CHECKMATE ENTERPRISES LIMITED v. KUNG FAN BUN

Lands Tribunal - procedure - application for default orders including claim for interest - differences between liquidated damages and penalty clauses in tenancy agreements - if penalty the right to interest survives the unenforceability of penalty rate - if penalty clause necessary for applicant to adduce evidence of relevant interest rates to enable actual loss to be judicially determined - Rule 13A, Lands Tribunal Rules, Cap. 17.

IN THE LANDS TRIBUNAL OF HONG KONG

Application No. L.T. 416 of 1984

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JUDGMENT

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1. In these proceedings the applicant being the landlord of Unit 1, Block 2, Wah Fung Industrial Centre, 1st Floor, 33-39 Kwai Chung Crescent, Kwai Chung, New Territories, Hong Kong applied to recover possession from the respondent tenant on the ground of the respondent's default in paying rent together with other particularised relief. The other relief included interest at the rate of 3.5% per month on the arrears of rent and mesne profits.

2. The respondent was served with the application on the 3rd day of August 1984. No notice of opposition has been filed. On the 30th day of August 1984 the applicant applied, pursuant to Rule 13A of the Lands Tribunal Rules, Cap. 17, for orders in default against the respondent in terms of the orders sought in the substantive application.

3. The affidavit in support of the Rule 13A application exhibited the tenancy agreement executed by the parties. Under Clause 5 of the tenancy agreement the respondent agreed to pay interest at the rate of $50 per $1,000 per month on arrears of rent. In the affidavit in support the applicant's authorised agent deposed that the applicant was prepared to claim interest at the lesser rate of 3.5% per month. I observe that this lesser rate of 3.5% per month is the amount claimed both in the originating application and in the interlocutory application under Rule 13A.

4. Upon the application under Rule 13A being received it was, pursuant to Rule 13A(4), referred to me by the Registrar. Upon perusing the application it appeared to me that the claim for interest was in the nature of a penalty rather than a genuine pre-estimate of loss. The applicant was therefore invited to appear and make submissions whether he was entitled to interest at the rate claimed.

5. I have now had the benefit of those submissions during which the applicant's solicitor indicated that the applicant was prepared to accept interest at the rate of 1.5% per month.

6. The law is well settled that parties to a tenancy agreement or other contract, may agree in advance to the sum which shall be payable as damages in the event of breach. If the sum is a genuine pre-estimate of loss it is called "liquidated damages". In that event the liquidated damages constitute the precise amount which the injured party is entitled to receive as damages for breach. That sum is contractually due by the defaulting party to the injured party without the latter having to suffer the inconvenience, difficulty or delay of proving any actual damage.

7. If on the other hand, the pre-estimate is not a genuine attempt to anticipate actual loss but is inserted in the nature of a threat - in terrorem - it constitutes not liquidated damages but a "Penalty". The law is equally well settled that notwithstanding the prior contractual agreement, the injured party is only entitled to recover a sum representing his actual loss and not any higher sum provided for in the penalty clause. The penalty clause is not therefore an illegal contractual provision having no effect. The clause is merely, as to quantum, unenforceable. The contractual right to damages by way of interest or otherwise remains but it is necessary for the injured party to establish actual loss rather than recover the penal pre-estimate. Where the interest stipulated constitutes a penalty, a further principle is that the actual loss proved may not exceed the penal pre-estimate. The actual loss will invariably be far less than the penal pre-estimate so this apparent limitation will rarely be invoked in practice. These fundamental principles relating to the differences between liquidated damages and penalties are conveniently summarised in Chesire & Fifoot 'Law of Contract' (10th Edn.) 556.

8. No doubt in many cases it will be necessary for an injured party to adduce evidence of current interest rates relevant to the particular circumstances of an application before a default order may be made under Rule 13A. In every case the Registrar, or if the application is referred to him under Rule 13A(4), the Presiding Officer, will judicially have to determine the actual loss.

9. In the present application I am prepared to take judicial notice of current interest rates. On that basis I am prepared, without further evidence, to award interest at the rate of 1.5% per month. If the applicant had wished to pursue a claim for a higher rate it would have been necessary for it to call further evidence for my consideration. In the event it elects not to do so.

10. In these circumstances I am prepared to make orders on the Rule 13A application in terms, subject to the rates of interest in paragraphs (b)(ii) and (iii) each being reduced from 3.5% per month down to 1.5% per month. DATED this 6th day of September 1984.