LO YUK SUI v. FUBON BANK (HONG KONG) LTD formerly known as INTERNATIONAL BANK OF ASIA LTD

CACV 47/2017

[2019] HKCA 1345

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 47 OF 2017

(ON APPEAL FROM HCA 409/2005)

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JUDGMENT

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Hon Lam VP (giving the Judgment of the Court):

1.  We handed down our judgment allowing the appeal on 1 March 2019.

2.  There are three consequential matters on which we shall give our determination in this judgment:

(a) Costs;

(b) Interest; and

(c) Application for leave to appeal to the Court of Final Appeal.

3.  Counsel have lodged written submissions on these matters.  After reading the same, we are of the view that they can all be processed on the papers without any oral hearing.

Costs

4.  It is common ground that the costs of the appeal and the cross-appeal shall be paid by the Plaintiff to the Bank with certificate for two counsel.  We make an order in those terms and such costs are to be taxed if not agreed.

5.  The parties cannot agree on the costs in the court below.  The Plaintiff submitted that the Bank should only be awarded one-third, alternatively no more than one half, of its costs in the court below.

6.  On the other hand, the Bank submitted that it should have the whole costs in the court below.

7.  At [42] and [52] of the judgment of 1 March 2019, we have foreshadowed the dispute on costs by highlighting that the construction point which we decided in favour of the Bank was not a point taken before the judge. 

8.  In his submissions on costs, Mr Yu SC referred to certain passages in pleadings and submissions alluding to the express references to the 2002 DRP in the Letter.  We have read those passages.  With respect, whilst there were admittedly such references, those references were made in the context of the DRP Implied Condition and the Dissatisfaction Point.  

9.  We do not accept Mr Yu’s submission that the construction point which found favour with us was run by the Bank and it was rolled-up by the judge under the Dissatisfaction Point.  It is quite clear to us that the then counsel for the Bank (not Mr Yu) premised the Dissatisfaction Point on the construction of the precondition of “execution of formal documentation to the satisfaction of the [Bank]” in the Letter.  He submitted that as the Bank was dissatisfied with the formal documentation by reason of the introduction of the Additional Option, it had no obligation to choose Option 1.  The argument was correctly rejected by the judge for the reasons he gave at [58] to [73] of the judgment below.     

10.  The construction point we relied upon in allowing the appeal has nothing to do with the dissatisfaction of the Bank as regards formal documentation. 

11.  Mr Jat SC submitted, based on the principles discussed in Re Elgindata (No 2) [1992] 1 WLR 1207, Wong Kam Tong v Tin Shing Court (No 2) [2012] 2 HKLRD 1128 and Hung Fung Enterprises Holdings Ltd v Agricultural Bank of China [2012] 3 HKLRD 679, the Bank should be deprived of some of the costs in the court below by reason of weak points taken by the Bank which did not succeed (some of which were withdrawn by the Bank).  Those points included:

(a) No Consideration Point;

(b) Material Alteration Point;

(c) No Intention Point:

(d) Dissatisfaction Point;

(e) Additional Option/Equal Treatment Point; and

(f) Reasonable Time Point.

12.  In Hung Fung Enterprises Holdings Ltd v Agricultural Bank of China, supra, Kwan JA (as she then was) referred to the dicta of Atkin LJ in Ritter v Godfrey [1920] 2 KB 47 being applicable in Hong Kong and this had led Recorder Paul Shieh SC in Eminent Investments v Dio Corp [2017] 4 HKLRD 52 to examine if there is any tension between that dicta and the post-CJR philosophy on costs.  The learned Recorder acknowledged Ritter v Godfrey, supra, remained good law in Hong Kong in light of Hung Fung Enterprises Holdings Ltd v Agricultural Bank of China, supra.  However, he opined that there is, at first sight, an intrinsic unease between the more liberal exercise of discretion in departure from the usual order of costs follow the event and the rather rigid three-fold factors in Ritter v Godfrey, supra.  The learned Recorder however managed to harmonize the apparent conflict by adopting a liberal approach in assessing factor (2) in Ritter v Godfrey, viz “the party has done something connected with the institution or the conduct of the suit calculated to occasion unnecessary litigation and expense”. 

