WASHING BO LAUNDRY LTD v. NG KWOK WAI AND ANOTHER

DCCJ 6892/2020

[2023] HKDC 1421

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 6892 OF 2020

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

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

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

JUDGMENT

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

INTRODUCTION

1.  This case is about a 24-hour self-service laundry franchise outlet. Such an outlet operates in a way similar to convenience stores, such as those belonging to the well-known 7-Eleven chain, that are usually found in residential areas of the city. Each outlet is run by a different franchisee under a common brand name pursuant to the franchisor’s standard terms of agreement.

2.  The present case is a dispute between the parties to a franchise agreement dated 23 February 2017 (“the Franchise Agreement”) for the operation of a laundry shop at Shop A3, Ground Floor, 45 Carpenter Road, Kowloon City (“the Shop”). It was entered into by the plaintiff (“WBL”) as franchisor and the 1^st defendant (“Mr Ng”) and 2^nd defendant (“Ms Ho”) as franchisees.

3.  In 2017, WBL ran a self-service laundry franchise business under the brand name “Washing Bo” (“洗衣寶”). In return for an upfront joining fee and certain monthly service fees, WBL provided to its franchisees various services including payment handling, maintenance of washing machines, supply of consumables, advertising and promotion. With the assistance of WBL, each franchisee would find and rent a suitable shop space from a third party landlord.

4.  In the present case, Mr Ng entered into a three-year lease dated 14 March 2017 in respect of the Shop. Around the same time, Mr Ng and Ms Ho entered into the Franchise Agreement with WBL with a view to operating a self-service laundry service station at the Shop for a period of five years from 23 February 2017 to 22 February 2022. As we will see, however, the franchise agreement was terminated by WBL for breach with effect from 22 January 2020.

5.  The alleged breaches of agreement related to the defendants’ failure or refusal to settle monthly administrative fees and Octopus administrative fees. In this action, WBL claims arrears of those fees as well as unpaid future instalments payable of those fees under the Franchise Agreement. The defendants dispute liability for those fees and counterclaims for repayment of overpaid Octopus administrative fees.

ISSUES IN DISPUTE

6.  The case was heard by me in a trial lasting for four days. At trial, WBL was represented by Ms Lilian Ip, counsel. The defendants were represented by Mr Chan Siu Chung, of Messrs S C Chan & Co. The only live issues that require determination are:-

(1)  Whether the defendants are liable to pay an administrative fee of $3,000 per month after the termination of the Franchise Agreement and for the rest of its outstanding term;

(2)  Whether the defendants are liable to pay liquidated damages of $20,000 per year for early termination of the Franchise Agreement, pro-rated to the duration of the outstanding franchise term;

(3)  Whether WBL is liable to refund or account to the defendants for monthly Octopus POS fees allegedly overcharged by it during the subsistence of the Franchise Agreement.

7.  For completeness, I record that the following issues were pleaded but were withdrawn or abandoned by the parties in the course of the trial. While no longer live issues they may have an impact on my decision on costs:-

(1)  Shortly after the commencement of the trial, Ms Ip informed the court that WBL would abandon its claim for monthly Octopus administrative fees of the sum of $3,000 over a period of 32 months (totaling $96,000);

(2)  In the defendants’ written opening submissions, Mr Chan conceded liability for the monthly instalments in respect of the Octopus reader of $800 per month over a period of 32 months (totaling $25,600);

(3)  In the defendants’ oral opening submissions, Mr Chan indicated that he would no longer pursue the defences of undue influence, unconscionable contract terms and frustration. However he maintained the defence and counterclaim based on misrepresentation as to the terms of the Agreement.

8.  In closing submissions, Mr Chan’s position on the misrepresentation issue shifted to a point where it was effectively abandoned. As I understand his final position, he was not relying on misrepresentation to either rescind the Franchise Agreement or to support the Counterclaim for a partial refund of Octopus administrative fees. This obviates the need for me to make any findings of fact on that issue.

