United Merchants Finance Ltd v. Kwan Kwong Kwok

DCCJ000977/1984

HEADNOTE

Accord and part satisfaction arising from compromise of breach of hire purchase agreement - part-illegality - interest upon interest exceeding 60% per annum contravening S.24 of Money Lender's Ordinance severed from the principal sum of the accord and enforced with permissible rate of interest on the ground that the principal sum forms the main consideration with the illegal double interest as merely a subsidiary consideration.

See Binder v. Alcachouzos (1972) 2 Q.B. 151 at 158 and Goodinson v. Goodinson (1954) 2 Q.B. 118.

IN THE DISTRICT COURT OF HONG KONG

HOLDEN AT VICTORIA

CIVIL JURISDICTION

ACTION NO. 977 OF 1984

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BETWEEN

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Coram: H.H. Judge E. Li in Chambers

Date: 28 April 1984

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JUDGMENT

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1. This is an application for Summary Judgment in respect of a claim by the Plaintiff for breach of the Defendant's undertaking to pay $8,947.22 with agreed interest of $3,471.96 totalling $12,419.18 by 16 equal monthly instalments of $776.20 each commencing on 4th of June 1983. The Defendant had in fact paid 3 monthly instalments to the total sum of $2,328.60 leaving a balance of $10,090.58 outstanding under the settlement - accord without satisfaction.

2. The debt which gave rise to the accord was from breach of a hire-purchase agreement on the part of the Defendant as the hirer.

3. The Deputy Registrar queried whether the Plaintiff's claim ought to proceed under Order 84 of the Rules of Supreme Court as applicable to the District Court rather than for breach of the accord. The question of illegality or part-illegality and severability and severance arise.

4. Section 24 of the Money Lenders Ordinance renders any agreement for the repayment of a loan which carries an effective rate of interest over 60% per annum illegal and unenforceable and this applies to all money lending albeit banks and other finance houses including deposit-taking finance companies are exempted from formality such as money lenders licence etc. under Parts I and II of the Ordinance.

5. Without going into the details of the hire-purchase agreement itself and without examining the rate of interest thereunder with the microscopic measure of Lord Denning's Rules in Campbell Discount Company Ltd. v. Bridge 1962, Appeal Cases 600 at 632 both of which are unnecessary for the present exercise, suffice it to state that the apparent rate there was 3% per month. When this 3% is added to another 3% per month for the sum under the accord, it already gives a rate of interest of 6% per month, that is 72% per annum as being caught by Section 24 of Cap. 163. It is, therefore, obvious that the rate of interest for the accord in reality amounts to illegality.

6. There is a manifestly obvious public policy in favour of encouragement and enforcement of compromises of disputes which the parties themselves have agreed to. Compromises result in a saving of public resources and probably produce an optimum result from the disputants' point of view in that they have agreed to one, and that this has not been imposed by a third party mediator. However, to enforce compromises of illegal contracts would have the effect of undermining the public policy underlying the illegality doctrine : it would be paradoxical, to say the least, to permit a party to enforce the compromise of an illegal contract but not the illegal contract itself. Whether the compromise of an illegal transaction is itself enforceable depends on the question of whether the courts must give effect to the broad social policy underlying the illegality despite any private arrangement between the parties. Normally this will mean that the compromise, like the illegal contract, is not enforceable. An interesting problem on the compromise of an allegedly illegal contract arose in Binder v. Alachouzos. ⁽¹⁾ A lent a sum of money to B which B refused to repay on the grounds that the transaction was one of money lending and A was not a registered money lender. A sued B, and after taking legal advice B compromised the action on the terms that he would repay the loan and not contend that the contract was one of money lending. B then repudiated the compromise arguing that it, like the illegal contract, was unenforceable. The Court of Appeal upheld the compromise, and did so on the grounds that the compromise was of a dispute of fact whether the contract was in actual fact an illegal money lending contract.

7. (See Chitty on Contract, Volume I, 25th Edition, Page 554 at paragraph 1042. )

8. Returning to the instant case although the facts are not on all fours with Binder, the same principle applies. Here we have a compromise in the form of an accord under which the defendant had conceded as a matter of fact that nothing was illegal or unfair about the hire-purchase agreement and about the liability which he had assumed thus leaving no room for dispute for any unfair play or inadequate rebate under Lord Denning's Rule. The accord itself is therefore enforceable.

9. Now severability and severance. The tests are that the illegal part of a contract can only be severed from the legal part if the severance of the offending part does not alter the scope of the whole contract as to make it a new contract and if the illegal promise is not substantially the whole or main consideration for the promise now sought to be enforced.

10. In other words, if the illegal promise forms only a subsidiary part and not the main part of a consideration to support the promise of the Defendant, it is severable (see Chitty same Volume, Page 644 at paragraph 1187 and Goodinson v. Goodinson, 1954, 2 Q.B. 118).

11. The consideration for the accord was forbearance to sue for breach of the hire-purchase scheme, that is for the sum of $8,947.22. That must be the principal or main consideration. The sum of $3,471.96 being agreed interest for the accord to be paid by 16 monthly instalments must be a subsidiary consideration and as such is, in my opinion, severable from the principal sum.

12. For the above reasons, Judgment is entered for the Plaintiff in the sum of $6,618.62 ($8,947.22 being the amount compromised minus $2,328.60 the 3 instalments paid under the compromise) together with interest at 3% per thereon from 4th of September 1983, i.e. the date on which monthly payment, should have continued under the compromise to the date of actual payment having severed the illegal part $3,471.96 from the total amount under claim in this action.

13. Costs to the Plaintiff on the Upper Scale.

(1)    (1972) 2 Q.B. 151 at 158

Representation:

Mrs. Liu, Charles H.Y. Yeung & Co. for Plaintiff.