13.  At [17] and [18], Recorder Shieh had this to say regarding the application of this factor (2):

“ 17. In my judgment, the qualifying words ‘calculated to’ do not mean that one had to deliberately do something with a motivation that costs be wasted. In litigation, one rarely goes about doing something with the motivation of inflicting unnecessary costs, and also, for the purpose of intention, one has to adopt an objective test. Therefore if one knows that his act would carry certain consequences, it suffices for the purpose of ‘intention’.

18. In deciding whether or not the defendant's conduct was ‘calculated to’, in the sense that the defendant was aware that the consequences of running the defences would be to occasion unnecessary litigation or expense, it calls for an assessment of the merits of the defences which had failed.”

14.  At [23], he drew support for his approach from the judgment of Kwan JA in Pfeiffer v Cheung Hay Kit, CACV 245/2013, 29 October 2014.

15.  For the reasons given below, we doubt if it is still necessary to refer to Ritter v Godfrey, supra, when a court exercises discretion to deprive a successful party of his costs.  However, since Mr Jat was content to proceed on the basis that Ritter v Godfrey, supra, remains good law in Hong Kong, we would say we agree with the Recorder’s approach as to the modern application of Ritter v Godfrey.

16.  Ritter v Godfrey, supra, was decided in 1919.  In those days, there was no Order 62 Rule 5 which was added to our rules in 2008.  Rule 5(1) directs the court in appropriate circumstances to take account of the conduct of the parties in exercising its discretion as to costs.  Rule 5(2) provides that such conduct includes whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue and the manner in which it has been pursued or defended.  The litigation culture and the court’s approach to costs is indeed, as observed by the Recorder, very different from the situation in England in 1919.

17.  In light of Rule 5, there is no longer any room for contending for a rigid application of Ritter v Godfrey, supra.  As held by Kwan JA in Pfeiffer v Cheung Hay Kit, supra, it is no longer necessary for a party to have acted unreasonably or improperly to be deprived of his costs of a particular issue on which he has failed.

18.  But it is still necessary to have justification for depriving a successful party of his costs (see YBL v LWC (No 2) [2017] 2 HKLRD 783 at [10]) and it is not the law that whenever a successful party fails on some issues the court must assess the costs of each issue separately to deprive him of some costs (see Poon Ching Man v Lam Hoi Pun [2016] 3 HKLRD 815 at [37]. 

19.  In the present context, despite Mr Yu’s submissions to the contrary, we agree with Mr Jat that the points he identified are inherently weak points.  We also agree that in the circumstances the Bank should not have all the costs in the court below. 

20.  As we did not sit through the trial, we are somewhat handicapped in assessing the extent to which the Bank should be deprived of its costs below.  Mr Jat submitted that these points took up a large portion of the trial.  Mr Yu submitted that the evidence which is required to substantiate these arguments also served to explain the factual matrix to put the Letter in context.   He also said the length of time spent on dealing with the facts was due to the complexity of the commercial arrangements and the genesis of the same.  Counsel also alluded to similar evidence being needed to address the Plaintiff’s contentions. 

21.  Mr Yu further submitted that a fair amount of expense was incurred on quantum which the Plaintiff obviously ought to bear.

22.  Whilst there must be overlaps in the evidence on the various issues, we do not accept that all the evidence adduced before the judge was necessary if the point of construction was examined in the way as we did.  Further, the preparation of the legal arguments (including pleadings as well as other evidentiary or forensic preparation for the same) must have taken up substantial costs on both sides.  Having said that, we do not find the percentages of reduction suggested by Mr Jat to be reasonable. 

