", 90 AJIL (1996); pp. 41-42. Available online at <http://tldb.uni-koeln.de/TLDB.html>; TLDB Document ID: 123400.

4. See Jacob S. Ziegel in "Report to the Uniform Law Conference of Canada on Convention on Contracts for the International Sale of Goods". Available online at <http://www.cisg.law.pace.edu/cisg/text/ziegel78.html>.

5. With regard to the awarding of interest, Gotanda submits that: The practice of awarding interest as an element of damages is well established among the countries in Europe. Countries in North and South America generally authorize the awarding of interest to compensate a party for the loss of the use of money. Like their European and North and South American counterparts, Asian countries, such as China, India, Japan and the Republic of Korea, generally allow interest to be paid when a debtor defaults on a money payment. Several countries do not allow interest as part of an arbitral award. Most of these countries are in the Middle East and Africa, and have legal systems based on Shari'a (Islamic law). The Shari'a is based on the teachings of the Koran, Islam's holy book, which expressly prohibits the taking of interest, or riba. Some Islamic countries, such as Egypt, have moved away from Shari'a toward more Western-style legal systems. In these countries, either the payment of interest is expressly permitted in certain circumstances or a similar fee is allowed as a "service" or as "administrative" costs. Other countries, such as Iran, have adopted fundamentalist Islamic law, which strictly adheres to the Shari'a principles, including the prohibition against the taking of interest. Even in Iran, however, there is a limited exception to this prohibition. (Supra. note 3, pp. 42-50.)

6. See Lauterpacht, Hersch, Private Law Sources and Analogies of International Law, New York, Toronto (1927); p. 145. TLDB Document ID: 104200.

7. See Comment 1 on UPICC Art. 7.4.9.

8. See Volker Behr in "The Sales Convention in Europe: From Problems in Drafting to Problems in Practice": 17 Journal of Law and Commerce (1998); p. 268. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/behr.html>.

9. See ICC Award No. 9333, 10 ICC Bull. No. 2, 1999, p. 103. TLDB Document ID: 209333.

10. Supra. note 8, p. 283. For instance, in Germany, the general rate of legal interest is 4% (Section 288 BGB), as compared to 5% when the parties are businessmen and interest arises from commercial transactions (Section 353 HGB). The situation is now, or at least until recently, not much better in some other European countries. Obviously, plaintiffs -- generally unpaid sellers -- want to recover interest at higher rates.

11. See Phanesh Koneru in "A General Review of Interest Issues Under the CISG Citing the Ruling in this Case and other CISG Cases": CISG Case Presentation (Oct. 12, 1997); p. 11. Available online at <http://cisgw3.law.pace.edu/cisg/wais/db/cases2/927585il.html>.

12. See Fritz Enderlein, Dietrich Maskow, International Sales Law: United Nations Convention on Contracts for the International Sale of Goods, Oceana Publication (1992); p. 311. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/enderlein.html>.

13. See Dionysios P. Flambouras in "The Doctrines of Impossibility of Performance and clausula rebus sic stantibus in the 1980 Vienna Convention on Contracts for the International Sale of Goods and the Principles of European Contract Law: A Comparative Analysis": 13 Pace International Law Review (Fall 2001); p. 282. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/flambouras1.html>.

14. Supra. note 7.

15. Supra. note 13.

16. See Comment and Notes to the PECL: Art. 9:508. Comment B. Available online at <http://www.cisg.law.pace.edu/cisg/text/peclcomp78.html>.

17. See Franco Ferrari in "Specific Topics of the CISG in the Light of Judicial Application and Scholarly Writing": 15 Journal of Law and Commerce (1995); pp. 1-126. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/2ferrari.html>.

18. See T.S. Twibell in "Implementation of the United Nations Convention on Contracts for the International Sale of Goods (CISG) under Shari'a Law: Will Article 78 of the CISG Be Enforced When the Forum Is an Islamic State?": 9 International Legal Perspectives (1997); p. 71. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/twibell.html>.

19. See Peter Schlechtriem in "Uniform Sales Law - The UN-Convention on Contracts for the International Sale of Goods", Published by Manz, Vienna: 1986, p. 100. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/schlechtriem-78.html>.

20. See Eric C. Schneider in "Measuring Damages under the CISG", available online at <http://www.cisg.law.pace.edu/cisg/text/cross/cross-74.html>.

21. Supra. note 19.

22. Supra. note 12, p. 315.

23. See Christian Thiele in "Interest on Damages and Rate of Interest Under Article 78 of the U.N. Convention on Contracts for the International Sale of Goods": 2 Vindobona Journal of International Commercial Law and Arbitration (1998); pp. 3-35. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/thiele.html>.

24. See Comment 3 on UPICC Art. 7.4.9.

25. Supra. note 16, Comment C.

26. Supra. note 12, p. 313.

27. Supra. note 23.

28. Supra. note 16.

29. See Comment on UPICC Art. 7.4.10.

30. Supra. note 23.

31. Supra. note 12, p. 314.

32. Supra. note 26.

33. Supra. note 12, p. 349.

34. Supra. note 12, p. 316.

35. Supra. note 33.

36. Supra. note 16, Note 1.

37. Supra. note 12, p. 312.

38. See Jeffrey S. Sutton in "Measuring Damages Under the United Nations Convention on the International Sale of Goods": 50 Ohio State Law Journal (1989); pp. 737-752. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/sutton.html>.

39. Supra. note 37.

40. See Franco Ferrari in "Uniform Application and Interest Rates Under the Vienna Sales Convention": 24 GA. J. Int'l & Comp. L.; p. 471. Indeed, the solutions to the same problem can widely differ from each other depending on whether they were perceived as gaps intra legem or praeter legem. Undoubtedly, the setting forth of a criterion to be used to decide whether a gap must be considered a lacuna intra legem or praeter legem would have favored the uniform application of the Convention. However, the CISG does not set forth any useful criterion to determine in concreto when a gap is to be considered as being a lacuna praeter legem as opposed to a lacuna intra legem. This will be evidenced by the different solutions proposed in relation to the issue of what formula should be used to calculate the rate of interest in international sales contracts. The absence of such guidance raises the question of whether the issue of determining the rate of interest has to be dealt with as a matter governed by the Convention, but not expressly settled in it (lacuna praeter legem), or as one excluded from the sphere of application of the Convention (lacuna intra legem). (See Franco Ferrari in "Uniform Application and Interest Rates Under the 1980 Vienna Sales Convention": Cornell Review of the Convention on Contracts for the International Sale of Goods (1995); pp. 3-19. Available online at <http://www.cisg.law.pace.edu/cisg/biblio/1ferrari.html>.)

41. Supra. note 1.

42. Supra. note 17.

43. ICC Arbitration Case No. 8128 of 1995. Available online at <http://www.cisg.law.pace.edu/cisg/wais/db/cases2/958128i1.html>.

44. See Albert H. Kritzer in "Editorial remarks on the manner in which the UNIDROIT Principles may be used to interpret or supplement CISG Article 78". Available online at <http://www.cisg.law.pace.edu/cisg/principles/uni78.html>. See e.g., Vienna Arbitration proceeding SCH-4318 of 14 June and Vienna Arbitration proceeding SCH-4366 of 14 June 1994.

45. See Comment 2 on UPICC Art. 7.4.9.

46. Supra. note 1.

47. Supra. note 16.

48. Supra. note 16, Notes 2, 3.