RICOH HONG KONG LTD v. MAXWIN DIGITAL PRINTING LTD AND ANOTHER

DCCJ 3032/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 3032 OF 2006

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Dates of hearing :  25, 26, 27 & 28 February 2008

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JUDGMENT

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1.  The present dispute arises out of a rental agreement of 3 photocopying machines.

2.  The Plaintiff carries on the business of provision of photocopying products and related services.  By a rental agreement made in 2004 (“the Agreement”), the Plaintiff agreed to rent 3 photocopying machines (“the 3 Machines”), including one Ricoh Aficio 1075 Digital Copying Machine (“the 1075 Copying Machine”) and two Ricoh Aficio CL7100 Laser Printers (“the CL7100 Laser Printers”), to the 1^st Defendant.  According to the term of the Agreement, there would be a minimum rental period of 60 months, with the monthly rental of $3,858 for the first 24 months, $2,858 for the next 12 months and $8,395 for the last 24 months.  After the minimum rental period of 60 months, the 1^st Defendant could purchase the 3 Machines at a nominal price of $100.  Hence, the arrangement between the parties was, in substance, a hire purchase agreement.

3.  After the payment of the monthly rental for the first month, the 1^st Defendant did not pay further monthly rentals to the Plaintiff pursuant to the Agreement.  On 21 June 2006, the Plaintiff commenced the present action against the Defendants to claim for, inter alia: (i) the sum of $340,603.71 being the unpaid rental payments of the whole minimum rental period; (ii) repossession of the 3 Machines pursuant to the terms of the Agreement; and (ii) the sum of $163,671.80 due to the Plaintiff under the other related agreements (“the Other Related Agreements”).  After the commencement of the proceedings, the Plaintiff repossessed the 3 Machines on or about 18 September 2006.  In respect of the claim for the sum due under the Other Related Agreements, the amount of the Plaintiff’s claim has been revised downwards to the sum of $61,882.70, and I am given to understand that the Defendants will not contest the Plaintiff’s claim in this regard.  Since the Defendants also do not pursue the counterclaim against the Plaintiff, the only remaining claim that requires adjudication is the claim for the alleged unpaid rental payments.

4.  The 2^nd Defendant has been sued as the guarantor of the debt of the 1^st Defendant under the Agreement.  It is common ground that if the 1^st Defendant is liable to the Plaintiff for the payment of the monthly rentals, the 2^nd Defendant would also be liable for the same.

Issues in respect of the claim for rental payments

5.  At least 2 factual issues are clear from the pleadings.  Firstly, the Defendants claim that Mr. Wong Ngai, also known as Mr. Eric Wong (“Mr. Wong”), of the Plaintiff had, prior to the making of the Agreement, made representations to the Defendants that the 3 Machines, in particular the CL7100 Laser Printer, could perform the following 3 functions (“the 3 Functions”):

(i) the 3 Machines were capable of printing data prepared by a Macintosh computer software known as Page Maker;

(ii) the 3 Machines were capable of printing data stored in Macintosh software in the format of booklets; and

(iii) the 3 Machines were capable of handling printing on art papers.

As these representations turned out to be untrue, the Defendants claim that the Plaintiff was guilty of misrepresentation.

6.  I then turn to the second factual issue.  After the 1^st Defendant later learnt about the alleged misrepresentations about the 3 Functions, the 1^st Defendant made various complaints to Mr. Wong of the Plaintiff.  The Defendants claim that in response to such complaints, Mr. Wong agreed with the 1^st Defendant that the latter did not need to pay the monthly rentals under the Agreement unless and until the problems relating to the misrepresentations were solved.  This is the so-called “Varied Agreement” as referred to in the pleadings (“the Varied Agreement”).

7.  Based on the alleged misrepresentations and the Varied Agreement, the Defendants claim that no monthly rental is due under the Agreement.  As the Plaintiff disputes both of the Defendants’ contentions, such issues require the adjudication of the court.  However, there is some confusion in the pleadings as to the remaining issues involved in this case.  After clarifying with counsel, the parties agree on the following positions depending on the court’ s findings on the 2 main factual issues above.

