MARINER INTERNATIONAL HOTELS LTD v. ATLAS LTD AND ANOTHER

HCA10714/1998,
HCA10752/1998
and HCA10821/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS. 10714, 10752 AND 10821 OF 1998

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(Consolidated)

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D E C I S I O N

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1. I shall refer to the plaintiff as ‘Sino’ and the defendant as ‘Hang Lung’.

2. On 6 February 2007, Hang Lung repaid to Sino a sum of $321 million, following a decision against them in the Court of Final Appeal, which was the deposit they had received for the purchase of a hotel under construction in 1997.  The parties cannot agree what interest should be paid on that sum.  Sino contend that it should be at prime +1% from the date of payment.  Hang Lung submit the rate should be HIBOR + 0.8% from the date of notice of termination of contract.  The difference between the two is considerable.  The former produces a sum in the region of $250 million, the latter about $112 million.

3. It is accepted that the usual order for interest is prime +1%.  The usual order can be departed from ‘in any particular case where there is evidence which shows some other rate to be more appropriate’ (per Cons JA in Komala Deccof & Co. S.A. v. Pertamina Minyak Dan Gas Bumi Negara (Pertaminia) [1984] HKLR 219 at p.223C.)

1. Prime or HIBOR?

4. A considerable amount of evidence, in the form of exhibits to affirmations, has been adduced.  Detailed analyses have been made of the numerous loans and borrowings made by Sino and Hang Lung over the last 15 years or so.  For comparative purposes there is also an abundance of evidence concerning loans by other major property developers such as “Sun Hung Kai”, “Cheung Kong” and “New World”.

5. Put simply, Mr Anderson Chow SC’s argument (for Hang Lung) is that when major property developers take out substantial loans in the course of business, the base rate is usually the inter-bank rate of “HIBOR” and not “prime”.  Given that the purpose of interest is to compensate the successful party for the cost of having had to part with its money, the appropriate base rate should be HIBOR.  Mr Chow also submits, correctly, that the court should look the rate at which a plaintiff with the general attributes of the successful party could borrow money but should disregard any special or particular attributes of the actual plaintiff in question.

6. I do not think that HIBOR is the appropriate base rate in this case for the following reasons :

(i)	There is nothing unusual in this particular case.  Although the litigation has been lengthy and factually complex, the issue has been stark, namely, Sino put a substantial deposit down to secure the purchase of a part-built hotel, they did not pay the balance on completion, the contract was not completed, who repudiated the contract?  Thus, there is nothing in the nature of the case itself which persuades me to depart from the normal rate.
(ii)	By definition HIBOR is the rate used for inter-bank transactions.  If the banks choose to use it for other loans it is a matter for them.  It is rarely appropriate for the courts to borrow that rate for interest in litigation.
(iii)	In the last 10 years or more there have been many many cases involving Hong Kong property developers.  There have been many many cases involving the return of deposits.  Throughout that period banks have lent vast sums of money using HIBOR as the base rate.  The courts however have continued to award interest based on the prime rate.  Cases where the court has exercised its discretion and awarded interest based on HIBOR are very very few and far between.  Mr Chow was only able to refer me to New World Development v. Sun Hung Kai Securities, HCA21961/1998 in which Deputy Judge To had said that, in that case, “prime was inappropriate”.  He did not however say that HIBOR was appropriate.  He also referred to Super Mate Ltd v. Keen Shine Ltd, HCA2645/2000 in which prime minus 2% was awarded.
(iv)	In spite of the fact that major companies have borrowed, generally speaking, at HIBOR rates the courts have not departed from the principles that prime is the appropriate rate for good reason.  HIBOR is a highly volatile rate.  Since 1997 it has fluctuated from 0.09% to 19.28%.  The margin which is added to it as a term of the loan also varies enormously and is often calculated to three decimal places.
	Moreover, it varies on a daily basis.  Merely selecting the HIBOR rate for the first or last day of each month (as proposed by Hang Lung) and calling it a “one month HIBOR” is not an accurate description as there will have been daily fluctuations (possibly large) within each month.  By the same reasoning, a ‘1 year HIBOR’ is even more meaningless.  Unlike prime it can be, at times, an unsteady ship in a stormy sea.
(v)	The use of prime as the base rate by the courts reflects a need for consistency and stability.  It is sensible for litigants to have a reasonable expectation of what interest will be payable, whilst leaving the door open for exceptional cases.  The terms of loans between banks and major companies vary all the time.  Terms vary, base rates vary, conditions vary, securities vary, creditworthiness varies, the purpose of the loan varies, the size of the loan varies and so on.  All this is stating the obvious but serves to demonstrate that the use of HIBOR in commercial loans depends on many things with which the courts are not concerned when deciding how to compensate a litigant for being deprived of his money for a period of time.

