TOP WINTON LTD v. LAM CHUN MAN

DCCJ5090/2017

[2018] HKDC 864

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 5090 OF 2017

--------------------------------------

--------------------------------------

----------------------

DECISION

----------------------

1.  This is the plaintiff’s appeal against the decision of Master Liza Tung dated 24 April 2018, by which she allowed post-judgment interest at the judgment rate, rather than at the contractual rate.

BACKGROUND

2.  The plaintiff is a licensed money lender.  It lent HK$850,000.00 to the defendant pursuant to a loan agreement dated 20 September 2017 (“the Loan Agreement”).  On the same day, the plaintiff and the defendant also executed a deed of loan for the same sum of money (“the Deed of Loan”).

3.  The Loan Agreement provided that the loan shall accrue interest at 3% per month, or 36% per annum. Clause 10 on p 2 of the Loan Agreement set out the calculation of interest as follows:-

“借款人及擔保人[1]同意必須就貸款按照合約內所列利率及計算方法向放債人繳付利息。由貸款提款之日起，直至貸款全數清還之日（包括法庭在放債人為追索貸款，而提出的法律訴訟程序，所頒發判決之前及之後的期間）。換言之，在法院判決之後，應付金額之利率仍然是以按照合約內所列利率及計算方法向放債人繳付利息，直至付清所有欠放債人及/或應付放債人的數額為止。”

4.  A similar term can also be found in Clause 2 of the Deed of Loan, which reads:-

“The Borrower shall pay interest on the Loan calculated at the rate and in the manner mentioned in paragraph 1(b) of the Schedule hereto. The Borrower shall pay interest at the said rate from the date of drawdown of the Loan until the date of full payment of the Loan (including the periods before and after the date of the judgment granted by the Court in legal proceedings instituted by the Lender for the recovery of the Loan). In other words, after the date of judgment of the Court the interest on the amount payable shall be calculated at the rate mentioned in paragraph 1(b) of the Schedule hereto until the amount payable by the Borrower to the Lender is fully paid.

借款人必須就貸款按照附表一(b) 段內所列利率及計算方法向放債人繳付利息。借款人須根據該利率支付利息，由貸款提款之日起，直至貸款全數清還之日（包括法庭在貸款人為追索貸款，而提出的法律訴訟程序，所頒發判決之前及之後的期間）。換言之，在法院判決之後，應付金額之利率仍然是以按照附表一(b) 段內所列利率及計算方法向放債人繳付利息，直至付清所有欠貸款人及/或應付貸款人的數額為止。”

5.  The defendant signed the Loan Agreement, and executed the Deed of Loan.  The plaintiff claimed that the loan was released to the defendant according to his instructions.

6.  The defendant failed to make any payment other than HK$79,816.00 in interest.  The plaintiff thus commenced the present case for repayment of the loan and interest accrued at 36% per annum.

7.  The defendant did not defend the action.  The plaintiff issued a summons under Order 83A rule 4 of the Rules of the District Court for default judgment under the Money Lenders Ordinance.

8.  On 24 April 2018, Master Liza Tung gave judgment against the defendant for repayment of the loan.  Pre-judgment interest on the outstanding loan was allowed at 36% per annum, but post-judgment interest was only allowed at the judgment rate. 

9.  The plaintiff thus appeals against the part of the learned Master’s order regarding the post-judgment interest, and contends that it ought to be calculated at 36% per annum up to the date of full payment.

10.  The defendant did not appear at the hearing before me.  After considering the plaintiff’s affirmation of service, I was satisfied that the defendant had due notice of this appeal hearing[2]. I ordered the appeal hearing to proceed in the defendant’s absence.

11.  I remind myself that this is an appeal by way of an actual rehearing of the plaintiff’s application and I should treat the matter as though it came before me for the first time.  I will give the weight it deserves to the learned Master’s decision but I am in no way fettered by the exercise of her discretion: Hong Kong Civil Procedure 2018, para 58/1/2.

THE PLAINIFF’S SUBMISSIONS

12.  Mr Raymond Chu, counsel for the plaintiff, submits that when an independent term or covenant of a loan agreement provides for a rate of interest to apply post-judgment, such rate should be adopted.  The contractual interest rate does not merge in the judgment ordering the repayment of the principal sum[3], and thus can be given effect by a separate order awarding post-judgment interest. 