8.  Firstly, if the court were to accept the Plaintiff’s evidence in the entirety and were to find that there was no misrepresentation about the 3 Functions of the Machines and no Varied Agreement, then the 1^st Defendant was in breach of the Agreement in not making the rental payments.  The problem then arises is that the Plaintiff, in the pleading, only claims for the monthly rentals for the whole minimum rental period pursuant to clause 15.3 of the Agreement, or alternatively for loss of profit.  As the Plaintiff indicates that it is not pursuing the claim for loss of profit, in the event that the court were to find that the said clause 15.3 is a penalty clause, it is arguable that the Plaintiff, in the absence of a claim for general damages, can only claim for the unpaid monthly rentals due prior to the termination of the Agreement, ie. the time when the Plaintiff accepted the repudiation of the Agreement on the part of the 1^st Defendant.  This may substantially reduce the quantum of the Plaintiff’s claim, and I will deal with such issue in more detail in the latter part of this judgment.

9.  Secondly, if the court were to accept the Defendants’ evidence in its entirety and were to find that there were misrepresentations about the 3 Functions of the Machines and the Plaintiff did make the Varied Agreement with the 1^st Defendant, then it is common ground that the Plaintiff is not entitled to claim for any rental payments from the Defendants under the Agreement.  Under such circumstances, the 1^st Defendant should be able to claim for damages against the Plaintiff for misrepresentation.  However, as the 1^st Defendant is not pursuing the counterclaim against the Plaintiff, I would only have to dismiss the Plaintiff’s claim for unpaid monthly rentals under such scenario.

10.  There may also be other possibilities based on different findings of fact, however for the purpose of this judgment, it is not necessary for me to deal with the other scenarios.  Further, so far as the misrepresentations about the 3 Functions are concerned, the Defendants only rely on the misrepresentation about the capability of the CL7100 Laser Printer to print data in Macintosh files in booklet-format.  This was the main concern to the Defendants and they are not relying on the other misrepresentations for the purpose of their defence.

11.  As the 2 main factual issues are the focus of this case, I will proceed to deal with them first.

Determination of the 2 main factual issues

(i)          The evidence of the Plaintiff’s case

12.  Mr. Wong testifies on behalf of the Plaintiff’s case.  He is a Senior Accounts Manager of the Plaintiff.  In July or August 2004, the 1^st Defendant approached the Plaintiff to acquire photocopying machines for certain printing works, and Mr. Wong was assigned by the Plaintiff to discuss the matter with the 1^st Defendant.  After the initial discussions, Mr. Wong arranged 2 demonstrations for the staffs of the 1^st Defendant, with each one lasted for about 3 hours, to demonstrate the functions of the 1075 Copying Machine and the CL7100 Laser Printer.

13.  According to Mr. Wong, during the initial discussions, Mr. Cheng Man Hong (“Mr. Cheng”), who is the 2^nd Defendant herein and a director of the 1^st Defendant, asked him whether the Plaintiff’s photocopying machines could print data stored in Macintosh software in form of booklets.   In reply, Mr. Wong clearly told Mr. Cheng and the staffs who attended the demonstrations that the CL7100 Laser Printer could print data stored in Macintosh files.  However, if the 1^st Defendant wanted to print such data in the form of booklets, the data in the Macintosh files would have to be first converted to data in Windows files, as the booklet-format printing software of the CL7100 Laser Printer only worked under the Windows Operating System.  In fact, the Plaintiff had Macintosh computers in its showroom at the time of the 2 demonstrations, and the 1^st Defendant’s representatives did use the Macintosh computers in the showroom to test the functions of the CL7100 Laser Printer.