FACTUAL BACKGROUND

9.  I will now briefly sketch the uncontroversial background events leading to the signing and subsequent termination of the Franchise Agreement. In early 2017, Mr Ng and her friend Ms Ho became interested in setting up a business for self-service laundry service stations. They made inquiries with several franchise chains in Hong Kong with a view to ascertaining the amount of set-up costs and recurring expenses required for a franchisee. That was how they came across WBL in February 2017.

10.  On 10 February 2017, Mr Fong Ka Nam and Mr Gordan Lam Siu Lung, both directors of WBL, met Mr Ng and Ms Ho and gave them a copy of an 18-page pamphlet entitled “特許經營與發展機遇簡介 - 洗衣寶自助洗衣”. The pamphlet was part of WBL’s promotional materials aimed at introducing WBL’s business to potential franchisees and recruiting them to join the network.

11.  In the pamphlet there was a section headed “開業成本及預算收入” (cost of starting a business and estimated income). Among the charges listed was an administrative fee of $3,000 per month (“以3組機計算的維護費, 洗衣液, 柔順劑, 支援”) (calculation based on maintenance of three sets of washing and drying machines, washing fluid, softener, provision of support).

12.  Soon after the meeting, Mr Ng and Ms Ho signed a Letter of Intent dated 10 February 2017. The document was entitled “洗衣寶自助洗衣店加盟意向書”. The Letter of Intent served to confirm the potential franchisee’s interest in joining WBL’s franchise network. It required payment of a $10,000 deposit. It also set out various amounts that would become payable when the franchise agreement was signed, such as one-off joining fee of $80,000, an equipment fee of $288,000, and a monthly administrative fee of $3,000 (for three sets of washing and drying machines).

13.  On 23 February 2017, Mr Ng and Ms Ho were invited by Mr Fong and Mr Lam to execute the Franchise Agreement at the office of Messrs Huen & Partners. The draft, written in Chinese, had been prepared by WBL. Mr Ng (who gave evidence on behalf of himself and Ms Ho) complained that he was only given a few minutes to study the document and that no one explained its content to him. However, there is no dispute that the Franchise Agreement was duly and voluntarily signed by Mr Ng and Ms Ho. The parties’ signatures were witnessed by a solicitor of the law firm.

14.  On 14 March 2017, Mr Ng entered into a tenancy agreement with the landlord in respect of the Shop. The term of the lease was three years commencing on 1 April 2017.

15.  By a letter from Huen & Partners, WBL’s solicitors, dated 22 December 2019 to Mr Ng and Ms Ho, WBL demanded payment of arrears of monthly administrative fees of $6,800 per month (consisting of three separate charges) from October to December 2019. They sought to terminate the Franchise Agreement pursuant to Clause 18.1 with effect from 22 January 2020 as a result of the defendants’ breach of contract. Finally WBL also sought to enforce Clause 20.8 and charge the defendants the administrative fees due in the remaining contract term, as well as compensation for loss of goodwill in the amount of $20,000 per annum on a pro-rata basis.

16.  In subsequent correspondence, various other sums were demanded by WBL ultimately arriving at a total of $271,000 as set out Huen & Partners’ letter dated 3 December 2020.

FIRST ISSUE: OUTSTANDING ADMINISTRATIVE FEES

17.  I shall now highlight the key provisions of the Franchise Agreement that are pertinent to this issue. They are Clauses 8.3, 18 and 20.8:-

“8.3 行政管理費

8.3.1 甲方向乙方每間特許經營店每月收取行政管
理費為港幣HKD3,000元，根據此合約的約定。另外，如加設裝備，以每組洗衣乾衣機計算，每月額外收取港幣HKD1,000元行政管理費。每月之15號前必須支付當月的行政管理費，如逾期未收到有關款項，甲方將向乙方收取過期欠款之利息，月息一厘。凡逾期十四天仍未收到有關應繳款項，甲方將交由律師跟進，而乙方需承擔由此而引起的所有法律費用。

8.3.2 如乙方提前終止特許經營合約，甲方將有權追討乙方會於簽定此合約是承諾履行之總合約加盟年期而還未履行之餘下每月行政管理費。”

“18. 甲方可在下列任何情況下提前一個月書通知乙方提前終止本合約，乙方須向甲方繳付餘下的相關費用，包括設備費（如適用）及剩餘的行政管理費：-

18.1 乙方未能依本合約的約定向甲方付清應付款項；[…]”

