Pre-judgment interest rate – prime plus 1%

In May 2016 the Court of Appeal in Hong Kong handed down three consistent decisions confirming that (among other things) prime rate plus 1% should continue to be used as the starting point for awarding pre-judgment interest on damages awarded by the courts in civil disputes.

Recent appeal cases

A defendant in all three cases argued that reference to prime rate was no longer realistic, as interest rates in Hong Kong had been persistently low for many years, and that the Hong Kong Interbank Offer Rate (HIBOR) thus more accurately reflected a commercial rate of borrowing in Hong Kong. The current prime rate (also referred to as the 'best lending rate') is 5% and 12-month HIBOR is approximately 1.27% (as of June 2016) – a difference of more than 3%.

In three separate judgments, the Court of Appeal ruled that prime rate plus 1% should continue to be adopted by the Hong Kong courts as the conventional starting point for awarding pre-judgment interest on damages, unless there is statistical evidence showing that:

• generally, prime rate plus 1% should no longer be used as a starting point; or
• in a specific case, the adoption of another rate is appropriate (eg, the actual cost of borrowing for a plaintiff is below prime rate).

The Court of Appeal considered that none of the three cases provided a sufficient basis for moving away from prime rate plus 1% as the starting point. The court explained that this longstanding practice dates back to Komala Deccof v Pertamina – a 1984 appeal decision in which the court considered that prime rate plus 1% was the appropriate starting rate, having regard to the then commercial lending and borrowing rates and following the practice used by the Commercial Court in England.  In 2002 this rate was subsequently approved by the Court of Final Appeal in Hong Kong as the "theoretical cost to the plaintiff of borrowing the sums withheld".

Comment

The three recent judgments of the Court of Appeal may be seen by some to be out of touch with commercial reality. Rates of borrowing have been consistently low for years in Hong Kong. When Komala was decided more than 30 years ago, the courts in Hong Kong followed the English approach in setting the rate at 1% over the then 'minimum lending rate', which was prime rate.

Some may argue that prime rate is no longer the 'minimum lending rate' in Hong Kong. For example, most major banks in Hong Kong currently offer low mortgage rates in a range between 1.8% and 2.5%.

It could also be argued that a key indicator of interest rates should be the 'base rate' – the rate that the Hong Kong Monetary Authority (HKMA) charges licensed banks for transactions through the Discount Window (the facility through which banks can borrow Hong Kong dollars overnight from the HKMA), rather than the best lending rate (ie, prime). The Hong Kong base rate was between 7% and 8% in 2000 and is currently 0.75% (as of June 2016).

In the United Kingdom, a 2004 report published by the Law Commission on pre-judgment interest on debt and damages recommended that pre-judgment interest be set at 1% above the Bank of England base rate, but the courts should have discretion to depart from this rate where there is a good reason to do so. The Bank of England base rate is currently 0.5%.

In each of the three cases referred to, the Court of Appeal considered that there was insufficient evidence to show clearly that prime rate is no longer relevant or rarely used in Hong Kong. It is unclear what evidence was adduced by the parties in respect of the market conditions and funds borrowing environment in Hong Kong.

Going forward, for now the courts in Hong Kong are expected to follow these Court of Appeal decisions. Therefore, prime rate plus 1% will be the starting point for awarding pre-judgment interest on damages awarded to a successful plaintiff, 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. Some losing defendants may regard these recent decisions as overly generous towards successful plaintiffs, given that commercial parties would generally be able to borrow funds at rates below prime rate (not only blue-chip companies and major financial institutions).

Interestingly, in Waddington the Court of Appeal concluded on this issue by stating that:

"That is not to say that there may not, in the future, arise a case in which the necessary evidential foundation will be laid for a consideration of whether or not the time has come to move away from prime rate plus 1% as the starting point for pre-judgment interest. But this is not such a case."

In the meantime, plaintiffs should not get carried away by approaching civil litigation as an opportunity for an investment return. It rarely is once (for example) the irrecoverable legal costs and management time are taken into account.

This blog is a summary of recent developments in Hong Kong. It should not be regarded as a substitute for advice in any particular case.  RPC is not responsible for the content of external websites.