14.  The 1^st Defendant’s representatives also raised the following 2 enquires: (i) whether the 3 Machines could handle printing on A3-sized papers with stable colour; and (ii) whether the 3 Machines could handle printing on art papers.  Mr. Wong replied in the affirmative for the first enquiry as the demonstrations were carried out using A3-sized papers.  Mr. Wong, however, replied in the negative in respect of the second enquiry.

15.  After the demonstrations and the negotiations, the 1^st Defendant agreed to acquire, by way of hire-purchase arrangement, one 1075 Copying Machine and two CL7100 Laser Printers from the Plaintiff.  The Plaintiff offered a 60-months’ fixed price payment term to the 1^st Defendant.  At first, the 1^st Defendant refused to accept such term, but when the Plaintiff agreed to adjust the monthly payments by having lesser monthly rentals for the first few years and higher monthly rentals near the end of the term, an agreement was then reached between the parties.

16.  Shortly prior to the execution of such agreement, Mr. Wong informed the 1^st Defendant that the CL7100 Laser Printers were out of stock.  The Plaintiff therefore offered to provide one CL7100 Laser Printer and one Ricoh Aficio CL7000 Laser Printer (“the CL7000 Laser Printer”) for temporary use by the 1^st Defendant free of charge until the delivery of the new printers.  In the meantime, the 1^st Defendant only need to pay the meter charges for the use of these 2 temporary printers.  The 1^st Defendant agreed.

17.  After the use of the photocopying machines for some time, the 1^st Defendant raised a few complaints about the operation of such machines, including paper jamming and incorrect printing of colours on the papers.  Mr. Wong learned from the technician serving the 1^st Defendant that these problems were caused by excessive and prolonged use of the machines.  To resolve the differences between the parties, Mr. Wong offered some concessions to the 1^st Defendant which were recorded down in a written note dated 13 October 2004 signed by the 2^nd Defendant on behalf of the 1^st Defendant.  In such note, it was stated that the 1^st Defendant was generally satisfied with the use of the machines.  However, in respect of the complaints, the Plaintiff agreed to: (i) replace the A4-sized tray of the 1075 Copying Machine with A3-sized tray; (ii) replace the 2 laser printers for temporary loan with new CL7100 Laser Printers which should arrive in October 2004; and (iii) provide free meter charges in respect of a total of 38,500 printings by the machines.

18.  After the arrival of the new stock of CL7100 Laser Printers, the Plaintiff and the 1^st Defendant signed the formal Agreement for the hire-purchase of the 3 Machines on or about 28 October 2004.  The 2 new CL7100 Laser Printers were then delivered to 1^st Defendant in about early November 2004.  By that time, the 1^st Defendant raised no further complaint about the 3 Machines, and the Plaintiff did send its technician to the 1^st Defendant’s office for general maintenance work.  Mr. Wong denies that he had made any representations about the 3 Functions of the Machines, and neither did he agree to make the Varied Agreement as alleged by the Defendants.

19.  The second witness of the Plaintiff’s case is Mr. Lee Chung Ming Albert (“Mr. Lee”) who is the Credit Control and Finance Manager of the Plaintiff.  According to him, the 3 Machines supplied to the 1^st Defendant were all brand new machines.  As the maintenance costs of second-hand printing machines are high and new models of printing machines appear in the market at a quick pace, users would not buy second-hand machines and there is no second-hand market for used photocopying machines and printers in Hong Kong.  As used machines were of no use to the Plaintiff, the Plaintiff treated the hiring of the 3 Machines to the 1^st Defendant as outright sale, and that was why there was a term providing for minimum rental period of 60 months in the Agreement.

20.  Mr. Lee further testifies that the selling price of the 3 Machines under the Agreement was actually $243,235.  Taking into account interest in the sum of $85,133 calculated at the rate of 7% per annum, the total sum of monthly rentals payable under the Agreement amounted to $328,368.