“20.8 乙方如在加盟期內因任何原因違約而被甲方終止合約，甲方將有權追討乙方於簽定此合約時承諾覆[sic]行之總合約加盟年期而還未覆[sic]行之餘下每月行政管理費。並且，乙方須以剩餘合約的年期按比例以每年港幣20,000元，賠償予甲方作為其商譬之補償及任何因提早結業，出售或轉讓而引申的費用及賠償，包括租約剩餘期限的租金，清拆及還原店舖之款項，律師費及訴訟相關之費用等。”

18.  Pursuant to the above clauses WBL now claims outstanding administrative fee dates until the end of the five-year term, ie 22 February 2022, altogether 32 months’ worth of such fees totalling $96,000.

19.  The defendants’ answer to this claim is twofold. First, Mr Chan submitted that the number of outstanding months could at most be 30.5, rather than 32. Secondly, he contended that insofar as Clauses 18.1 and 20.8 seek to impose a charge beyond the determination of the Franchise Agreement, they are penal in nature and liable to be struck down as such.

20.  I agree with Mr Chan’s first submission for the following reasons:-

(1)  As Mr Chan rightly pointed out, Clause 16.1 specifies clearly the dates of commencement and termination of the franchise period. It commenced on the date of signing of the tenancy agreement, which in this case is 14 March 2017. It ended on the date five years after the signing of the tenancy agreement, which in this case was 13 March 2022.

(2)  The last receipt (which served as a monthly statement statement) issued by WBL to the defendants is dated 2 October 2019. The receipt includes a charge of $3,000 being the administrative fee up to the settlement date of 30 September 2019. (Payment is made by way of deducting the monthly total income by various charges and fees payable to WBL.)

(3)  Between October 2019 and March 2022 (both inclusive), there was a total of 30 months. Hence, regardless of the actual date of termination, be it 22 January 2022 or any other date, the outstanding amount of administrative fee is $3,000 x 30, ie $90,000.

21.  In this regard, Ms Ip’s count of 32 months of outstanding administrative fees is incorrect. It seems to proceed on the basis that the first full month in respect of which the administrative fee was charged was June 2017. Thus, Clauses 8.3.2 and 18 would appear to entitle WBL to charge in full five years’ or 60 months’ worth of such fees, the last month of which fell in May 2022.

22.  There are several reasons why this way of counting is wrong. First, as Mr Chan correctly analysed, the franchise period ended on 13 March 2022, not in May 2022. Secondly, as shown by the first receipt issued by WBL dated 7 July 2017 (up to the settlement day of 30 June 2017), WBL did charge a pro-rated administrative fee of $774 for the last eight days in May 2017 (viz., 24 to 31 May 2017).

23.  In his testimony, Mr Ng explained, and there is no dispute, that WBL had encountered delay in obtaining approval for activating Octopus payment service. Thus, WBL effectively, and for good reason, waived any administrative fees payable prior to 24 May 2017. It is therefore too late for it to reclaim such fees or to unilaterally extend the franchise period beyond the contractual period.

24.  Now I turn to the more interesting and substantial argument based on the alleged penal nature of the post-termination charge of administrative fees. In Law Ting Pong Secondary School v Chen Wai Wah [2021] 3 HKLRD 185, the Court of Appeal adopted the modern approach laid down by the UK Supreme Court in Cavendish Square Holdings BV v Makdessi [2016] AC 1172 in considering whether a contractual clause is a penalty clause. (The approach was reconfirmed in Li Chiu Wah Joseph v Hong Kong Society of Notaries [2022] HKCA 1482, unrep, 30 September 2022, at [32], per Au JA.)

25.  The analysis espoused by the Court of Appeal consists of three steps as explained in [69] to [71] of its judgment, namely:-

(1)  The first question is whether the contractual provision imposes a primary obligation or a secondary obligation triggered by breach of a primary obligation. The doctrine of penalty is only engaged by the second type of provision and not the first.

(2)  If the provision imposes a secondary obligation, the court should then identify the legitimate interest of the innocent party in enforcing performance of the primary obligation, rather than simply seeking compensation for its breach.