23.  Doing the best we can in light of the limited assistance we have from counsel in this respect, it has to be a broad brush approach.  We would order the Plaintiff to pay 70% of the costs below, such costs are to be taxed with certificate for two counsel if not agreed. 

24.  The costs of the submissions as to costs shall be part of the costs of the appeal.

Interest

25.  The relevant developments leading to the Bank’s claim for interest are set out by Mr Yu at para 2 of his submissions on interest of 29 March 2019.  In order to satisfy the judgment of Ng J of 8 January 2016, the Bank paid to the Plaintiff on 5 February 2016 the following sums:

(a) Judgment sum of $51,719,000;

(b) Pre-judgment interest of $38,639,937.96;

(c) Post-judgment interest of $316,531.58; and

(d) Interim payment of costs of $9 million.

26.  The total of pre-judgment interest and the post-judgment interest was subsequently varied by Ng J on 19 December 2016 to $34,474,078.78.  As a result, on 21 December 2016, the Plaintiff repaid $4,482,390.76 to the Bank. 

27.  On 6 November 2017, the Bank made a further payment of $1 million in full and final settlement of costs as well as interest on costs.

28.  These principal sums were actually repaid by the Plaintiff to the Bank on 17 January 2019 after the hearing of the appeal. 

29.  Against such background, the Bank sought interest as follows,

(a) On the sum of $99,675,469.54[1] from 5 February 2016 to 21 December 2016;

(b) On the sum of $95,193,078.78[2] from 22 December 2016 to 17 January 2019; and

(c) On the sum of $1 million[3] from 6 November 2017 to 17 January 2019.

30.  There is no dispute about these figures and liability on the part of the Plaintiff to pay interest for these periods.  The issue we have to determine is the rate of interest.

31.  Evidence was filed by both sides on rates of interest. 

32.  The Bank seeks interest on the conventional rate for commercial cases at prime plus 1%.

33.  On the other hand, the Plaintiff contends that the costs of borrowing for the Bank should be lower.  Based on the evidence of his expert derived from annual reports of the Bank and data available in the public domain in relation to two other banks[4], Mr Jat submitted at paras 16 to 18 of his submissions of 26 April 2019 that:

(a) This Court should adopt the average borrowing costs of the comparable banks as the theoretical borrowing costs to award interest in favour of the Bank at 0.796% in 2016, 0.948% in 2017 and 1.265% in 2018/2019;

(b) Alternatively, this Court should adopt the average borrowing costs of all 3 banks as the theoretical borrowing costs to award interest at 0.859% in 2016, 1.035% in 2017 and 1.49% in 2018/2019; and

(c) By way of a further alternative, this Court should adopt the Bank’s theoretical borrowing costs in awarding interest at  0.984% in 2016, 1.207% in 2017 and 1.941% in 2018/2019.

34.  This Court has recently affirmed that for commercial cases prime plus 1% should be the starting point and interest would be awarded at such rate unless there is evidence to persuade the court that time has come to move away from such rate: Waddington Ltd v Chan Chun Hoo Thomas CACV 10/2014, 20 May 2016; Tadjudin Sunny v Bank of America NA CACV 12/2015, 20 May 2016; Chow How Yeen Margaret v Wex Pharmaceuticals Inc [2018] 3 HKLRD 163.

35.  In the present case, Mr Jat did not suggest that prime plus 1% is not appropriate in light of the prevailing money market in Hong Kong generally.  Instead, counsel submitted that lower interest rates should be adopted for the Bank because of evidence as to its lower borrowing costs.  He relied on Polyset Ltd v Panhandat Ltd FACV 28/2000, 25 April 2002 and Tate & Lyle Food and Distribution Ltd v Greater London Council [1982] 1 WLR 149 to support his submission. 