(ii)         The evidence of the Defendants’ case

21.  Mr. Cheng testifies in support of the Defendants’ case.  According to him, the 1^st Defendant at all material times carried on the business of a production house which engaged in the provision of printing services to its clients.  In or about July 2004, the 1^st Defendant received enquiry from a customer, Hong Kong Educational Publishing Co. (“HKEPC”), for an order for the printing of booklets using art papers.  The contents of the primary material for the printing work were stored in  computer files prepared by a Macintosh software known as Page Maker.  The delivery date for the booklets would be in the end of August 2004.  As the 1^st Defendant then existing printers could not handle such printing work, the 1^st Defendant had to acquire new printers for the order.

22.  After contacting the Plaintiff for possible acquisition of the new printing machines, the Plaintiff sent Mr. Wong to discuss the matter with Mr. Cheng.  By that time, Mr. Cheng emphasized to Mr. Wong that the printing machines had to satisfy the 3 Functions, and that the machines were to be acquired to fulfill the order by HKEPC on an urgent basis.  The machines therefore had to handle mass printing within a short period of time.  With these requirements in mind, Mr. Wong recommended the CL7100 Laser Printer to the Defendants.  Mr. Wong also provided Mr. Cheng with a catalogue of such printer.  The Plaintiff then arranged 2 demonstrations for the staffs of the 1^st Defendant to demonstrate the functions of the CL7100 Laser Printer and the 1075 Copying Machine.  Mr. Cheng did not attend these 2 demonstrations.

23.  After further negotiation, the 1^st Defendant agreed to acquire the 3 Machines and signed the Fixed Price Rental Agreement with the Plaintiff.  After the making of such agreement, the Plaintiff notified the 1^st Defendant that the CL7100 Laser Printers were out of stock.  According to the arrangement then agreed by the parties in late August 2004, the Plaintiff would, without charge, loan a used CL7100 Laser Printer and another CL7000 Laser Printer for use by the 1^st Defendant to meet the production deadline of the order by HKEPC.  The 1^st Defendant only had to pay meter charges to the Plaintiff depending on the volume of use of such printers.

24.  After using the printers for a while, the 1^st Defendant found out that such machines could not perform the 3 Functions.  In respect of the failure of the machines to print data contained in Macintosh files in booklet-format, a technician of the Plaintiff, Mr. Chor Chiu Wah, then came up with a temporary solution of converting the data in Macintosh files to Windows Acrobat files.  In such case, the CL 7000 and CL7100 Laser Printers were able to print the data in booklet-format.  However, there were also other problems including frequent paper-jamming and misprint of colours on the papers, and so the 1^st Defendant had to abandon the use of art papers for the order by HKEPC.  The 1^st Defendant raised such complaints to the Plaintiff, and as a result the Plaintiff agreed to give some concessions to the 1^st Defendant as recorded down in the note dated 13 October 2004.

25.  Despite that the CL7000 and CL7100 Laser Printers loaned to the 1^st Defendant could not print the data stored in Macintosh files in booklet-format, Mr. Wong assured Mr. Cheng that the new machines to be delivered to the 1^st Defendant could perform such function, otherwise the Plaintiff would provide a solution to such problem or to replace the printers.  After the arrival of the new stock, the 1^st Defendant, in reliance of such assurance, executed the Agreement for the acquisition of the 3 Machines, and the Plaintiff then delivered the 2 new CL7100 Laser Printers to the Defendant in about early November 2004.

26.  After using the new printers, the 1^st Defendant found out that the CL7100 Laser Printers still could not perform the 3 Functions, in particular the printing of data contained in Macintosh files in booklet-format.  Mr. Cheng raised such complaint to Mr. Wong, who then agreed that the Plaintiff would not charge any monthly rentals from the 1^st Defendant under the Agreement for the use of the 3 Machines unless and until the problem relating to the booklet-format was solved.  At that time, the 1^st Defendant agreed to pay the monthly rentals for the 1075 Copying Machine.  However, Mr. Wong said that it was very difficult to split the rental payments between different machines, and so no agreement had been made by the parties for the payment of the monthly rentals of the 1075 Copying Machine.

