18 May, 2017
Since the decision of the Court of Appeal (CA) in Komala Deccof v Pertamina [1984] HKLR 219, which was endorsed by the Court of Final Appeal in Polyset Ltd v Panhandat Ltd, FACV No.28 of 2000, dated 25 April 2002, the conventional practice in the Hong Kong courts has been to award pre-judgment interest at a rate of 1% over prime rate (Prime+1%) as appropriate compensation to a party for being kept out of his damages.
In May 2016, the CA handed down three judgments[1] (including Waddington Limited v Chan Chun Hoo Thomas and others, CACV 10/2014 and Tadjudin Sunny v Bank of America, National Association, CACV 12/2015) confirming that Prime+1% was an appropriate starting point for an award of pre-judgment interest. This is notwithstanding the arguments that in the prevailing low-interest economic and lending environment, prime rate was no longer the appropriate benchmark and a more appropriate approach would be to use the Hong Kong Inter-bank Offered Rate (HIBOR) as a starting point.
Lo Yuk Sui v Fubon Bank (Hong Kong) Limited, HCA 409/2005
Waddington and Tadjudin were recently applied and followed by the Court of Appeal in Lo Yuk Sui v Fubon Bank (Hong Kong) Limited, HCA 409/2005, 19 December 2016.
In Lo Yuk Sui, the CFI had previously handed down a judgment in favour of the Plaintiff for the sum of HK$51,719,000 together with pre-judgment interest at Prime +1%. Both the Plaintiff and the Defendant made applications to vary the judgment with respect to interest and costs. The Defendant, in particular, sought an order to change the pre-judgment interest as awarded under the judgment from Prime+1% to 2.5%.
The CFI acknowledged that, following the CA decisions in Waddington and Tadjudin, Prime+1% was an appropriate starting point for awarding pre-judgment interest. Nevertheless, the Defendant contended that the Plaintiff, a high-ranking banker, being a high net worth individual would have been able to borrow at a rate of interest much lower than Prime+1%, hence the appropriate rate of pre-judgment interest should be 12-month HIBOR from time to time plus 1.5%.
The Court however, did not accept this argument. Ng J found that there was no suggestion or evidence that all private banks or high street banks adopt a uniform lending policy towards high net worth individuals; it would thus be a “gross over-generalisation” to conclude that the Plaintiff would necessarily have been able to borrow at less than Prime +1% because he was a high net worth individual. On that basis, the court held that there was not sufficient evidence to justify a departure from the usual rate of Prime+1% in awarding pre-judgment interest.
The Lands Tribunal Followed the Prime+1% Norm
The Lands Tribunal followed the CA decisions and adopted the interest rate of Prime+1% in the land resumption cases Happy Dragon Restaurant Ltd v Director of lands [2014] 3 HKC and Eltron Development Ltd v Director of Lands [2016] HKEC 1105. In Eltron, the Court took the view that the Prime+1% practice represented a “broad brush” approach to determine what rate of interest was just and appropriate. Hence, the courts do not need to have regard to the rate at which a particular recipient of compensation might have borrowed funds.
In the recent Lands Tribunal Decision in Snowland Limited v Director of Lands, LDLR 2 of 2014, dated 31 March 2017, in which Deacons acted for the Applicant, the Tribunal followed Happy Dragon and Eltron and adopted the rate of Prime+1% for the award of pre-judgment interest.
In Snowland, the Applicant was awarded compensation for land resumption under the Lands Resumption Ordinance (Cap. 124) in the sum of HK$97,356,000, which was one of the highest awards per square unit. The Lands Tribunal emphasized that any suggestion that the starting point of Prime+1% should be changed must be supported by evidence before the court.
In rejecting the Respondent’s argument that interest should be awarded at 1-month fixed deposit rate, the Tribunal pointed out that as the Applicant is engaged in the business of real estate investment, it is more unlikely than not that the Applicant would just leave the compensation money in a bank and not utilize the same for other investments to earn more profit than the 1-month fixed deposit rate interest. The Tribunal also took the view that although the Applicant and its director may well be successful and experienced investors in real estate property, there was no evidence indicating their borrowing ability. In the absence of any evidence showing that the Applicant was in a position to secure a loan at an interest rate much lower than Prime+1%, the Tribunal ruled that Prime+1% should be adopted as the appropriate starting point.
Conclusion
Going forward, the Hong Kong Courts would be expected to follow the CA decisions: Prime+1% will be the starting point for awarding pre-judgment interest on damages awarded to successful plaintiffs in non-personal injury civil claims, in the absence of any clear evidence showing the plaintiff’s actual cost of borrowing or in the absence of any exceptional circumstances or agreement to the contrary.
However, this does not mean that Prime+1% will always be the norm without any change. In both Waddington and Tadjudin, the CA left open the possibility of a future case in which the evidential foundation would be laid to show that Prime+1% is no longer used or very rarely used as a starting point. It is then for the court to consider whether the time has come to move away from Prime+1% as the norm for awarding pre-judgment interest. Having said that, the absence of any sufficient evidence to justify a departure from the norm was emphasized again in Lo Yuk Sui and in Snowland.
Therefore, unless a defendant can provide evidence justifying that another starting point should be adopted, the Hong Kong Courts will stick with the norm.
[1] Waddington Limited v Chan Chun Hoo Thomas and others, CACV 10/2014, 20 May 2016, Tadjudin Sunny v Bank of America, National Association, CACV 12/2015, 20 May 2016 and Li Xiao Yun v China Gas Holdings Ltd, CACV 215/2013, 26 May 2016
Jean Lau, Deacons
jean.lau@deacons.com.hk