36.  On the other hand, Mr Yu submitted that as the award of interest is to compensate a claimant for being kept out of money and to achieve restitutio in integrum, when it is demonstrated that the loss stemming from deprivation of use of money to the relevant party is not adequately reflected in the cost of borrowing, the court should not adopt that as the measure for award of interest.  In the present case, counsel submitted that borrowing costs is not appropriate because the deprivation of the money would lead to a decrease in lending capacity of the Bank due to the requirement of the Hong Kong Monetary Authority on Capital Adequacy Ratios.  According to the evidence filed by the Bank, counsel said the average loss suffered by the Bank from 28 January 2016 to 17 January 2019 was 14.08% per annum[5]. 

37.  Counsel emphasized that the purpose of such evidence is not to invite the court to award interest at a higher rate than 1% above prime.  Rather, with such evidence, counsel submitted that the Plaintiff cannot show that an award based on 1% above prime would be unfair (in the sense of going beyond a fair compensation for the Bank’s loss of use of the money) and the court should award interest at that rate. 

38.  Mr Yu also submitted that the underlying assumption of the expert of the Plaintiff was that the Bank could replace the fund by means of short-term deposits which is incorrect.  The Bank also contended that Chong Hing Bank Limited and Dah Sing Banking Group Limited were not valid comparables.

39.  With respect, we agree with Mr Yu that there are flaws in the expert evidence of the Plaintiff.  Short-term deposit rates should not be adopted for references as the deprivation of the Bank was long term and long term loans attract higher interest rates.  Also, as observed by Ms Lee in her affidavit of 13 June 2019, the expert’s calculations were skewed as too much weight were attached to short-term liabilities.  Due to the difference in credit ratings (which must have bearing on costs of borrowing), the two banks adopted by the expert are not good comparables.     

40.  In respect of judgment sum and interest which will have to be repaid upon the overturning of the judgment on appeal, the underlying objective for ordering repayment with an award of interest is to provide redress against injustice that would otherwise be occasioned to a successful appellant, see Man Ping Nam v Man Fong Hang (No 2) (2007) 10 HKCFAR 140 at [14] and [15].  Such potential injustice arises from the successful appellant being deprived of the money during the relevant period.

41.  Forbes J in Tate & Lyle Food and Distribution Ltd v Greater London Council, supra, considered that award of interest was to provide for “the costs to the plaintiff of being deprived of the money which he should have had”.  In commercial context, “the interest is intended to reflect the rate at which the plaintiff would have had to borrow money to supply the place of that which was withheld”.  The underlying premise is that the injustice would be redressed by the party borrowing the same amount at commercial rate. 

42.  The learned judge further said:

“ I am also satisfied that one should not look at any special position in which the plaintiff may have been; one should disregard, for instance, the fact that a particular plaintiff, because of his personal situation, could only borrow money at a very high rate or, on the other hand, was able to borrow at specially favourable rates. The correct thing to do is to take the rate at which plaintiffs in general could borrow money. This does not, however, to my mind, mean that you exclude entirely all attributes of the plaintiff other than that he is a plaintiff. There is evidence here that large public companies of the size and prestige of these plaintiffs could expect to borrow at 1 per cent over the minimum lending rate, while for smaller and less prestigious concerns the rate might be as high as 3 per cent over the minimum lending rate. I think it would always be right to look at the rate at which plaintiffs with the general attributes of the actual plaintiff in the case (though not, of course, with any special or peculiar attribute) could borrow money as a guide to the appropriate interest rate.”

43.  In Komala Deccof & Co SA v Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (Pertamina) [1984] HKLR 219, Cons JA endorsed this approach in Hong Kong.  See also Polyset Ltd v Panhandat Ltd  FACV 28/2000, 25 April 2002 at [13] where Ribeiro PJ referred to the award of interest as reflecting “the theoretical cost to the plaintiff of borrowing the sums withheld”.

