In Tethyan Copper v. Pakistan, interest accounted for almost 30% of the $5.9 billion awarded to the claimant — a stark example of how pre- and post-award interest now routinely inflates investor-state awards far beyond the principal sum. The phenomenon has pushed interest quantification to the top of UNCITRAL Working Group III's reform agenda, according to a recent scholarly analysis.

Yves Derains, the veteran arbitrator, has described interest as the "mal aimé" — the un-beloved — of legal analysts. Tribunals typically devote only a paragraph or two to the issue. Scholarship is scant, and the topic remains peripheral in most ISDS reform discussions — yet interest often reaches very significant figures when added to principal damages.

How interest practice evolved

For most of the twentieth century, international tribunals adhered to three propositions: interest should be simple rather than compound, calculated at a flat rate (usually 5% or 6%), and run from the date the principal became legally due — the dies a quo. Tribunals balanced the claimant's deprivation against broader considerations affecting the debtor state.

Two developments strained that consensus from the late 1970s onward. US monetary tightening drove rates sharply higher through the 1970s and early 1980s, rendering the 5–6% flat rate commercially inadequate. The establishment of the Iran-US Claims Tribunal (IUSCT) in 1981 forced adjudicators to grapple with hundreds of claims in this new high-rate environment.

The 1986 McCollough award, penned by presiding judge Michel Virally, contained the most sophisticated attempt to rationalize prior authority under novel economic conditions. Virally framed the task as a balance: claimants must "under normal circumstances" be compensated for delay in receiving due payment, but defendants must not be subjected "to an excessive burden." Mediating those interests required weighing prevailing economic conditions, the applicable domestic law, "the nature of the facts generating the damage," and "the knowledge that the defaulting party could have had of the financial consequences of its default." The tribunal awarded a simple 10% rate.

Judge Brower's concurring and dissenting opinion in McCollough offered a competing conception that ultimately prevailed: "interest is an item of damage" whose "measure is the cost of such deprivation." That reframing — anchoring interest solely to the claimant's loss — became dominant in ISDS practice.

What are the three axes of dispute?

Once interest became an item of full reparation rather than a balancing exercise, tribunals overhauled three core questions.

• Interest rates. The IUSCT's 1985 Sylvania award shifted the focus to "the amount that the successful claimant would have been in a position to have earned if it had been paid in time." Sylvania preferred six-month US certificates of deposit. Contemporary tribunals commonly add a 2% premium to a near-risk-free base rate. A minority pegs rates to the investor's cost of capital — a method more likely to produce higher awards.
• Dies a quo. Under the traditional approach, tribunals disagreed whether the start date was the date of harm, the start of proceedings, or the award itself. The newer market-reality approach now treats the date of financial deprivation as the standard.
• Compounding. The IUSCT maintained traditional hostility to compound interest. Scholarship, however, became "practically unanimous" in criticizing restrictions as contrary to "modern economic conditions." Tribunals followed, beginning with the 2000 Santa Elena award. Compounding is now the ISDS norm, even where applicable national law forbids it.

What does the full-reparation framework miss?

The mainstream approach rests on a reading of the principle of full reparation that strips interest of legal limits. That reading is flawed in four respects.

First, the principle does not itself determine what counts as compensable harm. That requires a legal determination under the applicable law, not an appeal to "economic realities." Tribunals should enforce domestic restrictions on compounding or accrual periods rather than discard them.

Second, causation rules require that interest compensate only losses attributable to the state's breach. Awarding interest at the rate available for speculative commercial opportunities compensates investors for risks they never incurred. The correct measure is the risk-free rate — a position a handful of recent tribunals have adopted.

Third, full reparation does not relieve claimants of proving their loss. The UK House of Lords held in Sempra Metals that compound-interest claims require appropriate evidence. ISDS tribunals have generally presumed compound loss without proof, creating a regime more favorable to claimants on interest than on principal.

Fourth, equitable considerations can legitimately modify the calculation — for instance, by deferring the dies a quo where the sum is crippling for the host state, or granting a grace period for post-award payment.

What is changing at UNCITRAL?

Draft rules recently proposed by the UNCITRAL WGIII Secretariat (A/CN.9/WG.III/WP.268) would peg interest to a "risk-free rate" and place the burden on claimants to "specifically justify" compound interest. The risk-free provision directly addresses the causation critique; the compound-interest addition signals that compounding may become conditional on concrete proof of harm.

Vietnam and Nigeria have separately proposed (A/CN.9/WG.III/WP.261) that "interest shall not be calculated in ways deemed unlawful under the law of the respondent State at the time of the breach" — a step toward treating interest as a legal rather than purely financial question.

Separately, ILC Special Rapporteur Mārtiņš Paparinskis, in his First Report on compensation for internationally wrongful acts (A/CN.4/793), accepted that ISDS interest case law warrants careful scrutiny rather than uncritical acceptance.

The convergence of these signals — scattered awards applying risk-free rates, draft UNCITRAL rules, and state proposals — suggests ISDS practice may be pivoting from market-return expectations back toward legal principle.