The Hong Kong Land Co Ltd v. Chau Kam and Another

HCSA000002/1980

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Coram: Roberts, C.J., Cons, J.A. and Yang, J.

Date of Judgment: 1 May 1980

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JUDGMENT

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Cons, J.A.:

1. On the 18th April we gave leave to appeal against the decision of Mr. M.W. Fung sitting as adjudicator in the Small Claims Tribunal.

2. The respondents to the appeal are the joint owners of a unit in an industrial building which is managed by the appellants and who are entitled to collect a monthly fee of $250, payable by the owner of each unit under a deed of mutual covenant dated February 1978. The respondents say that the terms of that deed were never personally explained to them. That may be so. But the terms remain binding because they are part of the conditions on which the respondents purchased their unit. There is no duty imposed upon the appellants to expound those terms to the respondents.

3. The deed provides that if the management expense is not paid within thirty days of the demand, interest will become payable and the owner in default shall pay to the manager "a collection charge of $150 or such lesser sum as the manager may agree to cover the cost (other than legal costs ...) of the extra work occasioned by the default".

4. The respondents say that they forgot to pay this management expense (called the "operating charge") in September of last year. In October they attempted to pay two months' charges to the appellants. However, the appellants refused to accept unless the respondents also paid the $150 collection fee. The respondents refused to do so and the appellants brought the matter before the Small Claims Tribunal.

5. Although the amount involved is small it is important to the appellants because they manage many other buildings and the clause in question is a standard clause in all their management contracts.

6. When the matter came before the Small Claims Tribunal the adjudicator refused to award the $150. He took the view that it was a penalty and not an agreed pre-estimate of damages, and he substituted his own assessment of $30, although he does not indicate how he arrived at that figure.

7. An agreed figure is not a penalty if it is a fair estimate of the probable damage and not unconscionable: Dunlop Pneumatic Tyre Co. Ltd. v. New Garage and Motor Co. Ltd.⁽¹⁾. What then might the $150 represent?

8. We agree with the adjudicator that it cannot take into account the general cost of running the credit control department of the appellants, which is a department set up to receive, collect and record payments. That cost is part of the operating expenses, or overheads, and must come out of the monthly charges. But where there is a default in payment the control department is put to extra work - there will be further letters to write; staff will have to visit the Land Registry to see if the ownership has changed hands; they may have to send representatives to the owner; they may have to trace an owner who has disappeared; there will be further running through the computer. These represent expenses that may be taken into account.

9. We think it might have assisted the adjudicator if the appellants had furnished him with a more detailed analysis to support their claim. They say it would be impossible to do so, but we take leave to doubt whether that is really so. They say that in any event the burden is not on them, that it is on the respondents to show that the figure is unreasonable. However, where there is an agreed figure, which on the face of it does not seem extravagant, it is for the party disputing liability to establish that it is so.

10. The judge thought $150 to be extravagant when he compared it with the monthly operating charge. We think he was wrong to make that comparison. The monthly operating charge is not the loss that he ought to have considered. The true loss for comparison is the cost of the extra work.

11. The adjudicator also seems to have been influenced by the actual costs incurred by the appellants. That is not the correct approach. What he should have considered were the circumstances as at 1978 when the deed was entered into, and decided whether $150 could then be taken as a fair estimate of what might be involved.

12. No doubt in some cases the actual cost will fall below $150. On the other hand, it is not difficult to imagine cases where the costs could be much higher. A pre-estimate is a form of compromise between the two extremes. Bearing in mind the costs and prices that would have been envisaged in 1978 we do not think $150 is an extravagant or unconscionable figure.

13. The respondents complain that they have never been in arrears before, and that it is unfair that they have to pay extra. However they have no genuine complaint. They were in default last year.

14. The respondents have also drawn to our attention the fact that the appellants hold the equivalent of six months' operating charges as a deposit, not only from themselves but from all the other owners in the building. The respondents fear that the appellants may apply this money to their own individual benefit. That cannot be done. The terms of the deed require the appellants to apply all the funds for the management of the building. It is true that the respondents may not recover the deposit themselves, except in unusual circumstances, but if and when they decide to sell their flat, they will be able to pass on the benefit of that deposit to their purchaser and in that way recover the value for themselves.

15. The respondents say that the figure of $150 charged is unreasonable. However they do accept that they should be responsible for some extra charge for the work occasioned by their default. It is then only a question of whether the amount agreed in advance by the deed of mutual covenant does fall within the criterion imposed by law. We think that it does and that the adjudicator was wrong to substitute his own figure.

16. For these reasons the appeal is allowed and the figure of $30 in the adjudicator's award is increased to $150, making the total damages awarded $682.90. The appellants do not ask for costs.

Roberts, C.J.:

17. I agree.

Yang, J.:

18. I agree with the judgment just delivered by my brother Cons, save that I disagree with him on the question of burden of proof. In my view, as the words used in the relevant clause of the deed are neutral, the burden lies upon the appellants to show that a pre-estimated damage is intended and not a penalty. It would be otherwise if the clause used the word "pre-estimated damage", in which case the burden of proof would be on the respondents - see Halsbury, 4th edition, Vol. 12, p.421 note 2, second paragraph thereof:

"The terminology used may, however, affect the burden of proof: see Robophone Facilities Ltd. v. Blank [1966] 3 All E.R. 128, [1966] 1 W.L.R. 1428, CA, where the expression 'Liquidated damages' was used (the onus of showing that such a stipulation is a 'penalty clause' lies upon the party who is sued upon it: at 142 and 1447 respectively, per Diplock L.J.); and Willson v. Love [1896] 1 Q.B. 626, CA, where the expression 'penalty' was used (where the parties themselves call the sum made payable a 'penalty' the onus lies on those who seek to show that it is to be payable as liquidated damages: at 630, per Lord Esher); of. Crisdee v. Bolton (1827) 3 C & P 240 at 243; Barton v. Glover (1815) Holt NP 43."

Representation:

Ronny Tong (Deacons) for the Appellant

1st Respondent in person and on behalf of the 2nd Respondent

(1) (1915) A.C. 79