Chartered Finance (Hong Kong) Ltd v. Helen Fashions Garment Co Ltd and Another
Read the full judgment text of DCCJ 62/1978 on BabelCite. This District Court judgment was delivered on 29 March 1978.
1. This is an assessment of the Plaintiff's damages under a hire purchase agreement pursuant to an interlocutory judgment obtained in default of defence on the 17th January, 1978.
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DCCJ000062/1978 IN THE DISTRICT COURT OF HONG KONG HOLDEN AT KOWLOON CIVIL JURISDICTION ACTION NO. 62 OF 1978 -----------------
----------------- Coram: B.L. Jones Date of Judgment: 29 March 1978 ----------------- JUDGMENT ----------------- 1. This is an assessment of the Plaintiff's damages under a hire purchase agreement pursuant to an interlocutory judgment obtained in default of defence on the 17th January, 1978. 2. On the 4th June, 1977 the Plaintiff entered into a hire purchase agreement with the first defendant in respect of a new Citroen CX 2400 Pallas motor car. A guarantee and indemnity was executed the same day by the second defendant. The total cash price under the agreement was $75,400. Hire charges amounted to $13,504 so that the total hire purchase price was $88,904. The first defendant made an initial payment of $13,000 and was given a trade in allowance of $12,400 for a second hand car. The blance of the hire purchase price was to be paid by 36 monthly instalments of $1,764 commencing on the 4th July, 1977. 3. The first defendant paid three instalments under the agreement, but defaulted in payment of the instalment due on the 4th October, 1977. Although it was contended in the Particulars of Claim that the first defendant's default constituted a repudiation of the agreement Mr. Wintle conceded that the Plaintiff had terminated the agreement under clause VI by notice in writing dated the 17th November, 1977. 4. The car was repossessed on the date of termination. Subsequently the car was sold by the Plaintiff on the 10th December, 1977 for $44,000. 5. The Plaintiff claims damages to be assessed under Clause VII of the agreement, which provides for sums payable upon Termination as follows:-
6. Mr. Turtle the Plaintiff's Assistant Manager gave evidence with regard to the sale of the car. He said that the average price that was offered by various car dealers was $27,000. However, the highest offer was made by Concord Limited which was accepted. There was no recourse agreement so that Concord Limited were under no obligation to purchase the car. 7. The Court is required to determine the fair market value of the car, and to deduct from this figure proper expenses incurred in the sale. It is common knowledge that a new car will depreciate up to as much as 35% of the cash price in its first year. The price of $44,000 that was paid by Concord Limited took into account the cost of repairs that had to be carried out to the car. Repossession and storage charges amounted to $205 which I consider to be reasonable. I am quite satisfied that the Plaintiff sold the car at a fair market value. 8. Judgment has been entered for the Plaintiff for the sum of $3,528 being the two instalments in arrear for the months of October and November 1977 prior to the termination of the agreement. 9. Under Clause VII the Plaintiff has allowed the defendants a reduction in hire charges of $9,317.76 calculated in accordance with the "Rule of 78". The Plaintiff claims the sum of $1,571.24 as damages being a genuine pre-estimate of its loss under the agreement. 10. The principles upon which a finance company may recover damages were expressed by Lord Denning in Campbell Discount Co. Ltd. v Bridge (1) at 632 where he said:-
11. In calculating the damages allowance must be made for the accelerated payment of the capital outlay that the Plaintiff would otherwise have received by instalments. As a result the hiring charges should be discounted to take such acceleration into account. Overstone v Shipway (2) Yeoman Credit Ltd. v McLean (3) 12. I have been invited by the Plaintiff to adopt the "Rule of 78" or direct ratio rebate which is a common rebate formula used for customers who wish to effect an early settlement under a hire purchase agreement. The formula has received legislative approval in Australia, Canada and the United States. The Crowther committee on consumer credit recommended that rebate charges on early settlement should be calculated according to the "Rule of 78". Mr. Wintle submits that the same principle would operate fairly in the case of termination of an agreement. 13. The "Rule of 78" operates on the basis that charges are spread in the ratio which the number of instalments remaining to be paid bears to the total number of instalments in the agreement. Accordingly in a twelve month agreement where payment is to be made by equal monthly instalments 12/78 of the charge is treated as earned in the first month, 11/78 in the second month, 10/78 in the third month and down to 1/78 in the final month. The method is called the "Rule of 78" as the total of the numbers from one to twelve is 78. The figure of 78 only applies to a twelve month agreement. For a 36 month agreement as in this case the sum of the series is 666. The Plaintiff therefore calculates the loss under this formula as follows:- The car having been sold on the 10th December 1977 allowance for six instalments as at 4th December 1977 is 36 + 35 + 34 + 33 + 32 + 31 = 201. The sum of 465 is the difference between 666 and 201 which gives a fraction of 465/666 which is approximately 69%. As a result the Plaintiffs rebate to the defendants is 69/100 x $13,504 = $9,317.76. 14. Does the sum calculated in accordance with the "Rule of 78" represent a genuine pre-estimate of the actual loss suffered by the Plaintiffs as a result of the first defendant's breach or is it a penalty? If the Court construes clause VII of the agreement as penal the Plaintiffs are restricted to claiming damages at common law. Where possible it is obviously desirable that the parties should be aware at the outset what their obligations will be in the event of a breach of the agreement or if an early settlement is requested. Although repayments are made by equal monthly instalments the amount of finance due to the company at the beginning is greater than at the middle or the end. This is because of the initial expenses incurred by the finance company in setting up the transaction and where it arises, the costs involved for an early settlement. Further as the principal sum is constantly reducing the proportion of each payment attributed to the finance charge is also diminishing. The following example illustrates how such calculations are made on a new vehicle obtained through hire purchase at 8% per annum. The amount financed is $2400. The charges are $192. Payment is by 12 equal monthly instalments of $216 each. The charge rate is 8% flat per annum. Monthly instalment is divided into:-
It will be observed that half way through the agreement the finance company will have earned $140.31 of its total charges and in the second half $51.69. As a result if early settlement was effected after six months the customer would receive a rebate of $51.69. 15. In the manner that it has been drawn Clause VII is penal for it gives the Plaintiff carte blanche to make a reduction if any in the hire charges. 16. However, I accept that the "Rule of 78" provides a suitable formula for calculating the measure of damages in this case, although it must be regarded as approximate. 17. The Plaintiffs are therefore entitled to damages calculated as follows:-
Less:-
There will be judgment for the Plaintiff for $1571.24 with interest at 8% from the 17th November, 1977. The Plaintiff is also entitled to costs which I have been asked to assess. Costs are allowed at $600.00.
Representation: Mr. Wintle of Deacons for Plaintiff Defendants in person (1) (1962) A.C. 600 (2) (1962) 1 W.L.R. 117 (3) (1962) 1 W.L.R. 131 |