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Wayfoong Finance Ltd v. Tommy Ng Sung Hei

Read the full judgment text of DCCJ 5774/1974 on BabelCite. This District Court judgment was delivered on 4 April 1975.

1. On the 28th February, this year, the Plaintiff came before me on a similar application in V.C.J. Action No. 5106 of 1974, and after a three hours hearing, it was adjourned at the request of Mr. Fong, the Plaintiff's solicitor, for the purpose of consulting counsel. In this present application which came before me over a fortnight thereafter, Mr. Fong attended admittedly without any counsel opinion and regretfully offered very little further assistance to the Court. I am thus left with the tas

Case No.DCCJ 5774/1974
Court
District Court
Date04 Apr 1975
Judge—
Case Document
100%Judiciary

DCCJ005774/1974

IN THE DISTRICT COURT OF HONG KONG

HOLDEN AT VICTORIA

CIVIL JURISDICTION

ACTION NO. 5774 OF 1974

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Between Wayfoong Finance Limited Plaintiff
  and  
  Tommy Ng Sung Hei Defendant

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Coram: Liu, D.J., Q.C. in Court.

Date of Judgment: 4 April 1975

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RULING

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1. On the 28th February, this year, the Plaintiff came before me on a similar application in V.C.J. Action No. 5106 of 1974, and after a three hours hearing, it was adjourned at the request of Mr. Fong, the Plaintiff's solicitor, for the purpose of consulting counsel. In this present application which came before me over a fortnight thereafter, Mr. Fong attended admittedly without any counsel opinion and regretfully offered very little further assistance to the Court. I am thus left with the task of having to unravel the law and the facts in this application without the fullest possible argument. However, in the course of my deliberation my burden has been considerably lightened by the recent judgment of Judge Power in Wayfoong Finance Limited v. Ng Chung and Chan Shing (1). Hire-purchase agreements have been and still are causing not insubstantial difficulties, and the following comments of Professor Ziegel are revealing:-

  "The number of legal problems continues to multiply and some aspects of the law of hire-purchase have reached a state of complexity which must battle even the most expert lawyer."  
  "The law concerning an owner's rights on the termination of a hire-purchase agreement is in a muddle and the owner's position an unenviable one." (2)  

2. In this case, the Plaintiff is inter alia a hire-purchase firm of motor vehicles. By a Hire Purchase Agreement dated the 26th July 1973, the Plaintiff let to the Defendant a new private motor car Registration No. DB 4926 on the hire-purchase terms therein contained. Having made the initial payment, the Defendant defaulted after four monthly instalments. Thus, the said Hire Purchase Agreement was breached by the Defendant and terminated by the Plaintiff. The said private motor car was thereupon repossessed and sold pursuant to Clauses 7 & 9 of the said Hire Purchase Agreement. Pursuant to Order 84 Rule 3 of the Rules of Supreme Court which is applicable to the District Court, the Plaintiff now seeks leave to enter judgment in default of defence.

3. It is to be noted that in like cases in the English County Court, the Plaintiff may simply enter judgment in default of defence. See County Court Rules 1936, Order 10 Rule 2. (3). In this Colony, Order 84 Rule 3 R.S.C. is made applicable to the District Court, and the procedure may be summarized as follows:-

  (1) An inter partes summons need be issued;  
  (2) This summons must be served on the Defendant;  
  (3) An affidavit in support is not necessary;  
  (4) At the hearing of the summons, the original hire-purchase agreement (a copy may be put in with satisfactory evidence of loss or destruction) must be produced and marked;  
  (5) Whilst the question of a penalty may be raised in the English County Court by a summary application for entering judgment in default of defence and thereafter determined in an action proper, the primary task of the District Court under O.84 r.3 is to decide whether the sum claimed may be (and not is) penal; (4)  
  (6) Where leave is refused, the District Court must proceed to try the action;  
  (7) In the absence of any rules prescribed for bringing the case to trial, perhaps, directions for such trial ought to be given by the hearing judge.  

4. Steps set out above in (1) to (4) have been complied with in this case. The said Hire-Purchase Agreement was produced and marked "A". The sole issue for adjudication is whether the amount claimable under Clause 9 of the said Hire Purchase Agreement may be a penalty.

