Wayfoong Finance Ltd v. Ng Chung and Another

DCCJ010586/1974

IN THE DISTRICT COURT OF HONG KONG

HOLDEN AT KOWLOON

CIVIL JURISDICTION

ACTION NO. 10586 OF 1974

-----------------

-----------------

Coram: Judge Power, D.J.

Date of Judgment:

-----------------

JUDGMENT

-----------------

1. In this matter the Plaintiff, a Hire-purchase Company, seeks to recover damages from 1st Defendant for breach of a hire-purchase agreement and from 2nd Defendant as his guarantor. The Plaintiff Company repossessed and sold the vehicle and in clause 6 of its Particulars of Claim states that the balance of the sale price after deducting sums expended in repossession and payment of fixed penalty charges was $565 this amount having been calculated under Clause 9 of the agreement. The Plaintiff Company further alleges in Clause 4 of its Particulars of Claim that the outstanding payments amounted to $7,608 and finally claims that it is entitled to this figure less $565 which leaves a figure of $7,043. It appears that only the 2nd Defendant was served with the writ. He did not enter a Defence and application was then made by the Plaintiff Company for leave to enter judgment under 0. 84 r. 3.

2. This order provides (0.84 r.3(2)) that the summons must be served on the Defendant. The affidavit of service of the writ shows that this 2nd Defendant was served personally at Block 2, 19, Nam Tin Estate, Kowloon. His address on the writ is shown as "M/S Hoo Cheong Store BGC No. 352111, Block 2, 19, Nam Tin R/E., Kowloon". There is nothing in the papers to show from where this address was obtained. The affidavit of Mr. Tsang Kwong Lai as to service of this summons on the 2nd Defendant states that it was served by posting it "to the said 2nd Defendant at Block 2, 19, Nam Tin Estate, Kowloon". It is true that under 0.65 r.5 service can be effected by post. In this case there being no address for service for the 2nd Defendant, as he did not file a defence, the letter would have to be addressed to "his usual or last known address". While "Block 2, 19 Nam Tin Estate, Kowloon" was the place at which the 2nd Defendant was served with the writ there is nothing to show that it is his usual or last known address. Indeed, it would seem to me, that it can hardly be said to be providing an address at all where in a resettlement estate only the Block number is given. It may be that the address on the writ is the 2nd Defendant's usual or last known address but there is no evidence to establish that nor, of course, was that the address used for postal service. For the above reasons I have considerable doubt as to whether proper service was ever effected upon the 2nd Defendant.

3. However, the Plaintiff has addressed argument to me as to the enforceability of Clause 9 of the Hire-purchase agreement and has asked me, as there are 2,000, similar cases pending to give a ruling in that regard.

4. This is a matter of considerable difficulty and of importance as the rights of hire-purchase companies and of a very large number of hirers will be affected by the attitude which the Courts take to enforceability of this and similar clauses.

5. As to the general principles involved I consider I cannot do better than cite from the judgment of Denning L.J. in Campbell Discount v. Bridge (1962) A.C. 601 at 627:

6. I appreciate that the "minimum-payment" clause was a fixed percentage in the Campbell Discount Case but the general observations of Lord Denning are nonetheless apposite to the present case particularly as regards the fair and commonsense way in which he deals with lack of appreciation of the hirer of the real import of the Hire-Purchase form which he signs. If it is true that in England the hirer takes the form "on trust" when he signs it and that the Courts must therefore look with care at the form to ensure that the unsuspecting hirer is not being subjected to a penalty how much more true is this in Hong Kong. I doubt if one hirer in 10 in the Colony would be able even to read, let alone understand, the contents of the printed form. Before leaving the general principles involved I refer to the dicta of Lord Diplock in Financings Ltd. v. Baldock (1963) 2 Q.B. 104 at 117:

"In order to avoid the necessity of complying with the statutory requirements relating to money-lenders and to bills of sale, hire-purchase finance companies enter into a contract with the hirer whereby they hire to him a chattel for a fixed period at an agreed monthly rental and confer upon him an option to purchase the chattel at the end of the fixed period for an agreed (and nominal) sum. The business nature of the transaction is that of moneylending, and accordingly clauses are inserted by the finance company in the contract of hire in an endeavour to ensure that upon breach by the hirer of his obligation to pay an instalment of hire, the finance company shall be entitled, not only to terminate the contract of hire, but also to recover from the hirer sums which bear no relation to the damages appropriate to a breach of a genuine contract of hire. But hire-purchase finance companies cannot eat their cake and have it. If they choose to conduct their business by entering into contracts of hire of chattels, instead of entering into moneylending contracts secured by chattel mortgages, their legal rights will be governed by the terms of the contracts into which they enter and by the general principles of law applicable to contracts of that nature."

