Authored by: Justin Yuen
The recent judgment in China Agri-Products Exchange Ltd v Wang Xiu Qun & Anor, HCA 1807/2011, usefully sets out the relevant principles considered by the court when considering the question of interest payable on a judgment sum, in particular, whether it should be reduced due to a claimant’s delay in commencing or prosecuting proceedings. The court also considered simple versus compound interest.
The court had handed down judgment in the Plaintiff’s favour for RMB510 million for an Overpayment Claim, HK$54 million for a Profit Guarantee Claim and HK$1 for a Land Indemnity Claim and the court had to determine the question of interest in respect of those awards. The issues were:
- When should the pre-judgment interest payable by the Defendants start to run in respect of the Overpayment Claim, Profit Guarantee Claim and Land Indemnity Claim (Issue 1);
- Whether there should be a 50% discount to the pre-judgment interest payable by the Defendants by reason of alleged delay on the Plaintiff’s part in bringing the matter to trial (Issue 2); and
- Whether the interest payable under certain Instruments was simple or compound interest (Issue 3).
Issues 1 & 2: Starting time for the computation of pre-judgment interest and question of delay
The Court set out the relevant principles as follows:
- S.48(1)(b) of the High Court Ordinance (Cap 4) (HCO) provides that the court may award simple interest on any claims for damages for all or part of the period between the date when the cause of action arose and date of judgment.
- An award of interest is to compensate the claimant for being deprived of the money during the relevant period. In commercial cases, such compensation is reflected in interest at a rate at which a person in a similar position as the claimant generally would have had to pay to borrow money. For such cases, prime plus 1% should be the starting point and interest would be awarded at such rate, unless there was evidence to persuade the court that time had come to move away from such rate.
- Delay may be a factor taken into account by the court in considering the question of interest. The principles for the exercise of jurisdiction under s.48 of the HCO, are:
- the court may take into account delay on the claimant’s part and reduce the award of interest accordingly;
- a broad-brush approach to questions of delay is appropriate. That requires being realistic, and considering the character of the delay, making due allowance for the circumstances. Essentially, the court is concerned to see whether the claimant has neglected or declined to pursue or prosecute their claim for a significant period. If so, the logic of disallowing or reducing an award of interest for that period comes into play.
- In commercial disputes, the following principles are also relevant:
- where a claimant has delayed unreasonably in commencing or prosecuting proceedings, the court may exercise its discretion either to disallow interest for a period or to reduce the rate of interest;
- in exercising that discretion the court must take a realistic view of delay. In the case of business disputes, litigation is for all parties an unwelcome distraction from their proper business. It is not reasonable to expect any party to take every litigious step at the first possible moment, or to concentrate on litigation to the exclusion of all else. Delay should only be characterised as unreasonable for such purposes when, after making due allowance for the circumstances, it can be seen that the claimant has neglected or declined to pursue their claim for a significant period;
- when determining what disallowance or reduction of interest should be made to mark a period of unreasonable delay, the court should bear in mind that the defendant has had the use of the money during that period of delay (though it may not always excuse the fault of the claimant.
The Plaintiff’s position was that pre-judgment interest should run from the date of the accrual of the causes of action of the respective claims. The Defendants’ position was that it should only run from the date the claims were “properly introduced and particularised” by the Plaintiff, namely either the date of the writ, or alternatively, of the Re-Re-Amended Statement of Claim (SOC). The Defendants also alleged that there was “substantial unjustifiable delay” on the Plaintiff’s part.
Court’s decision on pre-judgment interest
The Court held that:
- There was no unreasonable delay on the Plaintiff’s part in prosecuting its claim before the date of the writ. If anything, the lapse of time was caused by the Defendants’ own wrongful conduct. There was simply no justification to deny the Plaintiff’s request for pre-judgment interest for the period from the dates of accrual of the respective causes of action of the claims to the date of issue of the writ.
- Regarding Issue 2 and the Defendants contention that there should be at least 50% discount on the interest payable by the Defendants to the Plaintiff, relying on a number of matters relating to the Plaintiff’s alleged “delay in prosecuting the present action”, there was again no substance in the Defendants’ criticisms.