27.  About 9 months later on or about 4 August 2005, the 1^st Defendant received the first batch of invoices from the Plaintiff demanding for the payment of the monthly rentals of the 3 Machines from November 2004 to August 2005.  As the problem relating to the printing in booklet-format still remained unsolved, Mr. Cheng confronted Mr. Wong about the issuance of the invoices, and the latter agreed to follow up on the matter.

28.  The 1^st Defendant did use the CL7100 Laser Printers for other printing works.  Some time in 2005, the 1^st Defendant received a few enquires from HKEPC as to whether the 1^st Defendant was capable to handle printing orders of Macintosh-formatted data.  The 1^st Defendant explained the unsolved problem of the CL7100 Laser Printers to HKEPC, who nevertheless placed the order with the 1^st Defendant.  The 1^st Defendant therefore went through the same process of carrying out the printing work by converting the data to files compatible with the Windows Operating System.  The final products were delivered to HKEPC but the latter still complained about the quality of the work.

29.  On 17 July 2006, the Plaintiff’s solicitors demanded for the return of the 3 Machines, and the same were collected by the Plaintiff on 18 September 2006.

30.  The second witness for the Defendants’ case is Mr. Lui Chung Wai.  He was under the employment of the 1^st Defendant at the material time and he attended one of the 2 demonstrations arranged by the Plaintiff.  He was the only staff who attended that particular demonstration, and he was mainly responsible for testing the machines in handling printing work on different kinds of papers including art papers.  He was not responsible to test the function of the machines in printing data contained in Macintosh files in booklet-format, and he believes that such should be the responsibility of his other colleague who attended the other demonstration at the Plaintiff’s showroom.

(iii)        Assessment of the Evidence

31.  After listening to the evidence, I find in favour of the Plaintiff on the 2 main factual issues.  As I see it, if Mr. Cheng’s evidence were indeed the truth, Mr. Wong had deliberately made misrepresentations to the Defendants about the functions of the 3 Machines, and I doubt whether it was worth for Mr. Wong to have done so.  Obviously, one may argue that Mr. Wong, being an aggressive salesman, might be temped to make such misrepresentations with a view to increase his own sales.  However, the relationship between the parties was not a one-off deal.  The 1^st Defendant would have to order printing material from the Plaintiff for the continuing operation of the 3 Machines, and the Plaintiff was under the Agreement to provide maintenance service to the 1^st Defendant for a term of 5 years.  If Mr. Wong deliberately provided such wrong information, the 1^st Defendant would have been able to find out the truth about the misrepresentations very soon.  As revealed from the evidence, the senior management of the Plaintiff was very concerned about the account of the 1^st Defendant.  In such circumstances, it would have brought Mr. Wong much more trouble if the 1^st Defendant later found out the truth about the misrepresentations, and I doubt very much whether it was worth for Mr. Wong to have adopted such foolish practice to boost his own sales.

32.  Further, the 1^st Defendant would have been able to find out the truth about the misrepresentations very easily from the technical staffs of the Plaintiff who attended the 2 demonstrations.  As revealed from the evidence of Mr. Wong, which is not disputed by the Defendants in this regard, the staffs of the Plaintiff’s technical team, known as Network Solution Team, were present during the 2 demonstrations.  They were not responsible for the sales of the Plaintiff’s printing machines, and so there was no need for them to conspire with Mr. Wong and to make false representations about the functions of the 3 Machines.  It is clear that at least one of the demonstrations was to ascertain the capability of the CL7100 Laser Printer to handle printing work with Macintosh files.  As the Plaintiff’s technical staffs were present in such demonstration to deal with all the technical enquiries, Mr. Wong’s plan of misleading the 1^st Defendant simply could not have worked.

