Interest: an alternative argument?

Jonathan Karas QC

1. Under the Arbitration Act 1996 s.49 arbitrators are given power to award interest. It has sometimes been suggested that this enables arbitrators to award interest on determinations of open market rents under rent review clauses.

2. Section 49 provides:

(1) The parties are free to agree on the powers of the tribunal as regards the award of interest.

(2) Unless otherwise agreed by the parties the following provisions apply.

(3) The tribunal may award simple or compound interest from such dates, at such rates and with such rests as it considers meets the justice of the case -

(a) on the whole or part of any amount awarded by the tribunal, in respect of any period up to the date of the award;

(b) on the whole or aprt of any amount claimed in the arbitration and outstanding at the commencement of the arbitral proceedings but paid before the award was made, in respect of any period up to the date of payment.

(4) The tribunal may award simple or compound interest from the date of the award (or any later date) until payment, at such rates and with such rests as it considers meets the justive of the case, on the outstanding amount of any award (including any award of interest under subsection (3) and any awards as to costs

(5) References in this section to an amount awarded by the tribunal include an amount payable in consequence of a declaratory award by the tribunal.

(6) The above provisions do not affect any other power of the tribunal to award interest.

3. The suggestion is that the rent payable under a lease following a determination on a rent review is "an amount payable in consequence of a declaratory award". This view is considered "likely" in the RICS Guidance Note (Eighth Edition). The matter, however, is not necessarily clear cut. The following points may be made.

4. First, a rent determined upon a rent review is not "an amount payable in consequence of a declaratory award". The dispute referred to the arbitrator is usually not whether or what amount is payable, it is simply the question of what is the "market rent" as defined in a rent review formula. Once set by the arbitrator, the lease itself provides the mechanism for when the new rent becomes payable. This sum set by the arbitrator is not payable in consequence of the award because there has never been any dispute that the reviewed rent is payable; the reviewed rent is payable and has always been payable under the terms of the lease regardless of the determination of the Arbitrator (it simply becomes due following the award in accordance with the mechanism under the lease). While the opposite conclusion is plainly also arguable, this interpretation is certainly consistent with a literal and natural reading of the statute. On this interpretation section 49 has no application where the question to be determined by an arbitrator is simply what is the market rent for premises under a pre-agreed contractual formula (and there is no issue over whether a rent is actually payable).

5. Secondly, this interpretation of the statute is entirely consistent with the principle of party autonomy. In the context of rent review where the parties have provided for arbitration as the mechanism for fixing a rent, the parties were well able to make provision for the award of interest on whatever rent is determined. Where they choose not to do so, there is no reason why the statute should be construed to supplement the bargain between the parties.

6. Thirdly, even if this is wrong and the Arbitrator does have power to award interest, there are good reasons why the discretion should not be exercised to award interest in the case of leases which pre-date the 1996 Act. In such a case the parties could not have contemplated that interest was payable in the absence of agreement: the parties, nevertheless, chose not to agree that interest should be awarded. In these circumstances, it would be wrong to award interest where the parties had never contemplated that it would be payable - particularly when this Arbitration has been conducted within a reasonable timescale.

7. Accordingly, even if one is inclined like most commentators to conclude that the interpretation suggested by the RICS Guidance Note is indeed "likely", the answer should not be treated as a foregone conclusion.