7. I turn now to the facts of the present application. In support of the application the Plaintiff filed 2 affidavits. The first was by a Mr. Michael HO Wai-kwong a supervisor of the Plaintiff Company to which was exhibited a copy of the Hire-Purchase agreement. This showed that after the initial cash payment of $3,619.50 the hirer, the 1st Defendant, had a balance of $9,200 plus hiring charges of $2,212 (a total of $11,412) left to pay to the Plaintiff Company. This was to be paid by 36 monthly instalments of $317.

8. It appears from Mr. Ho's affidavit that 1st Defendant made 12 payments totalling $3,804 which meant that, including his deposit, he paid a total of $7,423.50 leaving $7,608 outstanding under the agreement. As the payments commenced on 3rd March, 1973 the last payment was made on 3rd February, 1974. The vehicle was repossessed on 24th April, 1974 which meant that at that date the payments for March and April were outstanding, i.e. 14 monthly payments had become due under the agreement but only 12 had been paid.

9. It is perhaps worthy of remark that the Plaintiff Company's affidavits make no mention of any Notice of Default although it would appear that such may be necessary in certain cases even at Common Law (See Eshun v. Moorgate Mercantile (1971) 2 All E.R. 402 at 404 citing Reynolds v. G. & F. Facilities (1963) 107 Sol. 50 589).

10. The vehicle was sold for $1,000 of which the Plaintiff Company got $565 the balance having been expended for repossession expenses and fixed penalty charges.

11. The Plaintiff Company now seeks to recover what it says is a liquidated amount as provided under Clause 9 which clause it claims sets out a genuine pre-estimate of damage and not a penalty. Clause 9 provides that upon termination the hirer shall pay to the owner:

12. I shall deal firstly with (c). This in my view clearly provides a penalty. It does not set out, as it may have meant to, that the owner is entitled to the cost of putting the vehicle into good repair - it entitles him to the estimated cost. It entitles him to recover this cost without expending anything on repair. The effect of this is that the owner can repossess and sell the vehicle unrepaired, at the same time, obtain from the hirer the estimated cost of repairs. That this provides a penalty can be easily illustrated: A person hire-purchases a vehicle at a total hire-purchase price (total of cash price of $17,000 and hire charges of $3,000) of $20,000 and pays $5,000 down and is to pay 15 monthly instalments of $1,000. He pays 2 monthly instalments and then has a serious accident. He cannot afford the cost of repairs to the vehicle and the Company repossesses. The estimated cost of putting the vehicle into good repair is $6,000. The Company sells the vehicle, without repairing it, for $9,000. It then claims, under Clause 9, for estimated cost of repairs which is $6,000 and for compensation for depreciation. This will be the total sum to be paid, $20,000 less a discount for the unearned hire charges (for the purpose of this illustration I will use the table exhibited to the affidavit of Mr. Yeung to arrive at the figure to be deducted: 76/100 x 3000 = $2,280) less instalments of rent paid $6,000. (For the purpose of the illustration this figure will include both the "Initial Deposit" and the "Instalments of Rent" however, as to this, I shall make further comment later) less the sum at which the vehicle was sold - say $9,000.

so the Company will be entitled to ($20,000 less $17,280) $2,720 and to the estimated cost of repairs - $6,000. So the total amount the Company will obtain by virtue of the agreement will be:

This amount then is recovered under an agreement which, had it run its full course the most the company could have recovered would be $20,000. The illustration is of an extreme case but the principles involved hold good in all cases. (c) clearly imposes a penalty. However in the present case no claim is being made for estimated cost of repairs. As this estimated cost of repairs is a quite separate head of damage the fact that (c) provides for a penalty does not, in my view, mean that Clause 9 as a whole is a penalty clause.

13. In the present case, there being no claim made under this head, the claims being made under the other heads must each be considered on their merits.

14. I do not consider that (b) provides for a penalty. I turn now to consider (a) and (d). (a), on its face, does not provide for any peanlty. The Company is clearly entitled to all overdue rentals.

