HYUNDAI ENGINEERING & CONSTRUCTION CO.,LTD v. UBAF (HONG KONG) LTD

HCA 175/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 175 OF 2012

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REASONS FOR DECISION ON INTEREST

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1.  On 24 October 2012, I granted summary judgment in favour of the plaintiff in the sum of US$5,552,787.75 together with interest. In the order nisi, I awarded interest on the judgment sum at the rate of 8% per annum from 3 February 2012 to the date of judgment and thereafter at judgment rate.

2.  These are the applications by the parties to vary the award on interest.  In the hearing on 8 August 2013, I decided the applications in favour of the plaintiff and varied the order nisi to the effect that there be interest on the judgment sum at the rate of 1% above HSBC prime rate per annum from 28 December 2011 to judgment and thereafter at judgment rate.  I now give my reasons for such decision.

3.  The plaintiff is an engineering and construction company based in South Korea and it was involved in a construction project in Kuwait.  The defendant, which is a bank in Hong Kong, issued an advance payment bank guarantee (“the APG”) and a performance bank guarantee in favour of the plaintiff relating to the said project.  The plaintiff claims against the defendant for the sum due under the APG and I granted summary judgment in favour of the plaintiff.

4.  Both parties agree that pre-judgment interest should run from 28 December 2011.  However, the plaintiff claims that the appropriate interest rate on the judgment sum should be 1% over the HSBC prime rate (“the Usual Rate”), whilst the defendant contends that the appropriate rate should be London Interbank Offered Rate (“LIBOR”) plus 1.2%.

Legal principles

5.  There is no dispute between the parties about the following legal principles relating to the award of pre-judgment interest.

6.  Firstly, the court is conferred a statutory power under s 48 of the High Court Ordinance (Cap 4) to award interest in proceedings for the recovery of a debt or damages.  There is a discretion to determine the interest rate, the relevant time period, and which portion of the judgment interest should accrue.  This discretion must be exercised in accordance with well-established legal principles with regard to how such pre-judgment interest should be awarded.

7.  Secondly, pre-judgment interest is not punitive.  It is awarded on the principle that it is fair that a person who has been deprived of the use of money due to him should be paid interest on that money for the period for which he was deprived of its use (see: General Tire & Rubber Co v Firestone Tyre & Rubber Tyre Co Ltd [1975] 1 WLR 819, per Lord Salmon at 841E-F and per Lord Wilberforce at 836H).

8.  Thirdly, in order to compensate a successful plaintiff for being kept out of his money, the general practice in Hong Kong has, at least since 1984, been to award interest reflecting the theoretical cost to the plaintiff of borrowing the sums withheld.  This is a rate taken to be prime plus 1%, ie the Usual Rate, unless the evidence in a particular case makes adoption of another rate appropriate (see: Polyset v Panhandat Ltd, unreported, FACV 28/2000, 25 April 2002, per Ribeiro PJ at §13 and Komala Deccof & Co SA v Pertamina [1984] 219, per Con JA at 221-223). The Usual Rate has been described as “the usual order” for pre-judgment interest (see: Mariner International Hotels Ltd v Atlas Ltd, unreported, HCA 10714/1998, 15 January 2008, per Burrell J at §3).

9.  It has been the consistent general practice of the Hong Kong courts to adopt the Usual Rate particularly in commercial disputes.  In the recent decision of MGA Entertainment Inc v Toys & Trends (Hong Kong) Ltd [2012] 5 HKC 372, the Court of Appeal adopted the Usual Rate to award interest given that the case involved a commercial claim (per Tang VP at §72).  This approach is also in accordance with the general practice applicable in the Commercial Court in England where, as long ago since 1979, the Usual Rate was described to be in accordance with the usual practice of that Court (see: BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783, per Goff J at p 849).

10.  In Baker v Black Sea and Baltic General Insurance Co [1996] 5 Re LR 202, Otton LJ held that the applicability of the Usual Rate to a particular case is a presumption which applies unless its application would be substantially unfair to either party, and the burden therefore rests upon the paying party to justify any departure from the general rule in the form of a rate reduction by demonstrating substantial unfairness (at pp 212-213).

The appropriate interest rate

11.  The defendant does not dispute the aforesaid legal principles.  However, the defendant produces affidavit evidence with a view to justify a lower interest rate.