13.  In his written submissions, Mr Chu submits that Freeway Finance Co Ltd v Tam Chuen On Raymond [2010] 4 HKC 448, a decision by Deputy High Court Judge L Chan (as L Chan J then was), is binding on me.  In that case, the deputy judge was also asked to set aside a Master’s order allowing post-judgment interest at the judgment rate instead of the contractual rate.

14.  The relevant term of the loan agreement in Freeway Finance provided as follows:-

“… If the interest or the principal sum of the loan or any of the monthly payments or instalments is overdue, interest will continue to be payable by the borrower at the same interest rate above until it is paid in full irrespective of whether legal proceedings have been commenced and/or judgment has been obtained for the recovery of the principal sum of the loan and interest thereon.”

15.  The deputy judge referred to, amongst other cases, Economic Life Assurance Society v Usborne & Ors [1902] AC 147, and London Borough of Ealing v El Isaac & Anor [1980] 1 WLR 932.  At para 14 of the deputy judge’s decision, he quoted the following judgment of Templeman LJ in El Isaac:-

“It appears, therefore, that merger has a very restricted operation. It does not, as appears from the Usborne case which I have just cited, apply to a security. It does not apply to what is said to be an independent covenant and in most mortgages and deeds of borrowing these days care is taken to make the covenant an independent covenant. So that, in practice, a number of times on which interest ceases to run from a date of judgment is very small. But on principle and on the authorities, it seems to me, the merger doctrine only applies to contracts and covenants.”

16.  The deputy judge then held that the term I quoted at para 14 above was an independent covenant, and had not merged with the judgment on outstanding principal and interest.  He allowed post-judgment interest to be calculated at the contractual rate, ie 48% per annum, rather than at the judgment rate.

17.  At the hearing, Mr Chu referred me to the Court of Appeal’s decision in Honip Credit Ltd v Asia China Tea Export Co Ltd HCMP 399/2016 (Lam VP & G Lam J; 2 June 2016), which (he submitted) is consistent with Freeway Finance.  He also put before me Guangdong Finance Ltd v Wong Wai Hing DCMP 2370/2014 (HH Judge Andrew Li; 12 June 2015), in which Freeway Finance was followed; and Konew Capital International Ltd v Wong Mei Ling DCMP 816/2017 (HH Judge Yee; 10 July 2018), in which Honip Credit was followed.

18.  It suffices for me to refer to para 21 of the Court of Appeal’s judgment in Honip Credit:-

“… 本庭接納代表原告人的曾志行大律師的陳詞：一般來說，在法庭對被告人的法律責任作出判決而原告人取得裁決後，被告人的法律責任 – 包括支付利率的責任 – 會與判決併合。可是，這並不是一條絕對的法律規則。假若被告人的法律責任是基於合約的，則支付利息的責任是否與判決併合這問題，需看合同的規定才能決定。正如以往案例解釋，合約雙方可以同意，支付利息的責任並不會和任何根據判定債項的利率而支付利息；見 Re Sneyd Ex parte Fewings (1883) 25 Ch D 33; Economic Life Assurance Society v Usborne [1902] AC 174; Director General of Fair Trading v First National Bank plc [2002] 1 AC 481 §3; Freeway Finance Company Limited and Tam Chuen On Raymond [2010] 4 HKC 448; Citic Ka Wah Bank Limited and Fung Kam Fei [2008] 2 HKLRD 483。”

19.  In short, the Court of Appeal endorsed the approach in Freeway Finance that if, on interpretation of a contract term, there was an independent covenant to pay post-judgment interest at the contractual rate, the contractual rate would apply instead of the judgment rate.

ECONOMIC LIFE ASSURANCE SOCIETY v USBORNE

20.  Apart from Freeway Finance, Usborne was also considered locally by Ng J in the first instance judgment of On Sky Enterprise (HK) Ltd v Lanco International Holdings Ltd [2017] 1 HKLRD 941.  The plaintiff therein cited Usborne and the commentary at para 42/1/16 of Hong Kong Civil Procedure 2015 (in which Usborne was cited as an authority) in support of its argument that post-judgment interest should be calculated at the contractual rate of 48% per annum, rather than at the judgment rate. 