(d) assesses what the form calls "compensation for depreciation" by subtracting the following items from the total sum which would have been paid had the agreement run its full period:

15. I am of the view that (ii) when read with (a) clearly provides for a penalty. Under (a) the Company recovers all overdue rentals. Under (ii) it gives credit not for all rentals due at the date of repossession but for all rentals paid to the date of repossession. The effect of this is that the Company recovers due, but unpaid, rentals twice.

16. This can be easily illustrated: a hirer enters into an agreement at a Hire-Purchase Price of $20,000 (Cash Price $17,000 and Hire Charges of $3,000). He makes an initial payment of $5,000 leaving the balance to be paid by 15 monthly instalments of $1,000. He makes only 1 monthly payment. After a further 4 months have elapsed the Company seizes and sells the car for $9,000. The Company sues under Clause 9 but does not claim any estimated cost of repair. The deductions in the Compensation for Depreciation figure would be as follows:

17. This amount would then be deducted from $20,000 giving a figure of $3,640. The company would therefore under the agreement receive:

18. This example clearly shows how the Company recovers more than it was entitled to under the agreement. Certainly in many cases such as the present one, this is not so readily observable because it is obscured by the other figures involved but it nonetheless occurs. This is so because Clause 9 in effect allows it to recover due but unpaid rentals twice - once by directly suing for them and once by excluding them from the deduction to be made from the total sum when computing the Compensation for Depreciation. Indeed in Yeoman Credit v. Waragowski. (1961) 1 W.L.R. 1124 the Defendant was quite properly in my respectful view, given credit for the arrears of instalments, in relation to which judgment had already been obtained, when the final figure of damages was being assessed.

19. I have so far regarded the words "all instalments of rent paid" as including both what the agreement itself calls "monthly rentals" and the "Initial Payment". However I am in some doubt that the "Initial Payment" can properly be described as an "instalment of rent paid". If this be so then it is arguable that the formula for computing compensation for Depreciation also allows the company to, in effect, obtain the "Initial Payment" twice and provides for a penalty in that regard also.

20. Even if Clause 9 did not provide for recovery of a penalty it would still, in my view, not provide a proper basis for a claim under O.84 as the order does not apply to claims for unliquidated damages.

21. If Clause 9 is to be a proper pre-estimate of damage it is essential that it should set out a formula whereby the amount to which the Company is entitled can be positively ascertained i.e. an amount of liquidated damages. Does Clause 9 do this? I do not consider it does. One of the deductions to be made when computing the Compensation for Depreciation is "a discount for the unearned hire charges". How is this discount to be ascertained? There is no formula in the agreement itself. Is it to be what is fair and reasonable if so who determines what is fair and reasonable? If the Court is left to make such a determination, and I cannot see who else could properly make it, then Clause 9 does not provide a method of assessing liquidated damages. Such damages could not be assessed until the Court has ruled that the discount is fair and reasonable and a claim such as this would therefore be a claim for unliquidated damages to which 0.84 would not apply.

22. In the present case a table of deductions was exhibited to the affidavit of Mr. Yeung but there was no evidence that the rates contained therein were fair and reasonable and what we are concerned with here, of course, is whether the application is for liquidated damages. Indeed in another of these applications I was informed by Mr. Fong when referring to an exactly similar Hire-Purchase agreement and to the same Table of Deductions that the interest rate charged by the Plaintiff Company when they arrive at the hire charges set out in the agreement is not the same as allowed by them to the hirer in the Table of Deductions. Their interest figure, it would appear, is calculated on the whole sum for the whole period but interest figure allowed in the table is much less generous it being a reducting one in accordance with the reducing capital amount. Although I am not called upon to decide it here I should have thought it arguable that the Table does not provide a fair and reasonable method of assessing a discount for the unearned hire charges. I was not, I must say, impressed by Mr. Fong's argument that Hire-Purchase Company's are in business to make money and that they should therefore be allowed to earn interest at a higher rate than that which they are prepared to rebate to their customers. In Overstone Ltd. v. Shipway (1962) 1 W.L.R. 117 Davies L.J. agreed with Holroyd Pearce L.J. that assessing the interest rate in this regard was not a matter of exact mathematical calculation: "the function of the Court is not to act as mathematicians but to endeavour to ascertain the amount of the damage suffered by the injured party, and so far as money could do it put the injured party in the same position as if the contract had been performed". (p.124).