33.  In fact, the 1^st Defendant had been given a lot of opportunities to test the functions and the capabilities of the 3 Machines.  The Defendants claim that there was no Mackintosh computer in the Plaintiff’s showroom at the time of the demonstrations to test the compatibility of the CL7100 Laser Printer to work with Mackintosh files.  However, as “Microsoft Windows” and “Macintosh” are the two major operating systems for computers and the Plaintiff has a significant share in the provision of photocopying machines, I find it quite incredible that the Plaintiff had no Mackintosh computer in its showroom for demonstration purposes.  As numerous opportunities of testing were available, I find that the 1^st Defendant was fully aware of the functions and the limitations of the 3 Machines.

34.  Further, as Mr. Cheng claims that he had made express enquiry with Mr. Wong about the 3 Functions, Mr. Cheng should have been very angry when he later discovered that the representations were blatant lies.  As the Plaintiff had run out of stock of the CL7100 Laser Printers, it was still quite possible for the 1^st Defendant not to hire the CL7100 Laser Printers before the arrival of the new stock in October 2004, and yet the 1^st Defendant proceeded to hire such machines.  According to Mr. Cheng, Mr. Wong assured him that the Plaintiff would work out a solution to the problem relating to the booklet-format, and so the 1^st Defendant took delivery of the new CL7100 Laser Printers.  However, Mr. Wong had not been honest to him before and I wonder why he still trusted Mr. Wong in this regard.  This does not make a lot of sense.

35.  I also do not understand why Mr. Cheng did not insist to write down his complaint about the booklet-format in the note dated 13 October 2004.  As such problem was of much concern to the 1^st Defendant, there was no reason why Mr. Cheng did not insist to include such complaint in the note to protect the 1^st Defendant’s interest.  Indeed, Mr. Wong wrote down that the 1^st Defendant was satisfied with the use of the machines to protect the Plaintiff’s interest, this should have alerted Mr. Cheng to do something to protect the 1^st Defendant’s interest as well, and yet he had not insisted to include the Defendants’ complaint in the note.  Hence, I do have great reservation about the truth of the Defendants’ allegations.

36.  At one stage, Mr. Cheng in his testimony seems to suggest that the information in the catalogue of the CL7100 Laser Printer supplied by the Plaintiff was not correct.  However as the Defendants have not relied on the same in support of the plea of misrepresentation in the pleading, I do not need to deal with this particular issue.  In any event, the information in the catalogue was correct in the sense that the CL7100 Laser Printer was able to print data stored in Macintosh files, though not in booklet-format.  One would not expect the Plaintiff to list out all the technical limitations of the CL7100 Laser Printer in such kind of promotion catalogue, and so I agree that there was no misrepresentation in such document.

37.  I also do not find that there is any material inconsistency in Mr. Wong’s evidence.  There was some uncertainty as to whether the 1^st Defendant had made excessive use of the printing machines prior to the delivery of the new CL7100 Laser Printers, but that was Mr. Wong’s understanding of the cause of the problems of paper jamming and misprint conveyed to him by the Plaintiff’s technician.  On the other hand, I find that the Defendants were clearly aware of the limitation of CL7100 Laser Printer in printing data contained in Macintosh files in booklet-format.  Such information had been clearly conveyed to the 1^st Defendant both in the meetings between Mr. Wong and Mr. Cheng and in the 2 lengthy demonstrations.  However by that time, the 1^st Defendant was eager to acquire new printing machines for the order by HKEPC.  The Plaintiff had suggested a solution to the problem by converting the data in Macintosh files to Windows Acrobat files.  The 1^st Defendant accepted this solution and proceeded to acquire the 3 Machines from the Plaintiff.  It was only later that the 1^st Defendant was not satisfied with the solution that it withheld payment of the monthly rentals due under the Agreement.