5. I offer no apologies for reiterating the oft-quoted definition by Lord Dunedin in Dunlop Pneumatic Tyre Company Limited v. New Garage and Motor Company Limited, (5):- "The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage." The principles governing a penal contractual provision are said to "have been applied to hire-purchase cases in a highly technical and distinctive fashion." (6). However, the basic concept has not been eroded by these special considerations for hire-purchase agreements. Of course, the Courts will also have to be guided by the very pertinent observation of Diplock, L.J. in Robophone Facilities, Limited v. Blank (7) :-

  "Nevertheless, the courts would be doing an ill-turn  
  "to those whom the rule about 'penalty clauses' is designed  
  "to protect if they were to apply it so as to make it  
  "impracticable for parties to agree at the time when they  
  "enter into a contract on a fair and easily ascertainable  
  "sum to become payable by one party to another as compensation  
  "for the loss which the latter will sustain as a consequence  
  "of its breach. It is good business sense that parties to  
  "a contract should know what will be the financial consequences  
  "to them of a breach on their part, for circumstances may  
  "arise when further performance of the contract may involve  
  "them in a loss. And the more difficult it is likely to prove  
  "and assess the loss which a party will suffer in the event  
  "of a breach, the greater the advantages to both parties  
  "of fixing by the terms of the contract itself an easily  
  "ascertainable sum to be paid in that event. Not only does  
  "it enable the parties to know in advance what their position  
  "will be if a breach occurs and so avoid litigation at  
  "all, but, if litigation cannot be avoided, it eliminates  
  "what may be the very heavy legal costs of proving the loss  
  "actually sustained which would have to be paid by the  
  "unsuccessful party. The court should not be astute to  
  "descry a 'penalty clause' in every provision of a contract  
  "which stipulates a sum to be payable by one party to the  
  "other in the event of a breach by the former."  

6. It is convenient to set out here verbatim Clauses 7 & 9 of the said Hire Purchase Agreement:-

  "7. On any default in the punctual payment of rent or of any other sum payable under the Agreement (whether demanded or not) or on any breach of any of these conditions or if the hirer commits any act which may be or become an act of bankruptcy or (being a company) enters into any liquidation or dies or if a distress is levied or threatened to be levied upon the said motor vehicle or upon the hirer's premises or effects or if the hirer allows a judgment to remain unsatisfied then it shall be lawful for the Owner (but without prejudice to the Owner's claim for arrears of hire or damages for breach of agreement and without discharging any liability of the hirer to the Owner) to forthwith terminate the hiring and the Owner's consent to the hirer's possession of the said vehicle shall be deemed to be withdrawn and the hirer shall forthwith at the hirer's expense deliver up the said vehicle to the Owner and the Owner and its servants or agents shall be entitled without any notice to enter upon any premises where the said vehicle may be and seize and take possession thereof and to recover all charges costs and expenses incurred in connection therewith."  
  "9. If the hiring be determined by the Hirer under paragraph 8 hereof or if the Owner terminates the hiring or repossesses the vehicle under paragraph 7 hereof the Hirer shall pay to the Owner all overdue rentals and all sums expended in repossession of the vehicle, the estimated cost of putting the said motor vehicle into good repair and by way of compensation for depreciation the difference between the total sum which would have been paid had this agreement run its full period and had the hirer performed his obligations hereunder completely (less a discount for the unearned hire charges) less all instalments of rent paid to the date of repossession and the sum at which the vehicle shall be sold by the Owner subsequent to repossession."  

7. In substance, Clause 9 provides for payment by the Defendant as hirer in breach:-

  (a) Arrears in rental,
  (b) Repossession expenses,
  (c) Estimated cost for repair, and
  (d) Compensation for depreciation.

8. I have read with admiration the methodical approach of the learned judge in Wayfoong Finance Limited v. Ng Chung & Chan Shing (1), and for the purposes of deciding whether Clause 9 may be a penal provision I associate myself with all his criticisms levelled at the above categories (c) and (d). Unlike the learned judge who received affidavit evidence in that case, on this application I need or could do no more than rule whether the claim under Clause 9 may be a penalty. I adopt the criticisms of the said learned judge for this narrower issue. In my view, that is all required of the Court under 0.84 r.3. For the ultimate analysis as to whether the sum claimable under Clause 9 is in fact a penalty, it is necessary, except in obvious cases, to tackle construction in conjunction with evidence of the surrounding circumstances prevailing at the time of the making of the hire-purchase agreement. See Lombank Limited v. Excell & Another.(8).

