FUJI XEROX (HONG KONG) LTD v. VIGERS HONG KONG LTD

cacv 311/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 311 of 2006

(on appeal from HCA NO. 3735 of 2003)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  This was an appeal from a judgment of Deputy High Court Judge Toh given on 9 August 2006.  The claim before the judge was in respect of money said to be due under 2 rental agreements and one Document Solution Agreement (“the 2^nd DSA”).  There was a counterclaim but it is unnecessary to say more than that the judge dismissed it and that there was no appeal in respect of it.  The judge found in favour of the plaintiff on its claim.  At the conclusion of the hearing of this appeal this court dismissed the appeal with reasons to be given in writing.

Background

2.  The background to the matter was set out in paragraphs 4, 5 and 6 of the judgment below and save to say that the 2^nd DSA was entered into seemingly to assist the defendant in its financial difficulties by reducing the level of the payments in the initial years, it suffices to set out those paragraphs:

“4.   The Plaintiff is a company carrying on the business of, inter alia, the renting of office equipment, e.g. photocopier, facsimile machine, etc.  The Defendant company is a company carrying on the business of property, management, valuation and consultancy services.

5.     The Defendant had rented equipment from the Plaintiff and this dispute arose out of three such contracts:

 (a)    the 1st Rental Agreement –

This agreement is dated August 2, 2001 by which the Defendant rented a facsimile machine from the Plaintiff for a minimum rental period of 36 months commencing on September 1, 2001 for $500 a month.  The minimum rental period would have expired on September 1, 2004.  The Defendant had stopped paying rental as from January 1, 2003.

(b)    The 2nd Rental Agreement –

This agreement is dated September 6, 2001 for the rental of another facsimile machine for a minimum rental period of 3 years commencing on October 1, 2001 at a monthly rental of $500.  The Defendant had stopped paying rental from January 1, 2003.

(c)   The 2nd DSA –

This 2nd DSA superseded the 1st DSA signed in January 2002 for the lease of 16 pieces of equipment for a minimum contract period of 5 years with a quarterly rental of $231,600.  The Defendant had only paid rental up to June 20, 2002.  After negotiations in April 2003, both parties agreed that the 2nd DSA would supersede the 1st DSA and would take retrospective effect from July 1, 2002.  This 2nd DSA was for a minimum contract period of 24 quarters (6 years) from July 1, 2002.  A sliding rental scale was adopted from $159,000 for the first four quarters to $244,642 for the last four quarters.  The Defendant had failed to make any payments under the 2nd DSA.

6.   The Plaintiff therefore claims monies due and owing to them under the above 2 rental agreements and the 2nd DSA.”

3.  The judge held in favour of the plaintiff on the basis that it was not obliged to accept the defendant’s admitted breach of contract and treat the contract as terminated but was entitled to keep the contract alive and to sue for the contract amounts.  In paragraph 22 of the judgment it was specifically found that it was not unreasonable for the plaintiff to keep the contract alive, as the plaintiff had a legitimate interest to do so.  The judge referred to the evidence of Mr Yuen, which was unchallenged, that the plaintiff company could not sell the machines as there was no second-hand market for them in Hong Kong.  The only purpose to which those machines could have been put, if the plaintiff had taken them back, was to break them down and to use the parts to service other machinery.

This appeal

4.  On this appeal Mr Smith SC, who appeared on behalf of the defendant, relied on one point.  A number of other points had been argued in the court below those were not pursued in this court.  He relied on a passage in the speech of Lord Reid in White and Carter (Councils) Limited v McGregor [1962] AC 413 at page 429 where he said:

“Of course, if it had been necessary for the defender to do or accept anything before the contract could be completed by the pursuers, the pursuers could not and the court would not have compelled the defender to act, the contract would not have been completed and the pursuers’ only remedy would have been damages.  But the peculiarity in that case, as in the present case, was that the pursuers could completely fulfil the contract without any co-operation of the defender.  The Lord President cannot have meant that because of non-acceptance the contract had not been completely carried out, because that in itself would have been a complete answer to an action for the contract price.  He went on to say that the only reasonable and proper course which the pursuers should have adopted would have been to treat the defender as having repudiated the contract, which must, I think, mean to have accepted the repudiation.”

5.  It was said that in the present case the plaintiff had not had to service the machines and indeed could not have done so without the defendant’s consent since the plaintiff could not have had access to the defendant’s premises and furthermore no toner had been supplied after the middle of 2003.

6.  The judge dealt with this argument at paragraph 23 of the judgment where she said:

“23.  As for the Defence argument that the Plaintiff is prevented from performing their contract because the machines are in the Defendant’s possession and, therefore, the Plaintiff would not be able to service these machines.  I do not find this argument attractive at all.  If it is so, then whenever the Defendant, whether unreasonably or reasonably, wishes to terminate the contract, the Plaintiff would be forced to accept the termination.  Furthermore, I accept Mr Lam’s argument that in the present case, even if Lord Reid’s second exception is good law, the Plaintiff’s income is not earned by servicing the machine, but by permitting the Defendant to possess and use them.  Even if the Defendant chooses not to use the machine, they are still liable to pay the rental.”

7.  My reading of Lord Reid’s judgment is that he was not laying down any new proposition of law, rather he was affirming the general proposition that a party may enforce his contractual rights as he sees fit whether it be in a reasonable or unreasonable way: see page 430.  For the most part Lord Reid was dealing with losing arguments in the case.  The furthest he went was to suggest that a party could not use his contractual rights to penalise the other party by taking one course if there was another course which was equally advantageous to him.  In the first place, the plaintiff is not seeking to penalise the defendant but simply to enforce the contract.  In the second place, on the findings of the judge, any alternative course would not have been equally advantageous to the plaintiff who might have been in the position of being left with useless and unsellable second-hand machines.

8.  In addition I would add that the way the matter was argued in this court was not founded upon any pleading in the defence.  There was no finding of fact by the judge that the plaintiff had refused to service the machines.  In those circumstances the court cannot assume other than that the plaintiff had at all times been ready, willing and able to service the machines and that it had maintained adequate resources in the form of manpower to be able to do so.

9.  It was sought to be argued that the plaintiff had not maintained the machines or provided consumables, for example toner, because clause 10 enabled the plaintiff to refuse to perform its contractual obligations should the defendant be in breach.  It was said that the effect of clause 10 was therefore penal.  Although reference was made to the witness statements, particularly those of Lai Fung Ming Brenda, the statements are so imprecise as to time that nothing further can be gleaned other than the fact that the defendant had simply not made the contractual payments.  In those circumstances it availed the defendant nothing to rely upon clause 10 of the contract.  Despite the ingenuity of this argument, the fact remains that the pleadings and the evidence go no further than to show that the plaintiff was holding the defendant to its bargain.  There is nothing to show that the plaintiff had not done everything that it was required under the contract to do in the circumstances which prevailed.

10.  I can only conclude that I find the argument on behalf of the defendant without merit.  The defendant had solemnly entered a contract with a restructured payment schedule which had been devised in order to alleviate its financial problems but then immediately chose to make no payments thereunder and ignore its terms.  In the circumstances I have no doubt that the judgment below was correct.

Hon Le Pichon JA:

11.  I agree.

Hon Sakhrani J:

12.  I also agree.