In the recent judgment of National Housing Trust v YP Seaton & Associates Co Ltd ( UKPC 43), the Judicial Committee of the Privy Council (the "Privy Council") found that an arbitrator's award of compound interest should be set aside and remitted to the arbitrator because the arbitrator had no power under the law of the seat (Jamaica) to award compound interest. This judgment illustrates the importance of considering, including at the contract drafting stage, whether the law of the seat permits compound interest in the absence of party agreement.
The dispute arose out of a joint venture between the National Housing Trust ("Trust") – a statutory body responsible for increasing and enhancing Jamaican housing stock – and YP Seaton & Associates Co Ltd ("YPSA") – an engineering, contractor and developer services company owning the land to be developed. The subject of the joint venture was the construction and development of housing units and related facilities in Jamaica.
The dispute concerned the joint venture's project accounts, and was settled in part by a compromise agreement (the "Compromise Agreement"). In April 2004, the parties referred two outstanding items to arbitration before a sole arbitrator, Maurice J. Stoppi, a chartered and quantity surveyor: (i) the interest portion owed to Trust in respect of the 18 January 1999 statement (which had a value of J$27,255,919.92), and (ii) the contractor's profit owed to YPSA, which the parties agreed should be 14.8% of the value of the works.
The First Award
In the arbitration, Mr Stoppi ordered, in his first award dated 12 July 2005 (the "First Award"), that Trust pay YPSA J$24,325,000 as contractor's profit, being 14.8% of the total value of the works. He awarded no interest because he said none had been claimed or pleaded by YPSA. Trust made the payment of J$24,325,000 to YPSA in early December 2005, within six months of the First Award, as agreed in the Compromise Agreement.
In January 2006, YPSA applied to the Supreme Court of Jamaica to have the matter remitted to the arbitrator so that he could re-consider the question of interest. YPSA's position was that the arbitrator had been wrong to say that YPSA had not claimed interest because YPSA's points of claim claimed interest at 12% annually compounded monthly from completion until payment. This rate was said to be "the same rate as that which would be paid by [YPSA] to the Trust on any sum show to be owing by [YPSA] to the Trust." On 22 January 2007, McIntosh J remitted the matter to the arbitrator for him "to consider and arbitrate on the issue of interest on the profit awarded."
The Supplementary Award
The parties made further written and oral submissions to the arbitrator on the issue of interest, if any, owed to YPSA on the profit awarded. Trust argued, among other things, that an arbitrator does not have power either at general law or under statute to award compound interest. YPSA in response submitted that the loan agreement envisaged that Trust would pay interest at the lending rates of YPSA's bank.
By a supplementary award dated 11 May 2007, the arbitrator awarded J$214,512,232.76 to YPSA as compound interest for the period 30 October 1997 to January 2007 on the profits awarded (the "Supplementary Award").
In response, Trust applied to the Supreme Court of Jamaica to have the Supplementary Award set aside and the matter remitted to the arbitrator “to reconsider and arbitrate on the issue of interest in accordance with the laws of Jamaica”.
On 11 September 2009, Hibbert J granted Trust's applications. He found that the arbitrator had no power to award compound interest in this case. Because Hibbert J found that in this regard the arbitrator had acted in excess of his jurisdiction and misconducted himself, the Supplementary Award was therefore set aside and the matter remitted to the arbitrator for reconsideration of the rate of simple interest to be applied and the starting date.
YPSA's appeal to the Court of Appeal of Jamaica
YPSA then appealed to the Court of Appeal of Jamaica (the "Court of Appeal"), which allowed the appeal. The Court of Appeal accepted YPSA's alternative argument that the arbitrator awarded compound interest not on the basis of any right by contract but rather by relying on a general common law power to award damages. The Court of Appeal concluded that the arbitrator's jurisdiction to make an award of compound interest was "in accordance with the general law applicable to the dispute submitted to him. He was required to utilise his experience and expertise and to exercise his discretion to do what was just and equitable in resolving the dispute between the parties." The Court of Appeal also found that there was neither an error of law nor any misconduct by the arbitrator in the Supplementary Award.
Trust's appeal to the Privy Council
Trust then appealed to the Privy Council to consider the arbitrator's award of compound interest, seeking to have the Court of Appeal's decision overturned and Hibbert J's decision restored. The Privy Council allowed the appeal, finding that the Supplementary Award should be set aside and remitted to the arbitrator as originally ordered by Hibbert J.
On the issue of compound interest, the Privy Council found that the Court of Appeal was wrong to consider the arbitrator's award of compound interest as being based on a substantive legal right to interest, by way of some contractual right under the loan agreement or a claim in damages for breach of contract or in equity. The Privy Council further found that the Court of Appeal was wrong in thinking that it was open to the arbitrator in the circumstances of this case to make an award on any such basis.
The Privy Council considered the question of whether arbitrators have, as the arbitrator reasoned, a general discretion to award compound interest or if their power is (absent contrary agreement) limited to awarding simple interest. In this regard, the Privy Council found that both Chandris v Isbrandtsen Moller Co Inc  2 All ER 618 and the majority decision in Techno-Impex v Gebr van Weelde Scheepvartkantoor BV  2 All ER 669 remained good authority such that arbitrators have no general discretion to award compound interest, and should therefore proceed by analogy to the law of the seat's rules concerning the power to award interest. Because section 3 of The Law Reform (Miscellaneous Provisions) Act 1955 of Jamaica limits an award of interest in these circumstances to simple interest, by awarding compound interest in the Supplemental Award the arbitrator exceeded his jurisdiction and the powers impliedly conferred on him by the parties through the Compromise Agreement and the terms of reference.
It bears mentioning that Lord Toulson gave a dissenting opinion. On the issue of compound interest, Lord Toulson focussed on the fact that the arbitrator awarded compounded interest because the arbitrator had regarded such interest "as the measure of what YPSA had lost through non-payment of the developers' profit, because he said in his reasons (to which I have referred in para 77) that not to have awarded the sum which he did (ie compound interest) would not have restored YPSA to the same position as if the breach had not occurred." Lord Toulson thus agreed with the Court of Appeal that there was no sufficient basis for the court to disturb the award.
This case confirms the position that whether a tribunal can award compound interest is first and foremost a matter of the parties' agreement, and in the absence of such agreement, is then a function of the law of the seat of the arbitration. Section 49 of the English Arbitration Act 1996 provides that, in the absence of any agreement by the parties to the contrary, an arbitral tribunal has jurisdiction to award simple or compound interest as it considers is appropriate. Thus, tribunals in English-seated arbitrations, absent party agreement otherwise, will enjoy the discretion to award simple or compound interest as they see fit. However, where the parties to an arbitration have not made an express agreement regarding interest and the arbitration is seated outside of England & Wales, practitioners would be well-advised to consider the law of the seat of the arbitration in order to determine the extent to which a party may claim, and an arbitrator can award, compound interest.
For further information, please contact Chris Parker, Partner, Jennifer Hartzler, Associate or your usual Herbert Smith Freehills contact.