- Regarding the Defendants complaint that it took the Plaintiff some 8.5 years to bring the present action to trial, there was nothing to suggest that the Plaintiff had been dragging its feet or had been acting unreasonably. Further, the progress of this case had to be judged realistically given (i) its complexity; (ii) need to adduce expert evidence from multiple disciplines; (iii) existence of parallel Mainland proceedings; and (iv) the Defendants’ own conduct of the litigation.
- It was completely unrealistic to expect the Plaintiff to be in a position to plead all particulars and exact figures of the respective claims at the earlier rounds of pleadings. There was also no justification to deny interest to the Plaintiff by reason of the subsequent amendments.
- The time span of this litigation had to be considered against the overall complexity of the case and vast amount of factual and expert evidence adduced at the trial, which was reflected in the length of trial (23 days) and length of judgment (212 pages). In a case of this magnitude, the length of time taken from the commencement of the action to conclusion of the trial could not be said to be extraordinary, and the Plaintiff should not be held accountable or penalised for the same.
- The interest for the award under the Overpayment Claim and Profit Guarantee Claims should start to run from the respective dates of the accrual of the respective causes of action to the date of judgment at the rate of prime plus 1%. The interest for the award of the Land Indemnity Claim should start to run from the date of issue of the writ to the date of judgment at the rate of prime plus 1%.
Issue 3: Interest payable under the Instruments
The Plaintiff still owed amounts due under two respective Instruments, plus any interest stipulated in them, to the Defendants. There was a dispute as to whether such interest should be simple interest or compound interest. Clause 2 of the Instruments provided an undertaking to pay “適用于每天結餘的年利率為5%的利息(利息以一年365天為基準)”.
The Defendants argued that the definition of compound interest as commonly understood, is that interest is to be calculated on the principal amount and also on the accumulated interest of previous periods (be it on daily, monthly or quarterly intervals), thus being regarded as “interest on interest already accrued”, whereas the definition of simple interest is that interest is merely to be calculated upon the principal (i.e. the original amount of the loan) and that it then followed from the words “每天結餘” in Clause 2 that interest was to be accrued at an annual interest rate of 5% compounded on a daily interval. In the case of ambiguity in the meaning of Clause 2, the Defendant argued that the contra proferentem rule applied, so that the clause should be construed against the interest of the Plaintiff as it was the party who drafted the terms of the Instruments.
The Court rejected the Defendants’ above arguments, holding that the interest payable under the Instruments was only simple interest, for the following reasons:
- An express contract for payment of interest will normally specify the interest rate, and it may further specify the method of computing interest and whether interest is to be compounded. Computing of interest must be distinguished from compounding. The latter is the capitalisation of interest so that interest itself yields interest.
- The courts have emphasised that a construction for charging compound interest should be supported by the wording of the relevant clause. The party claiming compound interest has the burden to prove the contractual terms for charging compound interest and the rate. The fact that interest was stated in the relevant clause to accrue from day to day is “neutral”. If it were the parties’ intention that the interest accruing daily be capitalised, it would be surprising that there was no reference to compound interest or capitalisation of interest in the relevant clause.
- In the present context, had it been the parties’ intention that the interest under the Instruments was to be compounded daily, they could have easily provided for it by stipulating, e.g. the payment of “複利息” or “複利率” (i.e. the Chinese term for compound interest). Yet there were no such words in Clause 2.
- Therefore the combined effect of the words “每天結餘” and subsequent phrase “利息以一年365天為基準” was that the annual interest rate of 5% would be divided by 365 to produce a daily interest factor, which could then be multiplied by the number of days for which the loan was outstanding. The words “每天結餘” themselves are neutral as to whether the interest charged is simple or compounded in nature. They do not, without more, support a construction that interest was to be compounded or capitalised daily.
- There was no room for the application of the contra proferentem rule because:
- the meaning of Clause 2 was clear; and
- the modern view is to recognise that commercial parties are entitled to make their own bargains and that the court’s task is to interpret fairly the words they have used. In relation to commercial contracts negotiated between parties of equal bargaining power (as was the case here), the contra proferentem rule has a very limited role.
Given the long duration of litigation in Hong Kong, interest is an important component of the winning party’s claim. This judgment provides clear guidance as to the period and rate generally adopted by the court in awarding interest.