In a recent LOF arbitration, in which HFW acted for the contractors, the following question arose: what is the correct interest rate to apply to sums awarded by way of salvage remuneration under Lloyds Standard Salvage Arbitration (LSSA) Clause 8.1? The Arbitrator held that interest should be awarded at a rate that reflects the contractor’s own currency of account. This has been upheld on recent appeal.
Under LSSA Clause 8.1, the interest rate applicable to sums awarded by way of salvage remuneration is left to the discretion of the Arbitrator1. Where the contractor operates in more than one currency, traditionally, the practice of Lloyd’s Arbitrators has been to award interest at a rate that reflects the contractor’s commercial operations, rather than the currency of the award (i.e. US dollars). The logic behind this argument is that the contractor would have had to borrow at a foreign commercial interest rate and therefore the compensation awarded should reflect the rate at which the contractor has had to borrow while it has been out of pocket pending the award.
Notwithstanding the above, in this arbitration, cargo interests attempted to argue that the correct interest rate to apply is the rate of the currency of the award. The contractors, on the other hand, argued that the Arbitrator should follow tradition and award a blended interest rate reflecting their commercial operations.
The Arbitrator was not persuaded to depart from the traditional practice. He considered the practice both sensible and fair, since the contractor would have to find the equivalent sum from other sources in the currencies in which it operates during the time it was out of pocket. The Arbitrator also considered it significant that the contractor’s key expenditure had been in a currency other than the currency of the award.
A similar issue has come before the English courts previously. The key English law authority dealing with this issue is Helmsing Schiffahrts GmbH v Malta Drydocks Limited2. In this case, the English courts adopted a similar approach to that taken by the Arbitrator above. The English law position was succinctly summarised by Mr Justice Kerr, who gave the leading judgment in this case, as follows:
“The English principles governing an award of interest are clear. The jurisdiction is discretionary under s. 3 of the Law Reform (Miscellaneous Provisions) Act, 1934. The discretion is normally exercised on the basis that the successful party is to be compensated by an award of interest for having been kept out of his money by the losing party from the time when the money should have been paid until judgment. The rate of interest awarded is usually based on commercial borrowing rates prevailing during this period.”
The approach of both the English courts and Lloyd’s Arbitrators in awarding interest at a rate reflecting the currency used by the claimant is significant and should be borne in mind by parties to such proceedings. Parties will need to remain alive to the commercial borrowing rates of the parties with which they transact and any fluctuations in same, in order to factor the difference in to the overall interest compensation amount.