21.  However, Ng J held at para 103 about Usborne:-

“This Court has read the decision itself and is not satisfied that it supports the wide proposition stated in Hong Kong Civil Procedure 2015, Vol.1 at para.42/1/16 or assists Mr Barlow. The actual decision was that on the true construction of a mortgage deed, the mortgagees were entitled to retain their security until they were paid the principal sum and interest as stated in the mortgage ie 5% p.a. which was higher than the then judgment rate. On the other hand, in the present case, this Court is concerned with whether a provision in a loan agreement justifies the exercise of this Court’s discretion in awarding post-judgment interest at 24% p.a. which is 3 times the judgment rate.”

22.  Ng J went on to decide that post-judgment interest should be allowed at the judgment rate only, as the contractual rate would grossly over-compensate the plaintiff, and undermine the certainty and consistency established by the practice of the courts in awarding post-judgment interest at the judgment rate.

23.  The commentary at para 42/1/16 of Hong Kong Civil Procedure 2018 now reads:-

“A contract to pay the debt with interest at, e.g. 15 per cent, does not entitle a plaintiff to levy under his execution more than the current statutory interest. The contract (or a subsequent agreement) must state specifically that any judgment obtained for recovery of the debt shall carry interest at a specified rate per cent and the higher rate until payment of interest should form part of the judgment[4] (see Re European Central Ry (1877) 4 Ch D 33; Ex p Fewings (1883) 25 Ch D 338; Arbuthnot v Bunsilall (1890) 62 LT 234; However this wide proposition is not supported by the decision of the House of Lords in Economic Life Assurance Society v Usborne [1902] AC 147).”

MY ANALYSIS

24.  With the Court of Appeal’s decision in Honip Credit, it is clear that I should follow the approach in Freeway Finance and Honip Credit, rather than the approach in On Sky. 

25.  I note that neither Honip Credit nor Freeway Finance were cited by Ng J, and his Lordship did not appear to have been alerted to them.

26.  In any event, with respect to Ng J, I prefer Freeway Finance’s interpretation of Usborne, that it supports the proposition that an independent covenant in an agreement does justify post-judgment interest to be awarded at the contractual rate rather than at the judgment rate.  I think the learned authors of Hong Kong Civil Procedure 2018 describe the effect of Usborne too narrowly in para 42/1/16 of their commentary.

27.  When one reads the House of Lords’ judgment in Usborne, it can be seen that Lord Davey at 152 referred to Popple v Sylvester (1882) 22 Ch D 98, and observed that that case concerned the enforcement of a demand for personal payment.  It was then the question whether the covenant to pay interest was independent of or ancillary to the payment of the principal money arose.  On the facts, Fry J in Popple v Sylvester concluded that the payment of interest was an independent covenant.  Lord Davey at 153 approved of Fry J’s judgment.  Hence, whilst the facts of Usborne concerned with the construction of a mortgage deed, I read it as supportive of the legal principles identified by Freeway Finance. 

28.  Applying the above to the present case, I need to decide whether Clause 10 of the Loan Agreement and/or Clause 2 of the Deed of Loan was a covenant independent of the payment of the principal.

29.  The learned Master does not appear to have set out her reasoning in not adopting the contractual rate for post-judgment interest.  I agree with Mr Chu that, compared to the clause in Freeway Finance, Clause 10 of the Loan Agreement and/or Clause 2 of the Deed of Loan are even clearer in defining the obligation to pay contractual interest up to the date of full payment as one completely separate from the payment of the principal.  In my judgment, it is not conducive to the freedom of contract and commercial certainty to deny the plaintiff the contractual rate for post-judgment interest.

DECISION

30.  I will allow the appeal. Paragraph 2 of the learned Master’s judgment should be set aside, and replaced with an order that the defendant do pay the plaintiff interest on the principal sum of HK$850,000.00 at the rate of 36% per annum, from 3 January 2018 until full payment.

31.  I also make a costs order nisi that the costs of this appeal be to the plaintiff (with certificate for counsel), to be taxed on the indemnity basis[5].  The plaintiff has provided me with its skeleton bill of costs, asking for a total sum of $58,400.00.  Although costs are to be taxed on the indemnity basis, I still find the plaintiff’s claim excessive, as the time claimed for the preparation of this appeal appears unreasonable.  I summarily assess the costs payable by the defendant to be $44,600.00.  This costs order nisi shall become absolute unless an application for variation is made within 14 days from this decision.

32.  The defendant may make an appointment with my clerk for interpreting this decision to him in Chinese, if he so wishes.

33.  I thank Mr Chu for his assistance.