(3)  Thirdly the court should assess whether the clause is out of all proportion to the legitimate interest by considering the circumstances in which the contract was made. Traditional notions of whether the clause has a deterrent purpose or whether it is a genuine pre-estimate of loss would be subsumed by the broader enquiry into the legitimacy of the interest that supports the provision.

26.  In the Franchise Agreement, there are clear indications that the obligation of the franchisee to pay the monthly administrative fee is a primary obligation that subsists throughout the entire franchise period. Clause 18.1 and the first part of Clause 20 address the situation of termination as a result of the franchisee’s breach in the following terms:-

(1)  Clause 18.1: “…乙方須向甲方繳付餘下的相關費用，包括設備費（如適用）及剩餘的行政管理費”

(2)  Clause 20.8: “… 甲方將有權追討乙方於簽定此合約時承諾覆[sic]行之總合約加盟年期而還未覆[sic]行之餘下每月行政管理費。”

27.  In my view, the words quoted above must mean that the franchisee’s (乙方) obligation to pay the monthly administrative fee continues despite, not because of, the franchisor’s (甲方) termination of the Agreement. In other words, the obligation is not triggered by breach but continues until the end of the franchise period notwithstanding such breach.

28.  To some extent, this construction is also echoed by the wording of Clause 8.3.2. That provision deals with the situation where the franchisee seeks to determine the Franchise Agreement prematurely. In such a case, “甲方將有權追討乙方會於簽定此合約是承諾履行之總合約加盟年期而還未履行之餘下每月行政管理費。” In other words, the franchisee is still liable to pay the monthly administrative fee for the duration of the outstanding term of the Agreement if it seeks an early termination of the franchise for whatever reason.

29.  Mr Chan protests that it is unfair to require the franchisees to continue paying the monthly administrative fee when the franchiser no longer provided the promised administrative services after the Agreement was terminated. Those services were set out WBL in its promotional pamphlet in return for the charge of $3,000 per month. He also criticises WBL for failing to provide any breakdown for the amount of $3,000 in order to show that it would continue to incur any further expenditure after termination.

30.  In my view, the points raised by Mr Chan may be relevant to the identification of a legitimate interest at the second stage of the Cavendish analysis, or perhaps to the assessment of proportionality at the third stage. With respect, however, they do not assist in the classification of the obligation under Clauses 18.1 and 20.8 as primary or secondary. Once the obligation is characterised as a primary one, it is not open to the court to question the wisdom or reasonableness of the parties’ bargain, for example, by asking why payment is structured to spread over 60 months or how exactly the monthly figure is arrived at.

31.  To take stock, I partially allow this head of WBL’s claim to the extent of $3,000 per month x 30 months totalling $90,000.

SECOND ISSUE: DAMAGES FOR LOSS OF GOODWILL

32.  Next, WBL’s claims liquidated damages under the second part of Clause 20.8, the text of which has been set out above. The amount claimed is $53,400 at the contractual rate of $20,000 per year, pro-rated to the unspent period of the Franchise Agreement, namely, 32 months.

33.  In the first place, I have already explained why I take issue with WBL’s use of 32 months for the purpose of calculating outstanding post-termination administrative fees. For essentially the same reasons, I hold that the relevant period under the second part of Clause 20.8 should be 30 months instead.

34.  The principal defence mounted to the claim is that the obligation arising under the second sentence of Clause 20.8 is in the nature of a penalty and thus unenforceable. WBL disagrees. In her final submissions, Ms Ip accepts that the obligation is secondary in nature, since it is clearly triggered by breach. In view of this concession (no doubt correctly made), I proceed to ask whether the provision seeks to protect one or more legitimate interests of WBL.

35.  I shall begin with the wording of Clause 20.8 itself. The clause cites two main items of compensation together with a number of sub-items:

(1)  Compensation for goodwill or reputation; and

(2)  Any expenses and compensation arising from early termination, sale or transfer, including (a) outstanding rental, (b) sums required for dismantling and reinstating the shop premises, (c) legal fees and (d) litigation costs.

36.  I readily accept that in the context of a franchise chain such as the one operated by WBL, the goodwill of its business or the reputation of its brand name is of vital commercial importance. The importance of goodwill is twofold. First, a strong brand name can attract more franchisees to the network, which in turn strengthens the brand name by increasing its market exposure. Secondly, a well-known brand with a good reputation tends to inspire confidence in consumers who rely on the high and consistent quality of the service provided by outlets belonging to the chain.

37.  However, the same cannot be said about the second main item (and the sub-items) of expenses enumerated in Clause 20.8. According to WBL’s business model explained above, it does not bear or share any responsibility for any unpaid rental, demolition or reinstatement of any shop premises. Such liabilities, and the costs associated with their enforcement, if any, fall on the franchisee and the franchisee alone. So unless (which is not the case here) WBL is required to act as a guarantor or surety for the tenant or franchisee, such liabilities would normally be none of its concern.

38.  At the second stage of the test, how should the court deal with an impugned provision which is expressed to cover a range of interests of the innocent party only some of which are demonstrably genuine or legitimate? Here, the court is concerned to identify any legitimate interest in performance of the contract beyond purely monetary compensation for breach. The court is not confined to the terms of the contract and may examine the inherent circumstances of the contract, judged as at the time of the contract: see Law Ting Pong Secondary School, sup cit, at [67].

39.  When the parties entered into the Franchise Agreement they were clearly aware that WBL was not acting as a surety or guarantor in respect of the franchisees’ obligations under the third party lease. Hence, they must both know that the second category of losses was simply inapplicable. (According to Ms Ip, the clause was a boilerplate provision used by WBL in all franchisee agreements regardless of whether any of the potential liabilities were applicable in any given case.) In the circumstances the parties would have read or understood this part of Clause 20.8 as if it was qualified by the words “if any”, and simply disregarded it.

40.  It is the third and final stage of the analysis that poses the real difficulty. Since the draftsman of Clause 20.8 indiscriminately included irrelevant, hence illegitimate, interests, it is impossible for the court to say what portion of the stipulated sum is referable to the franchisor’s legitimate interests. Would the clause have to be struck down merely because of its inclusion of a potentially penal, though irrelevant, element?

41.  In my view, it would not. For the reasons expounded above, the parties would have understood that the entirety of the agreed sum of $20,000 a year was in fact intended for compensation for WBL’s loss of goodwill, and that none of it went towards the other, irrelevant items. The question that remains is whether that sum can be said to be out of all proportion to the envisaged loss of goodwill.

42.  At the time of entering into the Franchise Agreement WBL had 20-odd franchisees in Hong Kong. This is not a large number. (For example, one of the leading self-service laundry franchise brands in Hong Kong boasts over 100 outlets.) Even so, there is force in Mr Chan’s argument that the loss of one franchise outlet would hardly make a difference to the overall strength and reputation of WBL’s brand name. Franchisees come and go. Moreover, each outlet is simply a rented retail space on a busy street. It is all too common in Hong Kong for a franchise retail business like a convenience store or self-service laundry outlet to close down after a few years, with or without reopening at another location, for reasons unrelated to the quality of its goods or services. Such an everyday occurrence is hardly likely to lower the esteem of the franchise brand in the eyes of the average consumer.

43.  In The One Property Ltd v The Swatch Group (Hong Kong) Ltd [2022] 1 HKLRD 975, a case cited by Ms Ip, the tenancy agreement between an upmarket mall owner and a retailer contained a clause which imposed a daily “fine” of $1,000 for each day that a retailer failed to keep its shop premises open. The learned Master held that the fine was not out of proportion to the legitimate interest of the owner in keeping up the goodwill of the mall. He also observed that damage to goodwill was intrinsically difficult to quantify.

44.  While I certainly accept that loss of goodwill is difficult to quantify, there are obvious differences between a shop within an indoor shopping mall on the one hand, and a franchised self-service laundry outlet on the other. In the context of a high-end shopping mall, the closure of a store leaves an unsightly gap which would obviously affect the mall’s overall appearance as well as the customer’s shopping experience. Furthermore, the adverse effect lasts for as long as the shop remains closed. By contrast, the closure of one franchised outlet at a particular street location is unlikely to cause a similar adverse impact on the franchisor’s goodwill which, in any event, is likely to be short-lived. For these reasons I do not find a direct parallel between The One Property and the present case.

45.  Nevertheless, I believe it is wrong to focus exclusively on the negative impact of early termination of a franchise agreement and the resulting loss of an outlet. If one looks at the broader picture, in 2017 WBL was actively seeking to build up a network of franchisees. It was at a critical stage of brand and network building. The opening of each outlet was in itself a tangible and visible form of advertisement for the franchise’s brand name. Understandably WBL needed all the help from each and all of its franchisees, and the more of them, the better.

46.  With these commercial considerations in mind, I will now scrutinise the quantum of compensation under Clause 20.8. As we have seen, the amount of damages is directly pegged to the length of the outstanding franchise period. This is also readily understandable. Building a brand name takes time. WBL had an obvious commercial interest in seeing each franchised operator serve out the full franchise term (five years in this case). The damages may also be seen as a price the franchisee agreed to pay for being allowed to use the group’s brand name and to partake in the fruits of collective brand-building by other franchisees who were similarly committed to the same term.

47.  Quantitatively speaking, I do not think that the amount of $20,000 per year (or $1,667 per month) of the unspent franchise term can be considered extravagant or unconscionable or out of all proportion to the protected interest. I find therefore that the agreed compensation under Clause 20.8 is in the nature of liquidated damages rather than a penalty.

48.  For the above reasons, under this head I hold that the amount payable by the defendants is $20,000 x 30/12, ie $50,000.

THIRD ISSUE: REIMBURSEMENT OF OCTOPUS ADMINISTRATIVE FEES

49.  By way of Counterclaim, the defendants have sought repayment of a total of $69,026.73 which they claim to have been overcharged by WBL for the period from 1 June 2017 to 30 September 2019. In closing submissions, Mr Chan revised the amount to $63,848.03, for reasons which will appear below.

50.  The dispute centres on the proper construction of Clause 38 of the Franchise Agreement which reads as follows:-

“乙方設有八達通服務，甲方會以總公司的身份通過八達通系統收取乙方的每月總收入，並在每月之下一個月份的14天內扣除甲方之行政管理費，八達通設備連安裝的分期貸款（每月港幣$800，總共五年）及八達通行政服務費(每月港幣$3,000或營業額百分之五，以較高者為準之最低服務費) 後，甲方會以轉帳方式傳入乙方所提供之香港銀行戶口。如乙方因在任何原因終止加盟，甲方將有權追討乙方全數應收取之餘下加盟年期的八達通供款（每月港幣$800，總共五年）和甲方之行政管理費（每月收取行政管理費為港幣$3,000以每組洗衣乾衣機計算，每月額外收取港幣HK1,000元行政管理費，總共五年）。”

51.  Clause 38 contains two separate charges in relation to the use of the Octopus POS system. First, the defendants had to pay $800 per month by way of loan instalments for the installation of the Octopus reader (八達通設備連安裝的分期貸款). As already mentioned, Mr Chan does not dispute liability for this charge. However he challenged WBL’s calculation of Octopus administrative charge (八達通行政服務費) on several grounds, most of which were no longer maintained in final submissions.

52.  The first ground relates to misrepresentation. In gist the defendants claimed that WBL failed to inform them of the existence of the charge and failed to explain the content of Clause 38. Moreover the charge was not mentioned in any of the pre-contractual discussions and documents such as the pamphlet and the Letter of Intent.

53.  Before and at the trial, both parties expended a tremendous amount of time and effort seeking to establish what exactly was said to Mr Ng and Ms Ho at the various meetings by representatives of WBL, as well as the terms of agreement between WBL and Octopus Cards Ltd (“OCL”). Ultimately Mr Chan accepted that the defendants had to abide by the terms of the Franchise Agreement, whether or not they understood or read it before signing. Thus, he effectively abandoned any reliance on misrepresentation. For the avoidance of doubt, if I had to deal with this ground, I would have dismissed it for exactly the same reason.

54.  It remains for me to address two other grounds relied on. First, it is the defendants’ case that Clause 38 only allowed WBL to charge an amount equivalent to what it had to pay to OCL under its agreement with OCL. In other words, the charge was only a back-to-back payment to enable WBL to recoup its own expenses in providing the Octopus payment service, and no more.

55.  The argument runs contrary to the clear wording of Clause 38, which contains a simple formula for calculating the Octopus administrative charge: “每月港幣$3,000或營業額百分之五，以較高者為準之最低服務費”. The wording is very clear. WBL was entitled to charge either 5% of the franchisee’s revenue for that month or $3,000, whichever was the higher.

56.  In practice, for some unknown reason, WBL adopted 3% as opposed to 5% of the franchisee’s monthly revenue as the base rate. But that does not matter, because in all the monthly receipts WBL “topped up” the amount of Octopus administrative charge to $3,000 as the “higher” basis of charge to which it was entitled. The defendants object to this element of topping up. They provide a breakdown of the excessive charges in Table A which is appended to the Answers to the plaintiff’s Request for F&BP of the Defence and Counterclaim dated 8 June 2021.

57.  Having heard his testimony, I appreciate that Mr Ng strongly resented the top-up charge because it was not what he (rightly or wrongly) understood it to be. However, I see no escape from the clear and straightforward terms of Clause 38. They are inconsistent with Mr Chan’s contention for a back-to-back charge. As we shall see below, Mr Chan actually came very close to agreeing with this conclusion without saying so expressly.

58.  The final ground and, as I understand it, the only ground that was still maintained in Mr Chan’s final submissions is what I may call a complaint about “mislabelling”. To explain how the complaint came about, it is necessary for me to refer in some detail to the first three monthly receipts issued by WBL to the defendants:-

(1)  In the first receipt dated 7 July 2017 (already mentioned above), a charge for八達通行政費was stated to be $2,593.30. This amount represented the difference between the minimum charge of $3,000 and (a) $57.50 plus (b) $349.20. The latter two amounts in turn represented 3% of the shop’s revenue in (a) the last eight days of May 2017 and (b) the month of June 2017, respectively.

(2)  In the second receipt dated 1 August 2017, a charge for八達通行政費in the sum of $2,585.40 appeared. This was the top-up charge, ie the difference between $3,000 and $414.60, the latter being 3% of the shop’s revenue in July 2017.

(3)  In the third receipt dated 1 September 2017, the description八達通行政費was replaced by電子支付系統手續費, the amount of which was $2,538.00. This represented the difference between $3,000 and $462.00, the latter being 3% of the shop’s revenue in August 2017.

59.  As Mr Ng said in cross-examination, after he received the first receipt in July 2017, he was baffled by the top-up charge which he considered excessive. He arranged a meeting with OCL staff at which he discovered that OCL was in fact charging WBL a much lower fee than what WBL was charging him. Effectively, WBL was reaping a big, easy profit in the name of “八達通行政費”. Apparently the OCL staff considered the practice unacceptable.

60.  In the wake of the complaint, WBL decided to change the label of the charge from八達通行政費to電子支付系統手續費in the August 2017 receipt and all subsequent receipts. This was apparently done by WBL to appease OCL. But in substance the same top-up charge was still imposed every month despite the change of description.

61.  Mr Chan contended that the change of label was a sleight of hand and that consequently the top-up charge from 1 September 2017 (ie the date of the third receipt) onwards lacked any contractual basis. In particular, there was literally no provision in the Franchise Agreement for imposing any “電子支付系統手續費”.

62.  In line with this contention, Mr Chan made a last-minute concession. In closing submissions, he informed the court that the defendants would not object to paying the first two months’ top-up charges, namely, $2,593.30 and $2,585.40, as shown in the two receipts issued before the change of label. (This is the explanation for the reduction of the Counterclaim from $69,026.73 to $63,848.03.)

63.  The belated concession is, to say the least, surprising. By conceding the first two months’ of top-up charges in respect of the Octopus administrative fee, the defendants must implicitly acknowledge that all the other grounds in support of the Counterclaim, including those based on misrepresentation and the “back-to-back” interpretation of Clause 38, are baseless.

64.  I can shortly dispatch the complaint based on the mislabelling of the Octopus administrative charge. Since it was Mr Ng who instigated the complaint that eventually led to the change of description, there could have been no doubt in his mind that the “電子支付系統手續費” from August 2017 onwards was, in fact and in substance, part of the Octopus administrative charge, ie八達通行政服務費, referred to in Clause 38. Apart from the change of label, WBL continued to calculate and impose the charge in the same way and according to the same contractual formula.

65.  In short, I find that Mr Ng’s excuse for refusing to honour the charge is wholly disingenuous. I find that all the charges listed in Table A fell fairly and squarely within Clause 38. I dismiss the Counterclaim in its entirety.

DISPOSITION

66.  In the result, WBL succeeds on the following claims:-

(1)  By concession, the defendants are liable to pay WBL a total of $25,600 in respect of the installation charge for the Octopus reader;

(2)  Secondly, I find the defendants liable to pay WBL outstanding monthly administrative fees totalling $90,000;

(3)  Thirdly, I find the defendants liable to pay WBL liquidated damages for loss of goodwill in the sum of $50,000.

67.  The total amount payable by the defendants to WBL is thus $165,600. I further award interest on this sum at 1% above prime rate from the date of the Writ. All other claims as well as the Counterclaim are dismissed.

COSTS

68.  Subject to the specific matters discussed below, WBL has largely succeeded on all of its claims. Conversely the defendants have failed entirely in their Counterclaim. I therefore start from the position that the defendants should be ordered to bear the costs of the action.

69.  As I noted above, at the commencement of the trial, WBL abandoned a sizeable claim, namely, $96,000 worth of Octopus administrative fees for the remaining franchise term. I have not been told the reason for the last-minute withdrawal of the claim. In the circumstances, I would apply to the normal rule in cases of withdrawal and hold that WBL should in principle pay for the costs associated with this claim. But as the issues engaged by the abandoned claim overlap with the issues that were in fact argued, I propose to make only a 15% reduction in WBL’s costs entitlement.

70.  Regrettably, I find that the manner in which the defence was conducted was profligate and disproportionate to the amounts at stake. The defendants advanced a large number of arguments, all but one of which were abandoned by their solicitor at trial. I particularly deplore the amount of time and effort expended on the issue of misrepresentation which turned out to be a complete red herring. In fact, the case boiled down to a handful of self-contained issues of contractual interpretation against the background of undisputed facts.

71.  On the other hand, some, but not much, time was saved by Mr Chan’s concession in relation to the monthly payments for the instalment of the Octopus reader ($25,600). In view of the unsatisfactory conduct of the defence, I will make a 15% increase in the costs order against the Defendants.

72.  On a separate matter, on the first day of trial I discovered a serious procedural irregularity in the two witness statements of Fong Ka Nam. Instead of being signed by the witness as required by RDC O 38 r 2A(4), the statements bore the signature of Messrs Huen & Partners. It appeared that until then no one had spotted or raised the issue. Upon inquiry, Mr Chan informed the court that he had in fact spotted the absence of signature a few weeks prior to the trial, but not before the Pre-trial Review. He fairly accepted that he should bear part of the responsibility for failing to alert the court earlier to the issue.

73.  Having considered Mr Chan’s objections, including his express reservation of the defendants’ position on costs, I allowed Ms Ip to lead the same evidence orally notwithstanding the defect in the witness statements. I record that a total of 1 hour and 25 mins of trial time was wasted on account of the submissions and extended examination in-chief.

74.  Applying a broad-brush approach, I will make a deduction from the costs payable by the defendants a sum that represents one hour of the time expended at trial (calculated by reference to the total costs of both parties’ legal representatives in attendance).

75.  Overall, taking all the above factors into account, this is the costs order I propose to make:-

(1)  Subject to (2) below, the defendants do pay WBL’s costs of the action, to be taxed if not agreed, with a certificate for counsel.

(2)  There is to be deducted from WBL’s costs a sum representing one hour of trial time to be calculated by reference to the total costs of both parties’ counsel and solicitors in attendance, such costs to be taxed if not agreed.

(3)  This costs order is nisi except for sub-paragraph (2) above, and will become absolute in the absence of any application for variation that may be made within 14 days by any party.