SANWA FINANCE HONG KONG LTD. v. HONEY TECHNOLOGY LTD. AND OTHERS

CACV 271/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 271 OF 1999

(ON APPEAL FROM HCA 22129 OF 1998)

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J U D G M E N T

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Ribeiro JA:

The claim

1. The Plaintiff entered into a total of six hire-purchase agreements with the 1st Defendant on various dates in 1995 and 1996. In March and April 1998, the 1st Defendant defaulted on the rental instalments payable under each of those agreements. This led the Plaintiff, by letter dated 29 April 1998, to terminate the agreements and to demand payment and delivery up of the hired goods for repossession. One partial payment was thereafter made but, as at 18 November 1998, no goods had been repossessed and, according to the Plaintiff, $7,706,640.10 remained due and owing. On that date, it issued a letter before action demanding payment but no further payment has resulted.

2. The other three Defendants provided a series of guarantees to the Plaintiff securing the 1st Defendant's liabilities under the abovementioned hire-purchase agreements. Demands for payment under such guarantees were also issued by the Plaintiff on 18 November 1998, and again, no payments have resulted.

3. The Plaintiff brought this Action by Writ issued on 24 December 1998. It sought summary judgment against the 1st Defendant on the debt allegedly due and against the other Defendants on their guarantees. The application for summary judgment was adjourned by the Master to the Judge in Chambers and, on 26 August 1999, Godfrey JA, sitting as an additional judge of the High Court, gave judgment against all Defendants. They now bring this Appeal for orders setting aside such judgment and allowing them unconditionally to proceed to trial.

The Defendants' arguments

4. The 1st Defendant does not dispute the fact that it was in default on the rental payments. Mr Peter Graham, appearing for the Defendants, puts forward three arguments by way of defence.

5. The first is that the judgment cannot be sustained because of the way the Plaintiff's case has been pleaded in the Amended Statement of Claim ("the pleading point"). This was a point not taken below when the Defendants were represented by different counsel.

6. The second is that Godfrey JA erred in failing to accept that the 1st Defendant's evidence of a "standstill agreement" had raised a triable issue as to whether the Writ had been issued at a time when the Plaintiff had an accrued cause of action ("the standstill point").

7. The third argument is related to the second. It is that Godfrey JA applied the wrong legal test when he rejected the standstill point ("the legal test point").

The pleading point

8. In relation to the claim against the 1st Defendant, the Amended Statement of Claim pleads the six hire purchase agreements which are all in the same form. It refers in detail to some of the more important clauses in the agreements including Conditions 6(1) and 7 which provide as follows:-

"6(1)	If the Hirer shall make default in payment of any of the sums payable hereunder or shall fail to observe or perform any of the other terms and conditions of this Agreement ..., the Owner may at any time without prejudice to any pre-existing liability of the Hirer to the Owner, determine this Agreement without notice and thereupon this agreement and the hiring hereby constituted shall for all purposes determine and thereafter the Hirer shall no longer be in possession of the Goods with the Owner's consent and subject to the provisions of Condition 7 hereof and any pre-existing liabilities of the Hirer hereunder neither party shall have any rights against the other.
(2)	...
7(1)	Upon the termination of this Agreement:
	(i)	under Condition 6(1) hereof, if the Hirer has failed to pay any rental instalment or part payable under this Agreement for more than seven days after becoming due; ...
	the Hirer shall be deemed to have repudiated this Agreement and in such event the Owner shall be entitled to repossess itself of and remove the Goods whereupon the Hirer shall deliver up to the Owner the licence, and Certificate of Insurance and the Hirer shall pay to the Owner:-
	(a)	all arrears of monthly rental instalments payable hereunder (apportioned if necessary) together with interest accrued thereon pursuant to Condition 2(2) hereof up to the date of the Owner's acceptance of the Hirer's wrongful repudiation of this agreement;
	(b)	all costs incurred by the Owner in repossessing the Goods;
	(c)	any sums payable by the Hirer pursuant to the provisions of Conditions 2(3), 2(4), 2(10), 2(11) and 2(15) hereof;
	(d)	the expenditure (if any) incurred by the Owner in putting the Goods into good repair;
	(e)	a sum in respect of damages suffered by the Owner as a result of the Hirer's wrongful repudiation of this Agreement which shall be equal to the difference between (1) the sum which is equal to the actual sum advanced by the Owner (as stated in the Schedule overleaf) at the commencement of this Agreement plus Hire Charges up to the termination hereof and (2) the aggregate of the following items:-
		(i)	all monthly rental instalments paid prior to the date of repossession plus any sums recovered under sub-clause (a) above:
		(ii)	the best price obtainable by the Owner on the resale of the Goods less any deductions for expenses properly incurred in such resale provided that the Hirer expressly agrees that the Owner in reselling the Goods shall be obliged to offer the same only to persons whose business is that of dealing in goods and that the best offer received and accepted by the Owner from such a dealer for the Goods shall be agreed by the Hirer in all the circumstances to be the best price obtainable aforesaid.

9. The pleading then alleges the 1st Defendant's default in making the rental payments as follows:-

"8.	In breach of the Agreements, the 1st Defendant has failed to pay the monthly rental instalments due on the following dates and each succeeding month thereafter.

PARTICULARS

Hire Purchase Agreements		Monthly Rental Instalments have been overdue since
(1)	CH999-293	15 April 1998
(2)	CH999-00315	25 April 1998
(3)	CH999-346	25 March 1998
(4)	CH999-372	10 April 1998
(5)	CH999-377	20 April 1998
(6)	CH999-384	10 April 1998"

It then proceeds to make the following averments :-

"9.	By reason of the matters pleaded in paragraph 8 above, the 1st Defendant has clearly evinced an intention to repudiate the Agreements. By a letter dated 29 April 1998 from Deacons Graham & James ('DGJ'), solicitors for the Plaintiff, to the 1st Defendant, the Plaintiff accepted the 1st Defendant's repudiation of the Agreements, terminated the Agreements with immediate effect, demanded payment of the sums then due under the Agreements and demanded the delivery up of the Goods to the Plaintiff.
10.	One partial payment was made by the 1st Defendant following the issue of the said letter. By a letter dated 18 November 1998 from DGJ to the 1st Defendant, the Plaintiff demanded the 1st Defendant to pay to the Plaintiff the sum of HK$7,589,072.05 to cover the 1st Defendant's indebtedness to the Plaintiff under the Agreements. Despite the said demand by the Plaintiff, the 1st Defendant had failed to make any payment to the Plaintiff and to deliver any of the Goods to the Plaintiff. As at the date of the Amended Statement of Claim, a total sum of HK$7,706,640.10 was still due and owing by the 1st Defendant to the Plaintiff under the Agreements. The Plaintiff has therefore suffered loss and damage in the said amount.
11.	Since the 1st Defendant has failed to deliver up any of the Goods to the Plaintiff, there is no proceeds of sale of any of the Goods which could be made available to reduce the damage suffered by the Plaintiff.
	...
15.	In view of the matters pleaded above, the Plaintiff has suffered loss and damage in the sum of HK$7,706,640.10."

In the Prayer, the Plaintiff claims "the sum of HK$7,706,640.10" and other minor heads of relief.

10. Mr Graham contended that as a result of the language of paragraphs 9 and 10 of the Amended Statement of Claim, the Plaintiff's claim can only be based on a repudiation of the hire purchase contracts under the general common law. It does not permit the claim to proceed as one for a liquidated sum quantified under the terms of the contract. He argued that the Plaintiff should therefore not have obtained judgment because failure to make rental payments for a relatively short time could not be regarded as repudiatory conduct sufficient to found a common law claim. Alternatively, he argued, the Plaintiff was at best only entitled to interlocutory judgment for damages to be assessed and not to judgment in the amounts awarded.

11. In my judgment, while it is true that the pleading contains surplusage (including unnecessary references to the 1st Defendant evincing an intention not to be bound), taken as a whole, it clearly indicates and justifies the Plaintiff's reliance on its contractual rights to liquidated damages under Clauses 6(1) and 7. Not only are those clauses specifically pleaded, in the paragraphs following reference to those provisions, the pleading sets out the facts relevant to their operation, namely, the fact of default in rental payments, the consequential determination of the agreements by letter dated 29 April 1998 and quantification of the liquidated damages claimable under Clause 7.

12. I therefore reject the argument that the claim must be restricted to one for general damages at common law and hold that the pleading is sufficient to found a claim for the remedies provided for under Clause 7.

The default on 25 April

13. As appears from the facts set out above, the last payment default occurred on 25 April 1998, only four days before the Plaintiff determined the agreements by the letter of 29 April. It was argued by Mr Graham that, at any rate in relation to this instance of default, the remedies provided for by Clause 7 could not apply since, as a matter of construction, such remedies could only arise if the default had persisted for at least 7 days prior to the date when the Plaintiff terminated the contract. The Plaintiff was therefore thrown back onto its common law remedies in relation to this default and faced the attendant difficulties described above.

14. In my view, this argument involves too narrow a construction of the two provisions. Clause 6(1) provides that the power to determine the agreement for default may be exercised at any time with the instant legal consequence of depriving the hirer of possession of the goods. The words "upon termination of this Agreement under Clause 6(1)" in Clause 7(1) are, in my view, not intended to limit the subsequent words "if the Hirer has failed to pay any rental instalment for more than seven days after becoming due" to cases where the seven days had already elapsed by the time of the termination.

15. While the parties plainly intended to allow the defaulting hirer a grace period of 7 days to make payment if he wished to avoid the Clause 7 remedies, I do not see any reason to conclude that the Clause 7 remedies were intended to be inapplicable unless the Plaintiff had first held off determining the contract until the default had already persisted for seven days. On the contrary, the provision in Clause 6(1) that, subject to the provisions of Clause 7 and any pre-existing liabilities of the Hirer under the agreement "neither party shall have any rights against the other" strongly suggests that Clause 7 is intended to persist as the condition governing remedies, whatever the timing of the Clause 6(1) determination.

16. Accordingly, in my view, Clause 7(1) is intended to operate where two elements are present, namely, (i) termination of the agreement under Clause 6(1) and (ii) non-payment which has persisted for a period of at least 7 days after the initial default. There is no requirement for such period entirely to precede the act of termination.

17. It is therefore my conclusion that the 25 April default, like the other defaults, supports a claim for liquidated damages under Clause 7(1).

The standstill point

18. The evidence on this point is set out in the 1st Affirmation of the 2nd Defendant (who is a director of the 1st Defendant). The 1st Defendant is said to have fallen into financial difficulties in about March 1998 and a steering committee appointed by the 1st Defendant's banking creditors to deal with its affairs while an attempt was made to restructure its liabilities.

19. In this context the 1st Defendant alleges that "an informal standstill" in relation to its debt repayments was agreed to by its creditors, including the Plaintiff. Such arrangement was to last in the first instance until 31 October 1998, while restructuring efforts were made.

20. The ensuing material paragraphs in the Affirmation read as follows:-

"9.	At late October 1998, the financial advisor of the 1st Defendant, Ernst & Young informed the Plaintiff that a further conference was held by the Steering Committee on 3rd November 1998 and invited the Plaintiff to attend the conference. Mr Johnny Lui of the Plaintiff indicated they would not attend the conference but would like to be informed about the decision made by the Steering Committee.
10.	At around November 1998, Mr Geoffrey Ho of the 1st Defendant informed the Plaintiff that no further payment would be made pending debt restructuring of the Group. Mr Johnny Lui of the Plaintiff indicated they have no objection of such arrangement. We also informed the Plaintiff debt restructuring would be approximately to finalized (sic) in the late April and early of May 1999.
11.	Pursuant to the confirmation made by the Plaintiff, the 1st Defendant has not made any payment to the Plaintiff since August 1998. It was understood by the 1st Defendant that the Plaintiff would not terminate the Agreement and demanded the delivery up of the Goods pending the outcome of the debt restructuring in May 1999."

21. On the basis of such evidence, the 1st Defendant alleges that the Plaintiff agreed to an extension of the standstill arrangement until the finalization of the restructuring exercise expected in April or early May 1999 and that in the meantime, the Plaintiff was precluded from demanding repayment of the outstanding debt as it did on 18 November 1998.

22. Godfrey JA held that this evidence did not give rise to an arguable defence. I agree. For the defence to be sustainable, it would be necessary to show that the Plaintiff had arguably bound itself in law not to demand or sue for the debt prior to "April or May 1999". In my view, nothing in the evidence even arguably makes out such a legal obligation on the Plaintiff's part.

23. On the 1st Defendant's own evidence, there was never more than agreement to "an informal standstill". This merely indicates that the 1st Defendant's creditors had informally indicated a willingness to stay their hands to give the efforts at restructuring a chance of success. It provides no basis for suggesting that the creditors had waived or suspended their rights in a legally binding manner so as to prevent them from thereafter (or for any particular period) changing their minds and resuming enforcement of their rights if so advised.

24. The Plaintiff in fact held its hand until mid-November when, it says, because of the lack of progress towards a restructuring and because another creditor had broken ranks and started proceedings, it decided to resume enforcement of its claim. In my judgment, it was entitled to do so and no arguable basis for precluding this course of action has been disclosed.

The legal test point

25. Mr Graham submits that Godfrey JA applied the wrong test in deciding to reject the standstill point. This was based on the following passage from the Judgment :-

"The defendant hirer claims that the plaintiff promised to hold its hand until 31 October 1998 (which the plaintiff accepts) and that the 'standstill' was subsequently extended until May 1999, so that the plaintiff's demand for payment eventually made in November 1998 was premature. But there is no evidence sufficiently clear and unequivocal to support the defendant hirer's case for an extended 'standstill' and indeed its own evidence suggests that no agreement for such an extended 'standstill' was ever concluded. I will therefore give judgment as asked against the defendant hirer."

26. I am unable to accept that these words indicate any error of law. In my view, what the Judge was saying was that the matters advanced did not constitute sufficiently clear or unequivocal evidence of the existence of facts which (if properly supported by evidence) might be capable of constituting a triable defence. While a Defendant in Order 14 proceedings needs to do no more than demonstrate that he has an arguable case, he fails to achieve this if the evidence relied on for this purpose does not amount to workable evidence of the facts needed to establish the arguability of the defence.

The guarantees

27. Before Godfrey JA, the 2nd, 3rd and 4th Defendants had sought to set up an independent defence involving an alleged release from their guarantees. Mr Graham abandoned those arguments so that the liability of such Defendants depends solely on whether the 1st Defendant's liability is upheld. With respect, abandonment of the purported defence was entirely justified in the light of the evidence before the Court.

28. As I have held the 1st Defendant liable, it follows that the 2nd, 3rd and 4th Defendants are also liable under their guarantees.

29. In my view, the appeal must therefore be dismissed.

Mayo VP:

30. I agree entirely and have nothing to add.

31. The appeal is dismissed with an order nisi that the Defendants pay the Plaintiff's costs.