The interest payable by losing parties in litigation, both pre and post-judgment, is an issue of considerable importance to all parties concerned – especially in long-running, complex commercial cases, in which millions of Hong Kong dollars in interest may be at stake. In the recent judgment in Lo Yuk Sui v Fubon Bank (Hong Kong) Ltd,(1) which should attract the attention of lawyers and litigants, the High Court examined important questions of the court's power to award both pre and post-judgment interest.
On pre-judgment interest, the court followed a recent line of cases in confirming that despite the current low-interest borrowing environment, the default position remains that the applicable interest should be prime plus 1%.
On post-judgment interest, the court confirmed that it has the discretion to award interest at a rate higher than judgment rate (currently 8%), but declined to do so on the facts of the case.
It is important to take note of the court's analysis of these issues, which not only gives litigants some clarity on the current position, but may also indicate likely future trends.
The court heard two competing summonses relating to the interest and costs payable under a HK$51.7 million judgment dated January 8 2016 (this update does not cover the costs aspect).
The plaintiff sought an order that interest be applied:
- at the commercial rate of prime plus 1% from the date on which the cause of action arose until December 31 2014 (the final date for acceptance of a sanctioned offer made by the plaintiff) (ie, pre-judgment); and
- at the enhanced interest rate of 18% from January 1 2015 until payment. This demand for enhanced interest spanned two periods – pre-judgment (ie, from the defendant's failure to accept the sanctioned offer until judgment on January 8 2016) and post-judgment.
The defendant sought an order that interest be applied:
- at 2.5% or such other rate as the court considers appropriate until the date of judgment (excluding certain periods during which the defendant asserted that there had been undue delay, which will not be discussed here) (ie, pre-judgment); and
- thereafter, at judgment rate until payment (ie, post-judgment).
The court's jurisdiction to award pre-judgment interest is set out in Section 48(1) of the High Court Ordinance, which provides that the court may award simple interest at such rate as it thinks fit "for all or any part of the period between the date when the cause of action arose and… the date of judgment".
The plaintiff's demand for interest at prime rate (currently 5%) plus 1% for the period before expiry of the sanctioned offer was directly contradicted by the defendant's summons arguing for a much lower rate of 2.5%. What, then, was the appropriate interest rate?
The court noted that the convention of awarding pre-judgment interest at the rate of prime plus 1% had begun with the 1984 High Court decision in Komala Deccof v Pertamina(2) and been affirmed 16 years later by the Court of Final Appeal in Polyset Ltd v Panhandat Ltd,(3) which stated that the interest was based on "the theoretical cost to the plaintiff of borrowing the sums withheld. This is a rate taken to be prime plus 1% unless the evidence in a particular case makes adoption of another rate appropriate".
The court also referred to two May 2016 Court of Appeal decisions ruling that the rate of prime plus 1% should remain the starting point for award pre-judgment interest, unless there was statistical evidence showing that prime rate should no longer be used or that another rate should be used in a specific case.(4)
In the present case, the defendant argued that the plaintiff, being a high-net-worth individual, was in a position to borrow money at much lower rates. Affidavit evidence was presented by both parties on the issue. The defendant relied on the evidence of a high-ranking banker with experience in handling applications for unsecured loans by wealthy private citizens in arguing that the 12-month Hong Kong Interbank Offer Rate plus 1.5% should be applied. Ultimately, however, the court dismissed the evidence as insufficient to justify "a departure from the convention of awarding interest in commercial cases at prime plus 1%".
As for the plaintiff's claim for enhanced interest for the period following the defendant's failure to accept its sanctioned offer, the court clearly had jurisdiction under Rules of the High Court Order 22, Rule 24 to award enhanced interest pre-judgment (post-judgment interest was another matter – see below). After considering the facts of the case, including that the sanctioned offer had been made rather late in the proceedings, the court granted enhanced interest, but at the rate of 10% rather than the 18% demanded.