44.  Mr Yu referred us to Baker v Black Sea & Baltic General Insurance [1996] 5 Re LR 202 where Otton LJ elaborated on the approach adopted in commercial cases.  After referring to the commentary in the Supreme Court Practice 1995 under Order 6 Rule 2(12), His Lordship said at p.212:

“ Although there may be some uncertainty to what extent the personal circumstances of the plaintiff may be relevant, the pragmatic approach of the courts has certainly been reflected in the practice of the Commercial Court. The practice whereby interest is normally awarded at 1 per cent over base rate amounts to a presumption which can be displaced if its application would be substantially unfair to either party. That rate represents something of a compromise (albeit weighted in favour of the plaintiff) between what a plaintiff kept out of his money might have earned on it and what he might have had to pay by way of interest: See per Staughton J in La Pintada Compania Navegacion SA v President of India [1983] 1 Lloyd’s Rep 37, 43. It does not preclude evidence as to the rate at which persons with the general attributes of the plaintiff would have borrowed money: see the test in Tate & Lyle Food and Distribution Ltd v Greater London Council …”

45.  In that case, the English Court of Appeal upheld the decision of the judge to award interest at 2 per cent above base rate though the plaintiff had not in fact borrowed in the amount or over the period at the rate. 

46.  The facts of that case highlight that the award of interest is not based on the actual cost of borrowing of the receiving party.  As Ribeiro PJ observed, the applicable rate is a “theoretical cost”. 

47.  Further, the rate of interest is not to be assessed by reference to what the receiving party might have earned on the money.  Rather, the interest rate is to represent a compromise between that and what a person might have had to pay by way of interest to borrow the sum.  It is based on a notional borrowing, irrespective of whether the party had borrowed or could have borrowed a replacement loan on the actual facts of the case.  For these reasons, one should not have regard to the special personal circumstances of the receiving party in the application of the approach. 

48.  Given the notional nature of the exercise, it is not helpful to consider if the rate of interest should be fixed by reference to a restitutionary or compensatory approach.

49.  As submitted by Mr Jat, the exercise is meant to be broad brush and pragmatic.  From the point of view of efficient and fair dispute resolution and proper use of judicial resource, it would be disproportionate to conduct an inquiry into the personal circumstances of a receiving party in order to determine the applicable interest rate as if it were an exercise in an assessment of damages.  Thus, the general attribute of such a party which a court can have regard to should be on a high level of generality.

50.  Further, the actual business operation of a bank and the rates of interest offered by it to its customer are matters falling outside the scope of general attributes of a bank for determining the appropriate interest rate at which bank can notionally borrow money on a commercial basis in the money market. 

51.  The deposit rates offered by a bank to its customers cannot be regarded as the appropriate references for present purposes because those rates are offered as part of the business operation of a bank. It is integral to banking business to take deposits and lend monies.  There are differences in the rates of interest in such activities and a bank derives profit from such activities.  In the conduct of banking business, a bank has to observe the rules laid down by the Hong Kong Monetary Authority, including the requirements on Capital Adequacy Ratios.  In setting deposit rates, a bank will also have regard to its own operation costs.  In the process, many business factors come into the picture which go beyond simple borrowing and lending considerations in the context of a commercial loan in the money market.  It would not be fair to adopt the deposit rates of a bank as the interest rates for its commercial borrowing without regard to these other factors.  Once it is recognized that there are other factors (which can be special to a particular bank in question) in the equation for setting deposit rates, it follows that they should not be regarded as relevant for the notional exercise with reference to the general attribute of banks for our present purposes.  

52.  In our judgment, in terms of adjustment of interest rates on account of general attribute of a receiving party, one should confine oneself to general matters relevant for the purpose of commercial borrowing in the money market.  Thus, we cannot rely on the evidence adduced by the Plaintiff to determine the relevant rates.

53.  In the present context, it is not disputed that a bank can borrow money in the money market at interbank rates which are generally more favourable than rates offered to other commercial lenders.  In their last round of submissions, as an alternative to his primary argument, Mr Jat accepted interbank rates as applicable for present purposes.