7. Thus, I am not persuaded in this case to depart from prime as the base rate.  The next question is whether there should be a departure from the normal rate of prime +1%.  I shall deal briefly with that question in the following section.  Some of the issues considered therein are also relevant to the primary question of principle considered above.  I only include them below to avoid repetition.

2. Prime +1% or some other margin?

8. It is impossible to be exact in a case such as this.  A broad brush approach has withstood the test of time.  The court has to try and steer a course between too high a margin which would result in an undeserved profit to Sino and too low a margin which would fail to compensate them adequately.

9. In order to decide whether or not prime +1% is too high (no-one suggests it is too low), it is helpful to (a) take an overview of Sino’s credit history over the last 10 years and (b) make general comparisons with the borrowing of other similar sized developers.

10. As stated, an abundance of evidence has been supplied in this regard.  Too much analysis of too many loans does not assist.  Both Mr Chow and Mr Ronny Tong, SC leading Ms Yvonne Cheng (for Sino) have helpfully distilled the several bundles of statistics, graphs, contracts etc. into a more general form.

11. Mr Tong points out there have been times when Sino has borrowed at prime +1% or higher.  He reminds the court of the Asian financial crisis and rumours in the market place concerning Sino’s liquidity which, at the time, made it difficult for Sino to borrow at all.  He points to schedules which show that Sino has, at times, had to pay more for its borrowings than its competitors.  He also submits, and I agree, that comparisons with “1^st tier” developers such as Cheung Kong or Sun Hung Kai are less helpful.  In fact, he goes further and submits they are unhelpful.

12. A final point he stressed, which was not specifically addressed by Mr Chow, is that the relative cheapness of a loan by a big company is usually a reflection of the amount of security provided.  The cost of loans to big companies should always be viewed in context.

13. Mr Chow’s main thrust was to persuade the court to adopt HIBOR as the base rate.  Having been unsuccessful in that submission, he relies on the same facts and figures to persuade the court to select a figure lower than prime +1%.  Although his analyses of loans made by Hang Lung, Sino, Cheung Kong, Sun Hung Kai and New World primarily concern the “HIBOR argument” they have, nonetheless, some relevance to secondary issue also, namely, what would Sino have had to pay for a $321 million loan which remained unpaid for about nine years?

14. I am sure that, taking an overall view, Sino themselves would expect to have done better than prime +1%.  The totality of the evidence persuades me that interest at prime +1% in this case would be too generous.  Such is the size of the deposit and the many years it has remained in Hang Lung’s hands even small adjustments to the margin produce very big differences to the ultimate figure.  Each percentage point above or below prime is worth approximately $28 million.

15. Ultimately, it is important to err on the side of safety to ensure that Sino are not under compensated.  I am satisfied, having taken a broad view of Sino and Hang Lung’s credit history over the last 10 to 15 years, that prime minus 0.5% would achieve this whereas anything lower might risk under-compensation.  Such a rate will produce a sum of approximately $178 million.  Having considered all the evidence, I have come to the conclusion that prime simpliciter would have been marginally too generous.

16. Pursuant to Cons JA’s judgment (see paragraph 3 supra) this is a case where “some other rate is appropriate” (i.e. prime minus 0.5%) but not a case to alter the principle of using prime as the base rate.

17. It is agreed that whatever the precise figure is, a sum of $96,159.30 will be added representing one day’s interest at the judgment rate of 10.934% for the day on which the deposit was returned, 2 February 2007.

3. From when does interest run?

18. The above estimate of $178 million is based on interest running from the date of the notice of termination of contract by Sino, that being the date when the cause of action arose, 30 June 1998.

19. Early correspondence suggested that Sino did not challenge this position.  However, it has become part of their argument that interest should run from the time the money was handed over (namely by four instalments on diverse dates in 1997).

20. In my judgment, Hang Lung’s position that interest runs from the date Sino gave notice on 30 June 1998 is the correct one.  The reasons are as follows :

(a)	There is no contractual provision for interest therefore the only interest claimable is statutory interest, pursuant to s.48 of the High Court Ordinance, Cap. 4.
(b)	The fact that Hang Lung had the benefit of the deposit money up until notice of repudiation does not change the position that in the absence of specific contractual terms interest does not run until a cause of action accrues.
(c)	The cause of action stems from 30 June 1998.
(d)	Any perceived unfairness is balanced by the fact that the benefit to Sino was that it had secured the bargain it sought, namely the purchase of the hotel by them and no-one else at an agreed price.  Had Hang Lung conceded liability on 30 June 1998 (an unlikely scenario but a useful test) I am satisfied that the deposit would have been returnable interest free.

21. I order that interest be calculated at prime minus 0.5% from 30 June 1998.  Sino has effectively won the argument on costs and I therefore award them the costs of and occasioned by this application on a nisi basis.