FREEWAY FINANCE CO LTD v. TAM CHUEN ON RAYMOND

HCA 61/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 61 OF 2010

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D E C I S I O N

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1.  This is an appeal against a decision of a Master not to order interest at the contractual rate post-judgment.

Background

2.  The plaintiff is a licensed money lender.  It lent HK$5 million to the defendant pursuant to a loan agreement dated 28 November 2009.  Clauses 1 and 2 of the agreement provide:

“1. Interest will be paid by the borrower to the lender at the flat rate of 2.02% per calendar month (i.e. 24.24% per calendar year) equivalent to the effective rate of 4% per calendar month (i.e. 48% per calendar year) on the principal sum of the loan over the term of the loan.

2.  Repayment of the principal sum of the loan and interest thereon will be made by 120 equal monthly instalments of HK$142,500 payable on the 27^th day of each month commencing on the 27^th day of December 2009.  Payment shall be made promptly to the lender at its offices at … Hong Kong.  If the interest or the principal sum of the loan or any of the monthly payments or instalments is overdue, interest will continue to be payable by the borrower at the same interest rate above until it is paid in full irrespective of whether legal proceedings have been commenced and/or judgment has been obtained for the recovery of the principal sum of the loan and interest thereon.”

The rate of interest provided is at an effective rate of 48% p.a., which is the maximum rate permitted by the Money Lenders Ordinance, Cap. 163.  The agreement says that this rate is to continue to apply after judgment.

3.  The repayment of the loan and interest was secured by a legal charge on a property of the defendant.  Clause 2 of the charge provided, among other matters, that the defendant covenanted with the plaintiff that the defendant will on demand pay to the plaintiff:

“(vii)    interest on all sums advanced and all other moneys payable hereunder at such rate(s) per month as is/are applicable under the terms relating to any facility(ies) granted to the Defendant as is determined by the Plaintiff which determination shall be conclusive and binding on the Defendant.  Such interest shall be calculated with the usual monthly rests or on such other basis as may from time to time be stipulated by the Plaintiff in any facility letter covering the relevant sums advanced and shall be paid monthly in arrears on such date in each succeeding calendar month as the Plaintiff shall stipulate.”

4.  The defendant failed to make any repayment.  The plaintiff then started this action for repayment of the loan and the interest accrued at the effective rate of 48% p.a.  The plaintiff also sought an order of possession of the property.

5.  The defendant did not defend the action.  The plaintiff then issued a summons under O.83A r.4 of the Rules of High Court for default judgment under the Money Lenders Ordinance and under Order 88 for an order for possession.

6.  On 13 April 2010, the Master gave judgment against the defendant for repayment of the loan and interest accrued and further interest on the loan at the contractual rate of 48% p.a.  But the Master only allowed post-judgment interest at the judgment rate.  The Master also made an order for possession against the defendant which was subject to redelivery upon full payment of the judgment debt and any money secured by the legal charge.

7.  The plaintiff appealed for post-judgment interest to be calculated at the contractual rate of 48% p.a. as well.

8.  When the appeal was first heard on 3 May 2010, the plaintiff submitted a skeleton argument citing cases which provided for contractual rates of loan interests to continue to apply post-judgment.  But the plaintiff did not then consider section 49 of the High Court Ordinance, Cap. 4 and the provisions of the Unconscionable Contracts Ordinance, Cap. 458.  I therefore adjourned the appeal for the plaintiff to consider these issues.  But I directed that the execution of the power of sale in the legal charge should not be delayed by the adjournment of the appeal.  That would ensure that the repayment of the judgment debt by the proceeds of sale would not be delayed and the accrual of interest would not continue for longer than necessary.

Analyses of the Plaintiff’s Arguments

9.  The plaintiff accepts that in an ordinary case where a loan contract provides incidentally that interest at a certain rate is payable on the outstanding loan or any part thereof, such rate will cease to apply upon judgment being made because the liability to repay the loan is merged in the judgment.  After merger, the liability of the debtor to make payment stems from the judgment and not the loan contract.  The obligation to pay interest, if it is incidental to the loan, also merged in the judgment.  But the plaintiff submits that the covenant to pay interest may be so expressed as not to merge in a judgment for the principal if it is, for instance, a covenant to pay interest so long as any part of the principal should remain due either on the covenant or on a judgment.

10.  The plaintiff referred to para.90.1098 of Halsbury’s Laws of Hong Kong which states that:

“The parties may by agreement provide that the rate of interest specified in the agreement should continue to be payable after judgment, in which case the higher rate of interest should form part of the judgment.”

11.  In Popple v Sylvester, 22 Ch D 98, the defendant mortgaged certain policies of assurance to the plaintiff to secure his repayment of £3,000 to the plaintiff with interest at £7%.  The mortgage deed had a separate covenant stating that:

“The defendant would ‘so long as the sum of £3,000 or any part thereof should remain due on the security of the said indenture’ pay interest for the £3,000, or for so much thereof as should for the time being remain unpaid, after the rate aforesaid.”

12.  Fry J held that the judgment was to extinguish the personal covenant of the defendant to pay £3,000, but it had not determined the security or put an end to the charge.  The learned Judge further held that the charge remained notwithstanding the judgment and that the express covenant “so long as the principal sum should remain due on the security of the indenture,” continued in force.  Only part of the security was extinguished by the judgment and part of it remained.

13.  In Economic Life Assurance Society v Usborne & Ors [1902] AC 147, the trustees in a mortgage deed covenanted with the appellants to pay £20,000 on a certain day with interest at 5% and, if the principal was not then paid, to pay interest at that rate half-yearly upon so much of the principal as should remain unpaid after that day.  The House of Lords took the view that it was a question of construction of the particular deed and concluded that the appellants were entitled to retain the mortgage security until they were paid the principal sum and interest at 5%.

14.  In London Borough of Ealing v El Isaac & Anor. [1980] 1 WLR 932.  Templeman LJ said:

“It appears, therefore, that merger has a very restricted operation.  It does not, as appears from the Usborne case which I have just cited, apply to a security.  It does not apply to what is said to be an independent covenant and in most mortgages and deeds of borrowing these days care is taken to make the covenant an independent covenant.  So that, in practice, the number of times on which interest ceases to run from a date of judgment is very small.  But on principle and on the authorities, it seems to me, the merger doctrine only applies to contracts and covenants.”

15.  Clause 2 of the loan agreement herein provides that:

“If the interest or the principal sum of the loan or any of the monthly payments or instalments is overdue, interest will continue to be payable by the borrower at the same interest rate above (i.e. 48% per calendar year) until it is paid in full irrespective of whether legal proceedings have been commenced and/or judgment has been obtained for the recovery of the principal sum of the loan and interest thereon.”

16.  I am of the view that this clause is an independent covenant and has not merged with the judgment on the outstanding principal and interest.  It should therefore continue to have effect and the post-judgment interest rate should also be the contractual rate of 48% p.a.

17.  I now consider whether section 49 of the High Court Ordinance, Cap. 4 would affect the operation of this clause.  Section 49 of the High Court Ordinance provides:

“Section 49 of Cap. 4

(1)  Judgment debts shall carry simple interest-

(a) at such rate as the Court of First Instance may order; or

(b) in the absence of such order, at such rate as may be determined from time to time by the Chief Justice by order,

on the aggregate amount thereof, or on such part thereof as for the time being remains unsatisfied from the date of the judgment until satisfaction.

(2)   Interest under this section may be calculated at different rates in respect of different periods.”

There is no material difference between section 49 of the High Court Ordinance and section 17 of the Judgments Act 1838 (see Caltex Oil Hong Kong v Director of Buildings and Lands [1994] HKDCLR 31 at 42 (line 25-35)).

18.  It has been held in Economic Life Assurance Society & London Borough of Ealing that the contractual rate provided by an independent (and not incidental) covenant did not merge in the judgment and continued to apply post-judgment.  That meant section 17 of the Judgments Act 1838 did not affect the operation of the covenants in these cases.  Section 49 of the High Court Ordinance should therefore also not affect the operation of such covenant on post-judgment interest rate (see also paras 27-149, 27-151 (and footnote 24) of Chitty on Contracts, 28^th edn.).

19.  I also think the wording of section 49 of the High Court Ordinance does not have the effect of enabling the doctrine of merger to prevail over the effect of such independent covenant on interest.  Clause 2 of the loan agreement therefore did not merge in the judgment.

20.  I now consider the Unconscionable Contracts Ordinance, Cap. 458.  In Hang Seng Credit Card Ltd v Tsang Nga Lee [2000] 3 HKLRD 33, there was no dispute that the Ordinance applied to contracts for provision of credit facilities.  I also hold that the loan contract herein is subject to this Ordinance.

21.  There is nothing in this Ordinance which would prohibit the contractual rate of interest to apply post-judgment.  The rate of 48% p.a. is also permitted by the Money Lenders Ordinance (see also Director General of Fair Trading v First National Bank plc [2001] 1 All ER 97).

22.  I also consider whether clause 2 of the loan agreement would fall foul of section 6 of the Unconscionable Contracts Ordinance.  Section 6 of the Ordinance provides:

“6. (1) In determining whether a contract or part of a contract was unconscionable in the circumstances relating to the contract at the time it was made, the court may have regard to (among other things)-

(a) the relative strengths of the bargaining positions of the consumer and the other party;

(b) whether, as a result of conduct engaged in by the other party, the consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the other party;

(c) whether the consumer was able to understand any documents relating to the supply or possible supply of the goods or services;

(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the consumer or a person acting on behalf of the consumer by the other party or a person acting on behalf of the other party in relation to the supply or possible supply of the goods or services; and

(e) the amount for which, and the circumstances under which, the consumer could have acquired identical or equivalent goods or services from a person other than the other party.

(2) In determining whether a contract or part of a contract was unconscionable in the circumstances relating to the contract at the time it was made-

(a) the court shall not have regard to any unconscionability arising from circumstances that were not reasonably foreseeable at the time the contract was made; and

(b) the court may have regard to conduct engaged in, or circumstances existing, before the commencement of this Ordinance.

(3) In considering the exercise of its powers under section 5 to grant relief in respect of a contract or part of a contract found to be unconscionable, the court may have regard to the conduct of the parties to the proceedings in relation to the performance of the contract since it was made.”

23.  The defendant has not taken any part in this action and has given no evidence on the circumstances relating to the contract at the time when it was made.  There is no material for me to determine if the loan agreement or clause 2 thereof was unconscionable.

24.  In the premises, I am of the view that the plaintiff is entitled to post-judgment interest calculated according to clause 2 of the loan agreement.  I therefore allow the appeal and grant the plaintiff post-judgment interest at the rate as claimed.  I also make an order nisi that  costs of the appeal be to the plaintiff.