54.  Though Mr Yu submitted by reference to the evidence of the Bank that interbank rates could not compensate fully the loss suffered by the Bank, we do not think this is relevant.  First, as explained above, the determination of the interest rate in the present context is based on a notional exercise premised on the Bank borrowing amounts equal to the sums paid under the judgment.  The so-called additional “loss” arising from the rules laid down by the Monetary Authority does not enter into the equation. Second, such so-called additional “loss” arises from the actual business operation of the Bank and is not something which is meant to be covered by way of the award of interest.

55.  In the circumstances, we are of the view that the Plaintiff should pay interest on the respective sums particularized at [29] at the applicable interbank rates at the relevant periods of time.  We direct the Bank to prepare a draft order incorporating these rates at the relevant periods and submit the same (after consulting the Plaintiff) for our approval.

56.  Neither side can be regarded as wholly successful in the arguments on interest rates.  We will order each party to pay his own costs in this respect.

Leave to appeal

57.  The application for leave was argued by Mr Wong SC for the Plaintiff.

58.  In the Notice of Motion of 29 March 2019 seeking leave to appeal to the Court of Final Appeal, two questions were formulated at paragraph 5 as questions of law of great general or public importance:

“ (1) What is the role and significance of commercial background or purpose in the construction of a commercial contract?

(2)     What is the correct approach of the Court in evaluating and determining the commercial background and purpose in the construction of a contract?”

59.  Further, leave is also sought on the “or otherwise” limb on the basis that the construction of the Letter by this Court was plainly wrong in that it failed to construe the Letter as a whole and wrongly disregarded the commercial purpose of the Letter.

60.  With respect, we are not satisfied that there is any question of law of great general or public importance in the intended appeal. 

61.  Mr Wong tried to persuade us that Question (1) arose from our divergence from the Judge as to the significance that it was a bundled deal and the immediate personal guarantee provided by the Plaintiff. Our reasoning can be found at [45] and [46] of the judgment of 1 March 2019. 

62.  As submitted by Mr Yu, we did not hold that the commercial purpose of a transaction was not relevant in the construction of a document.  This Court tried to ascertain the common purpose (as opposed to the unilateral purpose of the Plaintiff) with reference to the distribution of commercial risks.  Our reasoning is plainly sensitive to the factual matrix in the present case. 

63.  We cannot perceive any legal point of principle arising from that part of our judgment.

64.  Mr Wong submitted under Question (2) that we wrongly took into account the Bank’s one-sided view of commercial purpose in our construction of the Letter.  In that connection, counsel referred to [20], [39] and [40] of our judgment.

65.  With respect, Mr Wong failed to read our judgment correctly.  The Letter itself clearly defined Debt Restructuring Proposal as the proposal of 7 October 2002.  It is an objective fact that in respect of secured indebtedness there were only two options under that proposal.  This objective fact (as opposed to the subjective unilateral intent on the part of the Bank) must be a relevant part of the factual matrix since the obligation undertaken by the Bank under Clause 1 of the Letter was to accept Option 1 under the Debt Restructuring Proposal.

66.  Likewise, the reference to possible difference in the Bank’s assessment if there were other options at [39] is a reference to an objective state of affairs rather than the subjective and unilateral assessment on the part of the Bank at the material time.  Again, we cannot see any error in taking such objective implication into account as part of the underlying factual matrix.

67.  These matters are only relevant in this appeal due to the specific terms of the Letter.  No legal point or question of great general public importance arises.

68.  Mr Wong fairly accepted that leave under the “or otherwise” limb is a matter for the Appeal Committee.

69.  In light of what we said in the judgment and above, we do not accept the suggestion that our construction is plainly wrong.

70.  For these reasons, we refuse to grant leave and dismiss the Notice of Motion with costs.  Having considered the Statement of Costs of the Bank of 10 May 2019, we fix the costs of the Bank in the Notice of Motion at $130,000.