9. Category (d) "Compensation for depreciation" is to be calculated by a sum equal to the amount by which the hire-purchase price exceeds the items below:-

(i) a discount for the unearned hire charges,  
(ii) all instalments of rent paid to the date of repossession, and  
(iii) the sum at which the vehicle shall be sold subsequent to repossession.  

10. On this category (d), I wish to make the following observations:-

  I. It is noteworthy that by the words in its third and last set of brackets, Clause 7 of the said Hire Purchase Agreement contemplates a claim for damages for breach. At the time of the making of the said Hire Purchase Agreement, there was hardly any foreseeable difficulty in the future assessment of such damages. At the date of the said Hire Purchase Agreement, such loss resulting from a breach must have been expected to be readily calculable. It would be a simple matter of dollars and cents. Hence, there would seem to be no justification for prescribing any particular set of rules in Clause 9 for the assessment of damages under the demonstrably false description "compensation for depreciation". When assessment of damages was expected to present no great difficulty, provision, such as Clause 9 for a set of special rules for their calculation must be viewed with suspicion.  
  II. In the adjourned application in V.C.J. Action No. 5106 of 1974, I was shown a table for calculating the discount unearned hire charges for refund. Mr. Fong was unable to explain to me how that table works. It would appear that the Plaintiff's profit in the hire-purchase was likewise spread out for payment by the Defendant over the hire-purchase period and that in each month's rental instalment, a portion of such profit is included. In this application, I am told that only a percentage of the profit allotted to the unexpired balance of the hire-purchase period would be refunded. I know not what this percentage is. Obviously this "compensation for depreciation" clause under Clause 9 covers more than mere depreciation of the vehicle itself, and to that extent it is a false description. Though the majority of the law lords in Bridge's case favoured the view that construction of a terminology, though obviously false, should be as a matter of substance and not of form (See also the comment of Professor Ziegel in the 1964 Cambridge Law Journal at p.119), in his speech in the House of Lords, Lord Devlin in Campbell Discount Company Limited v. Bridge, (9) was the opinion that the Court should not go behind a false description and get at the reality and that once a provision was held a penalty it should be treated as void for all purposes. This line of reasoning receives ardent support from the learned author in Goode on Hire Purchase Law and Practice, 2nd Ed. at p.396 where it concludes: "Thus, if an agreement provides for payment by way of depreciation of a sum which in fact covers the owner's entire loss of profit, whether resulting from depreciation or not, the provision should be held penal and the owner should be allowed to recover such loss as he can show resulting from depreciation." In this case, we have precisely the same contractual provision envisaged and condemned by that learned author. "Compensation for depreciation" calculated under Clause 9 was designed by the Plaintiff to cover inter alia its entire loss of profit. After all, it has been said that the test for a penal clause is whether it is a screen for a collateral object. See Slowman v. Walter, (10). Is it then still open to challenge that the sum claimable under category (d) is capable of being held a penalty? Be that as it may, this demonstrably false description provides yet a further cause for suspicion.  
  III. In paragraph 6 of the Particulars of Claim, "fixed penalty charges" were also claimed as a result of repossession and sale. There is no evidence of the nature of these "fixed penalty charges" (11) which seem to suggest the existence of some further terms collateral to those contained in the said Hire Purchase Agreement.  
  IV. There is no time limit for the permitted sale subsequent to repossession, and that would appear to be oppressive. However, it may be arguable that all clauses are to be construed against the Plaintiff as maker and that the provisions for "estimated cost for repair", "all instalments paid to the date of repossession", and "sale of the repossessed vehicle" should be given the most benevolent construction so as to avoid absurdities. But such possible contention on construction, though it may have much to commend itself, bears little relevance to the immediate issue, namely, whether the sum claimable under Clause 9 may be or is capable of being held a penalty.  
  V. In substance, the Hire Purchase Act 1965 limits the hire-purchase company's claim to actual loss with a ceiling of one half of the purchase price. Clause 9 ensures payment of almost the whole of the hire-purchase price in all events, and this is suggestive of a penalty.  
  VI. Finally, the case of Anglo Auto Finance Company, Limited v. James, (12) is instructive. There, upon termination of the hiring, the hirer was made Liable for:  
  (a) the arrears, and  
  (b) a sum equal to the amount by which the hire-purchase price exceeded:-  
  (i) the deposit,  
  (ii) the instalments already paid, and  
  (iii) proceeds of resale within a stated period.  