38.  Such conclusion is also supported by the fact that HKEPC did place further order with the 1^st Defendant for other printing works using Macintosh files.  If the solution of converting the data was not working to the level of reasonable satisfaction for the HKEPC’s order in August 2004, I wonder why HKEPC, with full knowledge of the limitation of the CL7100 Laser Printer as testified by Mr. Cheng, would still have proceeded to place further order with the 1^st Defendant.  This shows that the solution was, to a great extent, accepted by the parties at all relevant time.

39.  I also find it quite incredible that Mr. Wong would have agreed the terms of the Varied Agreement with the 1^st Defendant.  Even assuming that Mr. Wong might be an aggressive salesman, how could he have covered his own misbehaviour by agreeing with the Plaintiff not to charge any monthly rentals pending the solving of the problem relating to the printing of Mackintosh files in booklet-format? Mr. Wong certainly had to account to the Plaintiff for the handling of the 1^st Defendant’s account, and I do not believe that he would just have promised on behalf of the Plaintiff in not charging the monthly rentals, in particular there was no certainly as to when the Plaintiff would come up with a solution to the 1^st Defendant’s complaint and the Plaintiff’s loss of revenue could therefore be very substantial.  Further according to Mr. Cheng, Mr. Wong, for the avoidance of trouble, seemed to agree not to charge the 1^st Defendant for the monthly rentals of the 1075 Copying Machines.  Obviously, there was no complaint with the operation of such machine, and I find it quite unbelievable that Mr. Wong would have agreed to waive the payment of such machine simply to save the trouble of calculation.  This did not make a lot of commercial sense.  Hence, I do not accept the existence of the Varied Agreement, and I also find that the sending of the first batch of invoices in August 2005 was probably caused by the administrative delay on the part of the Plaintiff rather than the result of the making of the Varied Agreement.

40.  Lastly, the maintenance records of the 3 Machines do not support the Defendants’ case that they had raised serious complaints about the operation of the 3 Machines.  The records show that the Plaintiff’s technicians only attended the 1^st Defendant’s office for regular maintenance works only, and they did not contain any complaints by the 1^st Defendant about the functions of the 3 Machines.

41.  By reason of the aforesaid, I find against the Defendants on the 2 main factual issues.

Liquidated damages or penalty?

42.  Based on such findings, the 1^st Defendant was in breach of the Agreement in not paying the monthly rentals for the 3 Machines under the Agreement.  As the Plaintiff is claiming for the unpaid monthly rentals of the whole minimum rental period of 60 months pursuant to clause 15.3 of the Agreement, the next issue is, therefore, whether such clause is a penalty.

43.  Mr. Yeung, counsel for the Plaintiff, argues that the agreed sum of damages in such clause was a genuine pre-estimate of the loss likely to flow from the breach of the Agreement, and he relies on the case of Fuji Xerox (Hong Kong) Limited v Vigers Hong Kong Ltd., unreported, HCA 3735/2003 (decision of Deputy High Court Judge E Toh on 9 August 2006).  The facts of that case were indeed very similar to those in the present one.  The hirer was in breach of the agreements for the hiring of photocopying machines, and Deputy High Court Judge Toh held that the clause which required the hirer to pay the monthly rentals for the whole unfulfilled minimum contracted period of 6 years was not a penalty.

44.  However, I am not prepared to follow the learned judge’s decision because of the following reasons.  Firstly, the learned judge’s decision was clearly based on the factual finding that there was no second-hand market for the relevant photocopying machines in Hong Kong.  Although it is the evidence of Mr. Albert Lee, the Plaintiff’s second witness, that the same was true in the present case, I find that his evidence is somewhat inconsistent with the Plaintiff’s initial claim for loss of profit pleaded in the Statement of Claim.  As I see it, there must have been some profitable use of the used machines before one can make a claim for loss of profit.  Further, Mr. Lee’s reasons for supporting the lack of second-hand market are based on the high maintenance costs of the used machines and the rapid launch of new models in the market.  Nevertheless, if someone just hires the machines for a short period of time, for example 3 to 6 months, the higher maintenance costs and perhaps the slightly outdated model of the machines should not destroy the demand of the market for these rather new machines.  Ultimately, it depends whether the resale price is attractive or not.  Hence, I have great reservation in accepting Mr. Lee’s evidence that there was indeed no second-hand market for used photocopying machines in Hong Kong.

45.  The second reason is perhaps more important.  As agreed by Mr. Lee, the total amount of the monthly rental payments for the minimum rental period consisted of 2 basic elements: (i) the price of the 3 Machines; and (ii) the interest for the hire purchase arrangement.  If the Agreement provided that the 1^st Defendant would have to pay for the monthly rentals for the whole period irrespective when the 1^st Defendant terminated the Agreement, it would mean that the 1^st Defendant would have to pay the Plaintiff the same amount of interest whether the breach occurred on the first month of the 60 months’ period or the last month of such period.  Indeed, clause 15.3 provided that the hirer would have to pay the maximum loss to the Plaintiff even if the hirer just used the machines for 1 day.

46.  As provided for in Dunlop Pneumatic Tyre Co. Ltd. v New Garage and Motor Co. Ltd. [1915] AC 79 at pp. 86-88,there is a presumption that the clause is a penalty when a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and other but trifling damage.  Further, the learned author said the following in Chitty on Contracts, vol.1, 28 ed., at para. 26-113:

“A ‘minimum payment’ clause in a hire-purchase or hiring agreement will usually be held to be a penalty if it provides for the same total sum to be payable by the hirer irrespective of how long the agreement has been in force or ‘regardless of the seriousness or triviality of the breach in question.’”

Taking these observations into account, I find that the arrangement in clause 15.3 was not a genuine pre-estimate of the loss arising from the breach of the Agreement, and the clause is therefore a penalty clause.

Consequences of the finding that clause 15.3 is a penalty

47.  As the Plaintiff is not pursuing the claim for loss of profit and there is no alternative claim for damages, the quantum of the Plaintiff’s claim may be rather limited in the present case.  Even if the 1^st Defendant was in breach of the Agreement, the Plaintiff can only claim for the unpaid monthly rentals due prior to the termination of the Agreement.  The monthly rentals “due” after the termination of the Agreement can only be regarded as damages, and since there is no such claim in the pleading, the Plaintiff is not entitled to claim for the same.

48.  For the purpose of this case, the Agreement was terminated when the Plaintiff, by the commencement of the present action on 21 June 2006, accepted the repudiation of the Agreement on the part of the 1^st Defendant.  By that time, there were 19 months of monthly rentals due under the Agreement in the total sum of $73,302 ($3,858 x 20 months).

49.  I therefore grant judgment in favour of the Plaintiff against both Defendants in the sum of $135,184.70, being the aggregate of the sum of $61,882.70 due under the Other Related Agreements and the sum of $73,302 of due monthly rentals.  I also make an order nisi that there be interest on the said sum at 9.398% per annum, being the existing judgment rate, from the date of the writ to the date hereof and thereafter at judgment rate, and that the costs of the action be to the Plaintiff with certificate for counsel.  The order nisi shall be made absolute 14 days after the date of the handing down of this judgment.

50.  Finally, I do have certain views about the preparation of this case.  Looking at the facts, I imagine one of the obvious issues is whether clause 15.3 is a penalty clause, and yet the Defendants only sought leave to amend the pleading to raise such averment at the first day of the trial.  On the other hand, I still cannot quite understand the reason why the Plaintiff has not pursued an alternative claim for damages, and as a result the quantum of the Plaintiff’s claim has been substantially reduced.  Apart from the 2 main factual issues, the other remaining issues are not clearly defined in the pleadings, and I need to clarify with both counsel at the commencement of the trial about their clients’ positions with different findings of fact on the main factual issues.  All these add to the difficulty in the adjudication of the case.  If more efforts had been devoted to the formulation of the parties’ respective cases, I think that all these difficulties could have been avoided.