The plaintiff's summons included a demand for enhanced interest post-judgment. The question before the court was whether it had jurisdiction to make such an award and, if so, whether it should do so in the circumstances.
Section 49(1) of the High Court Ordinance sets out the court's jurisdiction to award post-judgment interest:
"49(1) Judgment debts shall carry simple interest
(a) at such rate as the Court of First Instance may order; or
(b) in the absence of such order, at such rate as may be determined from time to time by the Chief Justice by order,
on the aggregate amount thereof, or on such part thereof as for the time being remains unsatisfied from the date of the judgment until satisfaction."
The defendant argued that the court had no jurisdiction to award enhanced interest post-judgment, citing the English case of McPhilemy v Times Newspapers (No 2)(5) and the Hong Kong case of Kai Ming Fashion (HK) Ltd v Found Express Logistics Ltd.(6)
In McPhilemy Lord Justice Chadwick expressed the view that English Civil Procedure Rule 36.21 was not intended to confer on the court powers to vary the rate at which interest was payable under a judgment debt. In Kai Ming Fashion a High Court judge stated that he had no jurisdiction to order enhanced interest after judgment, basing his conclusion on McPhilemy. However, unlike the English rules, Section 49(1)(a) of the High Court Ordinance explicitly refers to a power to order interest "at such rate as the Court of First Instance may order".
In Lo Yuk Sui the court found that the strict legal position is that Section 49(1)(a) does enable the court to fix a post-judgment interest rate, which need not be the judgment rate as determined by the chief justice. However, on the facts of the case, the court found that the judgment rate should not be deviated from, citing the following factors:
- Early recovery of the sum due to a plaintiff is not one of the underlying objectives of Rules of the High Court Order 22, Rule 24 (the provision governing sanctioned offers).
- The fact that the judgment rate is higher than the commercial rate is itself a sufficient incentive for a losing defendant to make payment early. In the absence of special circumstances, no further incentive is justified.
- Whatever inconvenience and disruption may have been caused by the diversion of senior management of a plaintiff from their normal duties owing to the litigation, such inconvenience and diversion ends with judgment. It would therefore overcompensate the plaintiff in the present case should enhanced interest after judgment be awarded.
Based on the above analysis, the court awarded the plaintiff interest from judgment until payment at the judgment rate of 8%.
Borrowing costs in Hong Kong have remained low since the global financial crisis. In these circumstances, many paying parties may feel aggrieved by the courts' persistence in applying a pre-judgment interest regime formulated when different economic conditions prevailed and borrowing costs were considerably higher.
However, at least in theory, the prime rate is tied to the real cost of borrowing, being the average rate of interest charged on loans by commercial banks to private individuals and companies. The current prime rate of 5% has remained unchanged since December 2008.(7) The judgment in Lo Yuk Sui gives no indication that the courts' reliance on the prime rate is set to change in the near future, even where the receiving party's circumstances may in fact allow it to borrow at lower rates. The recent (albeit small) increase in the base rate may make this possibility more remote.(8)
As for post-judgment interest, for the same reasons it is perhaps unsurprising that the High Court has been reluctant to award post-judgment interest at a rate higher than the judgment rate of 8%, a rate which was fixed in April 2009 and has remained unchanged.(9) Although the court left the door open to higher interest being awarded in "special circumstances", it is difficult to see how such circumstances may arise in practice. In any event, should the cost of borrowing increase, the judgment rate should (at least in theory) be adjusted to reflect that.
The defendant has been granted leave to appeal (CACV47 of 2017).
For further information on this topic please contact Ben Yates or Jonathan Cary at Smyth & Co in association with RPC by telephone (+852 2216 7100) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
(4) For further details please see "Pre-judgment interest rate – prime plus 1%".
(8) Following a rate hike of 25 basis points in December 2016, the Hong Kong base rate is currently 1%, its highest level since 2008 – see www.tradingeconomics.com/hong-kong/interest-rate.