23. In this regard the view of Lord Denning in the Campbell Discount Case was that the Company "should recover the money it has advanced with interest at a reasonable rate up to the time when the hiring was terminated, less the instalments already received and the sum which the car might reasonably be expected to realize when it was delivered up to them". (p.632)

24. I turn again to the facts of the present case. The 1st Defendant deposited the trade-in value of $3,619.50 and this was treated as the Initial Payment. He then paid 12 monthly instalments of $317 ($3,634). His total payments then were $7,423.50. Leaving a balance owing of $7,608.

25. The Defendant's last payment was on 3rd February, 1974 and the hiring was terminated on 24th April, 1974. There were therefore "Overdue Rentals" due for March and April. The Plaintiff seeks as they are entitled to under Clause 9 to recover $634 in this regard. The Plaintiff in assessing the Compensation for Depreciation uses the figure $7,423.50 as the figure for "all instalments of rent paid". He has included the "Initial Payment" in this figure but he has not, of course, included the overdue rentals for March and April. The judgment he seeks will give him not only a judgment for the amount of the 2 rentals as such - $634 - but a further credit, in that regard, will also be included in the sum of $5,256.22 which he seeks as Compensation for Depreciation. This is in my view, as I have already indicated, a penalty. I will therefore not grant leave to enter judgment.

26. Indeed even were Clause 9 recast in an attempt to overcome the objectionable features which I have indicated above the Company would, if Financings Ltd. v. Baldock is correctly decided and there is nothing in my respectful view to indicate that it was not (it was reaffirmed in Eshun v. Moorgate (1971) 2 All E.R. 402), have to show before they were entitled to call such a clause into play that there had been a repudiation, not simply a breach of the contract by the hirer.

27. Further it would appear from the dicta of Lord Denning (at p.631) and Lord Denlin (at p.634) in the Campbell Discount Case that the clause may well be unenforceable in any event and is certainly so unless it was stated in the agreement that it is to apply only in the case of repudiation by the hirer. Should an assessment of damages be necessary, and it does appear to me that it will be hereafter in cases such as this, the Plaintiff Company must bear in mind that what the Court will be looking to in cases where damages are being assessed in consequence of a repudiation of the contract by the hirer will be "the value of the" vehicle at the date of repossession (See Financings Case at p.117, Campbell Discounts Case at p.265 and Yeoman Credit v. Waragowski (1961) 3 All E.R. 145 at 146). Of course this value may in some cases be reflected in the sum realized on sale but in others it may not. Indeed in the present case I would be by no means satisfied that it was, as the vehicle which had a cash price of $13,400 was sold some 15 months later for only $1,000. There may be reasons to explain this dramatic loss of value. If so they would have to be established on the assessment of damages. The deduction which must be made is of "the sum which the car might reasonably be expected to realize when it was delivered up to "the Hire-Purchase Company (Lord Denning in Campbell Discount Case at p.632). Indeed it might be argued that the provision in the agreement that the deduction shall be the "sum at which the vehicle shall be sold by the Owner" itself constitutes a penalty as such a figure is, we know from experience and commonsense, likely to be smaller, perhaps considerably smaller, than the value of the vehicle when returned to the owner. In other words it might be argued that the owner is holding the hirer in terrorem by saying - we will give you a credit not of what the vehicle is worth when we get it back but only of the figure which it realizes on a sale which shall be at a time and place and in a manner of our choosing.

28. I would finally remark that in my view the Particulars of Claim were quite inadequate. They should, whether the claim be under a Clause 9 of for common law damages, set out with enactitude the steps whereby the figures claimed are arrived at. This would at least give a hirer, who is most probably ignorant that he has any rights at all, the opportunity to query matters such as the sale price of the vehicle. In concluding I cannot help but respectfully endorse the remarks of Lord Radcliffe in the Campbell Discount Case (p.625) that the matter of damages for a hire-purchase company on repossession "may be one in which only legislation can mark the limits of what is to be treated as permissible". Since that remark the Hire-Purchase Act 1965 has come into force in the United Kingdom under the provisions of which the Hire-Purchase Company normally recovers no more that the amount by which one half/of the hire-purchase price exceeds the total of the sums paid and sums due immediately before termination of the agreement. Surely it is time for similar provisions in Hong Kong.

Representation: