RICOH HONG KONG LTD v. CHINA INVESTMENT (HK) HONGYI GROUP INDUSTRIAL LTD

DCCJ 3492 / 2010

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3492 of 2010

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BETWEEN

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ASSESSMENT OF DAMAGES

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1.    This assessment deals with the question of whether, in the context of leasing of a photocopying machine, a contractual provision requiring the customer, when in breach, to pay all the rentals of the unexpired term is a liquidated damages clause or a penalty.

The Plaintiff’s Claims

2.    By an Easy Printing Service Agreement dated 30 April, 2010 entered into between the Plaintiff and the Defendant (“the Agreement”), the Defendant rented from the Plaintiff a photocopying machine for a minimum period of 60 months at a monthly rental of $1,188 commencing from 30 April, 2010.

3.    The Defendant however defaulted as from the first month.

4.    The Plaintiff accepted the Defendant’s repudiation of the Agreement and gave notice of termination by serving the Writ of Summons dated 12^th October, 2010 of the present proceedings on the Defendant.

5.    The Defendant defaulted in giving notice of intention to defend, hence interlocutory judgment was entered against the Defendant with damages to be assessed on 7 February, 2011.

6.    The Plaintiff’s claim is for $71,695.80, which comprises 3 sums of money. 

The First Sum

7.    The first sum is $4,752.00 being the amount of 4 monthly rentals due from the Defendant before the termination of the Agreement, i.e. for the period from 30^th April, 2010 to 29^th August, 2010 at the rate of $1,188 per month.

The Second Sum

8.    The second sum is $415.80 being interest accrued on the said sum of $4,752.00 at the rate of 2.5% per month up to 29^th September, 2010 pursuant to Clause 10.1 of the Agreement.  Clause 10.1 provides that the Defendant must pay interest calculated on daily balances on any amount which the Defendant does not pay on time for the period it is unpaid at the rate of 2.5% per month.

9.    Clearly, the Defendant is in breach of the Agreement and interlocutory judgment has been entered, I have no doubt that the Plaintiff is entitled to these 2 sums of money.

The Third Sum

10. The third sum is $66,528.00, being the monthly rentals for the remaining 56 months after the termination of the Agreement at the rate of $1,188 each.  The Plaintiff pleads, in paragraph 10 of the Statement of Claim that since the Agreement has the express term for a minimum of 60 months, the Defendant should be liable for the remaining rentals.

11. Various provisions in the Agreement have been pleaded in support of this claim, but whichever provision it is, clearly, as Ms. Wong who appears for the Plaintiff has pointed out, the validity of the claim depends on whether the relevant provision is a liquidated damages clause or a penalty. 

12. Ms. Wong initially relies on Clauses 17.1(a) and 19.1(m) of the Agreement but after I have pointed out to her that the Plaintiff has also pleaded Clause 17.3 which deals with the situation where notice of termination has been given by the Plaintiff, she changes to rely on Clause 17.3.  I think she is correct as other provisions do not specifically deal with the present situation.

13. Clause 17.3 provides that,

“If we (the Plaintiff) give you (the Defendant) notice of termination you must immediately:

a. return the System(s) (i.e. the photocopying machine) to us; and

b. pay us the Payout Value for all the System(s) calculated as at the day we give you notice as liquidated damages for our loss of bargain ...”.

14. “Payout Value” is defined in the Agreement as “for any of the System(s) on a day, that part of the total Free Page Volume which remains un-invoiced by us (the Plaintiff) on the assumption that: (a) ..., the Free Page Volume would have been made each Billing Period...” (emphasis added).

15. It is stipulated in the Agreement that the Free Page Volume per Billing Period is 2,000 pages of Black & White photocopies, and the charge for each Billing Period is $1,188.

16. Therefore, in short, Clause 17.3 provides in the event that the Plaintiff gives notice of termination before expiry of the minimum term, the Defendant must pay all the rentals of the remaining term.

17. Ms. Wong argues that the burden of proving a payment obligation is penal rests on the party who is sued on the obligation but the Defendant is absent throughout: Halsbury’s Laws of Hong Kong (Volume 22) 2008 Reissue, para. [340.173]. I agree, but this does not mean that I should ignore the Plaintiff’s own evidence.

The Plaintiff’s Evidence and Analysis

18. Mr. Yee Pui Leung, the Senior Solution Manager of the Plaintiff, gives evidence to the Court.  I do not think it is necessary for me to go into details of Mr. Yee’s evidence here, suffice to say is that on the basis of his evidence, I have no doubt that the Plaintiff’s claim under this head must fail.  Indeed, Ms. Wong has also rightly conceded in her closing submissions that the formulation in the clause is not a genuine pre-estimate of the Plaintiff’s damages. 

19. The reasons are as follows.

20. Mr. Yee explains that the Agreement is entirely a provision of services agreement and not a hire-purchase agreement. Under the Agreement, the Plaintiff was to provide a new photocopying machine for the use of the Defendant.  The Plaintiff also had to provide toners and repairs and maintenance services up to a maximum of 2,000 Black & White pages per month.  In return, the Defendant was obliged to pay a monthly rental of $1,188. 

21. When being asked how the figure of $1,188 is obtained, Mr. Yee explains that $1,188 comprises 2 elements, (i) $140 for 2,000 pages; and (ii) the balance of $1,048 is, according to the Plaintiff’s internal records, the value of the photocopying machine.  The said $140 is calculated based on $0.07 per page and this already includes the costs of toners and repairs and maintenance services to be provided.

22. Hence, the photocopying machine in its brand new condition was worth $62,880 ($1,048 X 60 months).

23. Mr. Yee testifies that the Defendant returned the photocopying machine on 26 July, 2010.  Apparently, the return was without the consent of the Plaintiff as otherwise the Plaintiff would not have issued a notice of termination subsequent to this.  Be that as it may, the photocopying machine, when returned, was just about 3 months old and Mr. Yee admits that it must have some value though he does not know how much it is worth. 

24. I have no doubt that the photocopying machine must have some values, indeed following what Mr. Yee says, its residual or second-hand value should be rather substantial.  The Plaintiff has already regained possession of the photocopying machine, and in fact, as referred to in paragraph 13 above, Clause 17.3(a) requires the immediate return of it upon receipt of notice of termination.  It seems to me clear that since the value of the photocopying machine has already been embedded in the monthly rental of $1,188, if the photocopying machine is to be returned and indeed has been returned, allowing the Plaintiff to claim the full sum of $1,188 is tantamount to allow it to have double recovery.  The sum is therefore extravagant and unconscionable in amount in comparison with the greatest loss which could conceivably be proved to have followed from the breach:  see Chitty on Contracts Vol. 1 (30^th Ed.), at para. 26-127.

25. For the above reasons, I come to the conclusion that the said Clause 17.3 is not a genuine pre-estimate damages clause and is unenforceable.  

26. In this connection, it should be noted that although the following provisions in the Agreement have not been pleaded nor have they been raised by Ms. Wong in the hearing, they are pertinent to the issue under consideration:-

Clause 17.5

“When you (the Defendant) pay us (the Plaintiff) the Payout Value, we will refund to you the amount we calculate to be a fair allowance for any savings to us because we no longer are required to provide Maintenance Service under this Easy Printing Service (i.e. the Agreement) ” (emphasis added).

Clause 18.1

“As soon as practicable after System(s) are returned to us (the Plaintiff) under Clause 17.3 we will use reasonable attempts to reduce our loss.”

Clause 18.2

“We (the Plaintiff) will pay you (the Defendant) the gross proceeds we receive from our trying to reduce our loss up to the Payout Value of the System(s) less:

a. all costs and expenses we incur trying to reduce our loss, and

b. amount you owe under this Easy Printing Service.”

Clause 18.3

“We (the Plaintiff) need not pay you (the Defendant) any other proceeds we receive from trying to reduce our loss or any proceeds from selling the System(s).”

27. As said above, the Plaintiff has not pleaded the above provisions.  The Plaintiff, who is legally represented, could not have missed them.  It is more likely than not that the Plaintiff has deliberately chosen not to refer to these provisions. 

28. It seems to me clear that according to the way in which Clauses 17 and 18 are drafted, upon the proper construction of the Agreement, the Agreement intends to make the obligations to “refund” the savings under Clause 17.5 and to pay the sale proceeds under Clause 18 separate and independent from the Defendant’s obligation to pay the balance under the said Clause 17.3(b).  In other words, the Defendant must pay the remaining balance first, and the Plaintiff will then perform the refund and payment obligations.  The use of the word “refund” clearly shows this is the case.  It follows that if the Plaintiff fails to refund or pay the proceeds after the Defendant has paid, the Defendant would have a separate cause of action against the Plaintiff.

29. The Plaintiff is apparently taking the same view as well since otherwise they would not have merely relied on Clause 17.3(b) to claim for the balance in full. 

30. Mr. Yee mentions, in his witness statement, that the Plaintiff has suffered loss of profit in the sum of $59,875.20 as a result of the Defendant’s breach.  He explains that the basic cost of maintenance is internally estimated to be 10%.  Hence, deducting 10% from $66,528 would give a figure of $59,875.20.  However, there is not a shred of documentary evidence, such as the so-called internal estimates, in support of this assertion, but the fatal point is that loss of profit has not been pleaded in the Statement of Claim.  Without amending the Statement of Claim, the Plaintiff cannot rely on loss of profit now.  Even if the Plaintiff is able to rely on the refund of savings provision, I am not satisfied that the Plaintiff has proved that the savings are 10% as alleged.

31. Similarly, notwithstanding that the photocopying machine has already been returned to the Plaintiff before the commencement of the proceedings, this fact has not been pleaded and there is no evidence that the Plaintiff has performed its part under the said Clause 18 by selling the photocopying machine.  Also, the Plaintiff has not seen fit to deduct the value of the photocopying machine from its claim.  It is plain that the Plaintiff has failed to mitigate its loss.

32. Hence, even if the Plaintiff had pleaded loss of profit, it would still not be able to sustain its claim.

33. For the above reasons, the Plaintiff’s claim for $66,528.00 must fail.

Conclusion

34. In conclusion, the Plaintiff is only entitled to recover the first 2 sums, totalling $5,167.80.  I would add that the formulation under Clauses 17 and 18, taken together, is clearly aimed at achieving a fair compensation for the Plaintiff’s loss.  If the Plaintiff had adhered to these provisions, it should probably have been able to recover a higher award.

Order

35. I order that the Defendant do pay the Plaintiff $5,167.80 with interest at the rate of 8% per annum from 12 October, 2010, the date of the Writ to the date hereof and thereafter at judgment rate until payment.

Costs

36. The Plaintiff elects for summary assessment of costs.  The Statement of Costs states a total sum of $31,390. In my view, this is only a simple case.  After having heard Ms. Wong’s submissions, and taking a broad- brush approach, I assess it at $28,000. 

37. However, it is clear that the Plaintiff has substantially failed in its assessment.  Indeed, most of the work done before the hearing and the time spent in the hearing are attributable to the failed part.  Although I do not think the Plaintiff can be criticised for taking out this action in the District Court, the sum that the Plaintiff finally gets is $5,167.80, which falls below the jurisdiction of this Court.  In the circumstances, I should give regard to O. 62, r. 5(1) of the Rules of the District Court which provides,

(1) The Court in exercising its discretion as to costs shall, to such extent, if any, as may be appropriate in the circumstances, take into account –

...

(f) whether a party has succeeded on part of his case, even if he has not been wholly successful”.

38. This provision enables the Court to achieve greater or overall justice of the case: see Hong Kong Civil Procedure 2011, para. 62/5/7.  In my view, a partial costs order should more accurately reflect the level of success achieved by the Plaintiff, and I will so order.  Doing the best I can, I reckon that the Plaintiff should be entitled to 50% of the assessed sum, i.e. $14,000.00. 

39. For the above reasons, I give an order nisi that the Defendant do pay the

Plaintiff’s costs of this action in the sum of $14,000.00. 

Representation