12.  Firstly, the plaintiff is a company with an “AA-" rating.  According to the defendant, a company with such rating would be able to borrow at a rate of LIBOR plus 1.2% in Korea.  Secondly, according to the information disclosed by the plaintiff, it had obtained a US dollars loan in the sum of US$50,000,000 for 13 months in March 2012 (“the 2012 Loan”).  The interest rate was 3.73%, which would be much lower than the HSBC prime rate plus 1% (which would come to about 6%).  Thirdly, some of the companies in the Hyundai Group were able to borrow at lower rates.

13.  In reply to the defendant’s allegations, the plaintiff contends that LIBOR is not appropriate as the base rate to award interest because, inter alia, LIBOR is a highly volatile rate which fluctuates on a daily basis.  Further, the borrowing costs of the plaintiff in recent years significantly exceeded LIBOR plus 1.2% in absolute terms.  Most of the loans obtained by the plaintiff were in Korean Won, and the actual interest rates of the loans would depend on a numbers of factors such as tenure and quantum of the loans and the securities provided.  The plaintiff also produces documents to show that some Korean banks were prepared to offer business overdraft loans to the plaintiff at a rate of about 5.906%.  According to the plaintiff, the borrowing costs of the other companies in the Hyundai Group are quite irrelevant in assessing the borrowing cost of the plaintiff.  In respect of the 2012 Loan, it was for a special project in UAE and the loan was obtained from the Export-Import Bank of Korea, which is an official export credit agency, at a preferential rate with a view to support Korean enterprises conducting businesses overseas.

14.  In answering the plaintiff’s allegations, the defendant says that the plaintiff’s evidence of its cost of funds is limited to its costs in borrowing Korean Won, whilst the interest rate of borrowing in US dollars would be much lower.  Further, according to the information revealed in the plaintiff’s annual reports, the plaintiff was able to obtain loans at lower interest rates.  In this regard, the plaintiff maintains that the defendant had misread the information in the annual reports, and some of the loans referred to by the defendant were actually special purposes loans granted by government-sponsored institutions.

15.  Having carefully considered all the evidence presented by the parties, I do not accept that there is sufficient justification for the court to depart from the general practice of adopting the Usual Rate in awarding interest in commercial claims.

16.  Firstly, the defendant claims that the plaintiff can borrow at a rate of LIBOR plus 1.2%.  I have some reservation about such general assertion.  As mentioned by the plaintiff, the interest rates of the loans offered in the market would obviously depend on a number of factors such as tenure and quantum of the loans and the securities provided, and so more evidence needs to be provided by the defendant in order to substantiate such bold assertion.  More importantly, the fact that the plaintiff had to pay a much higher interest for the 2012 Loan shows that the plaintiff could not have borrowed US dollars at such a low rate as alleged by the defendant.  The court can safely assume that the plaintiff would have tried its best to borrow at the lowest cost, and yet the plaintiff had to pay much higher interest for the 2012 Loan.  Hence, I do not accept the defendant’s primary assertion that the plaintiff or a company with the same attributes of the plaintff could have always borrowed at a rate of LIBOR plus 1.2%.

17.  Secondly, I have no reason to doubt the plaintiff’s evidence that the 2012 Loan was granted by a government-sponsored institution at a preferential rate with a view to promote Korean export.  In such case, that interest rate did not reflect the commercial market rate.

18.  Based on these considerations, I refuse to adopt the rate of LIBOR plus 1.2% or 3.73% (the interest rate of the 2012 Loan) in awarding pre-judgment interest.  In the absence of any other evidence about the exact borrowing cost of the plaintiff, the court should fall back on the Usual Rate.

19.  Mr Man, counsel for the defendant, argues that the Usual Rate only shows the cost of borrowing in Hong Kong.  The present case has an international dimension and one would expect the plaintiff to have borrowed the money at the international market at a lower cost.  Whilst I agree that the HSBC prime rate may not truly reflect the exact borrowing cost in the international market, the court has no other information to make a realistic assessment of such borrowing cost.  To plug a figure in the air is just a wide speculation.

20.  Based on the aforesaid, the court should fall back on the general practice in adopting the Usual Rate.  Such approach also reflects a need for consistency and stability in the resolution of commercial disputes.  Neither is such established approach causing any substantial unfairness to the defendant.  I therefore varied the order nisi and awarded interest on the judgment sum at the rate of HSBC prime rate plus 1% from 28 December 2011 to the date of judgment and thereafter at judgment rate.

21.  Parties agree that costs should follow the event and so I awarded the costs of the related applications in favour of the plaintiff.