11. It was held that the provision was a penalty and that the hire-purchase company was entitled to recover only arrears and costs of repossession as well as actual damages. In James' case, there was no refund of any portion of trade profit included in the hire-purchase price. Save for the untidy language and the "fixed penalty charges" in this case, it would seem that the basic intent of the Plaintiff's was to act fairer towards the hirer than the hire-purchase company in the James' case by allowing "a discount for acceleration of payment". The ratio decidendi in James' case is savagely attacked by the learned author in Goode on Hire Purchase Law and Practice 2nd Ed. at p.395. Therefore, should I be called upon to determine whether in fact Clause 9 is a penalty as judged in the surrounding ciroumstances at the material time, I am naturally reluctant now to forecast the outcome. In this regard, I refer also to S.15 of the Hire-Purchase Act, 1960 of New South Wales which gives statutory sanction to the sum "meant" to be claimable under Clause 9 in this case. (13). This may well be a futile academic exercise in the end, because in that event the Plaintiff will be expected to adduce evidence to satisfy the Court that in the surrounding circumstances judged as at the date of the said Hire Purchase Agreement, Clause 9 is not penal; such evidence cannot obviously fall much shorter of that for proving actual loss and damage. However, the issue as at present before the Court is whether the sum claimable under Clause 9 or part thereof may be or is capable of being held a penalty, and although our goals are somewhat different, with all these pitfalls, I have arrived at the same conclusion as that reached by Judge Power. I rule that categories (c) "Estimated cost for repair" and (d) "Compensation for depreciation" in Clause 9 may be penal. In the result, the Plaintiff is entitled to be granted leave to enter judgment for (a) Arrears in rental and (b) Repossession expenses, and as I am duty-bound to proceed to try this action, the Plaintiff is further entitled to directions for such trial.

12. I have taken some time for my deliberation, and in the circumstances, the best course seems to be for this case to be adjourned sine die with liberty to restore so as to enable the Plaintiff to evaluate its position in the light of this ruling, and I so order. There will be no order as to costs.

  (B. Liu)
  District Judge
  4.4.75.

Representation:

Mr. Fong of Johnson, Stokes & Master for Plaintiff.

(1) KCJ Action No. 10586 of 1974 judgment of which was delivered on 4th March 1975.

(2) "The Minimum Payment Clause Muddle" by Jacob S. Ziegel. 1964 Cambridge Law Journal 108 at p.127.

(3) In the English County Court, a claim for a debt or liquidated damage may be commenced by a default action, and judgment in default of defence may be entered. See 0.10 r.2 The County Court Rules 1936. If a claim under a hire-purchase agreement ever required to be investigated to ascertain whether it is a penalty, it would not be treated as a claim for a debt or liquidated damage, and thereafter under 0.15 r.5 C.C.R. the default action shall continue as if it had been commenced as an ordinary action. See generally p.p. 341, 351, 386 and 431 The County Court Practice 1973. Therefore, in the English County Court, the query of a penalty, once raised, would have to be conclusively decided on evidence of surrounding circumstances as at the date of the hire-purchase agreement. See Lombank Limited v. Excell and Another, 1964 1 Q.B. 415. The bone of contention in the English County Court would then be whether the relevant clause is (and not "may be" as in this case) penal.

(4) Marginal reference 84/1-3/8, 1973 White Book.

(5) [1915] A.C. 79 at p.86.

(6) Goode on Hire Purchase Law & Practice, 2nd Ed. p.393 et seq.

(7) [1966] 3 A.E.R. 128 at p.142.

(1) KCJ Action No. 10586 of 1974.

(8) 1964 1 Q.B. 415 at p.425.

(9) [1962] A.C. 600 at p.634.

(10) (1784) 1 Bro. C.C. 418

(11) "Fixed penalty charges" are probably traffic fines.

(12) [1963] 3 A.E.R. 566.

(13) Under S.15 of the Hire-Purchase Act, 1960 in New South Wales, Australia, the owner may recover (1) all arrears in rental, (2) repossession expenses, (3) costs for repair, storage or maintenance, and (4) a sum to the extent of hire-purchase price less:-

(a) All rental due,

(b) Net sale proceeds, and

(c) Rebate of term charges and insurance.