UNITED MERCHANTS FINANCE LTD v. CHAU MAN KAY

IN THE DISTRICT COURT OF HONG KONG

HOLDEN AT KOWLOON

CIVIL JURISDICTION

CASE NO. 25479 OF 1984

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BETWEEN

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JUDGMENT

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1. On the 3rd November 1983 the defendant entered into a so-called "Hire Purchase Agreement with the plaintiff, in respect of a Honda Accord motor car. He made an initial payment, by way of "trade-in'', of $9,675.00, and agreed to pay the balance of the "Hire Purchase Price" by 12 monthly instalments of $1,002.00, commencing on the 3rd December 1983.  The total "Hire Purchase Price" included a sum of $2,960.00 for "insurance". This was part of the premium for a comprehensive policy of insurance, effected by the defendant with Bedford Insurance Co. Ltd. ("Bedford"). The defendant paid the instalments due on the Ad December 1983 and the 3rd January 1984, but on the 3rd February 1984, the motor car was involved in an accident and damaged beyond economic repair. A claim was duly made under the policy of insurance. On the 22nd February 1984, Bedford offered to settle the claim, on a constructive total loss basis, for $5,000.00. This was arrived at by deducting $2,000, under the excess provisions of the policy, from the "pre-accident market value of the vehicle", stated to be $ 7,000. This offer was not accepted by the defendant. He and the plaintiff took some steps to secure a higher offer, but nothing was ever received from Be ford, because it went into liquidation in or about March 1984.

2. By a writ, issued on the 22nd December 1984, the plaintiff sought to recover the 10 monthly instalments allegedly due between the 3rd February and the 3rd November 1984, amounting to $10,020.00, together with interest on such unpaid instalments at the rate of 3 per cent per month, in accordance with a clause in the Agreement. At the trial, the Particulars of Claim were amened to claim the same sum under the provisions of clause 5 of the Agreement, which deals with the application of insurance moneys and the effect of destruction of the goods. By his Defence, the defendant basically complained about the adequacy and basis of Bedford's offer, but also appeared to be alleging that the plaintiff had mishandled the insurance claim. At the trial, the evidence related mainly to the question of the true pre-accident value of the vehicle. In the result, this evidence turned out to be irrelevant because, although the plaintiff and the defendant had different views as to such value, they appeared to be in agreement that Bedford's offer was on the low side. At one point, it seemed to me that the plaintiff had acted prematurely, and without the defendant's authority, in rejecting Bedford's offer (see Exh. P.9). But, having heard the evidence, I was satisfied that this rejection was communicated to Bedford after consulting the defendant and with his approval.

3. For quite understandable reasons, the defendant did not pay any instalments to the plaintiff after the accident. Not having the benefit of using the vehicle, nor any prospect of becoming the owner thereof, I feel sure that he felt that he was no longer obliged to keep up the monthly instalments under the Agreement. In this respect, I am regretfully driven to the conclusion that he was mistaken, and that he has become a victim of what might be described as the "unacceptable face" of the strict or absolute philosophy which underlies the law of contract, and sometimes expressed in the form of the Latin tag: pacta sunt servanda. I must, of course, apply the law, however harsh its impact may be upon a litigant before me, and irrespective of the unfairness or injustice I may personally perceive. In the absence of legislation regulating contracts of the kind now before me, or a general power to refuse to enforce contractual terms because they are unfair or unreasonable, I must approach this case on the fictional footing that the defendant freely entered into the Agreement in question, despite the fact that its terms are expressed in a standard form, designed exclusively to protect the interests of the plaintiff, and the further fact that the plaintiff has quite erroneously, in my view, sought to describe its agreement with the defendant as a "HIRE PURCHASE AGREEMENT". As a matter of law it is nothing of the sort, because it did not give the defendant a right to terminate it at any time. At the most, it gave him a vague right to "accelerate payments" under the agreement. (cf. Clause 9). In essence, it is a conditional sale agreement, and it is trite law that a court must give effect to the essence of the agreement made between the parties, and not be misguided by inept labels or expressions used in their agreement.

4. Although I consider that the description of the Agreement, and some of its terms, are grossly misleading, I am unable to find as a fact that the defendant was prejudiced thereby. He is not familiar with the law. Unlike the plaintiff or its legal advisers, I am sure that he has never heard of Helby v Matthews [1895] AC 471 or Lee v Butler [1893] 2 Q B 318. He did not suggest that he believed that he had a contractual right to terminate the agreement at any time. At the most, he was contending that he should not be liable to the plaintiff for the sum claimed, after the vehicle had been destroyed and Bedford had failed to settle the insurance claim.

5. As the defendant was not legally represented, I endeavoured to ascertain whether there was any legal basis to support his understanding of the position. It seemed to me that he could only avoid being liable for the remaining instalments if he could rely on the agreement having become frustrated, either by the destruction of the vehicle or the subsequent insolvency and liquidation of Bedford. In National Carriers Ltd. v. Panalpina (Northern) Ltd.[1981] AC 675, Lord Simon of Glaisdale said (at 700):

"Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance."

He further added (at 701) that the doctrine of frustration had been developed by the law

"..... as an expedient to escape from injustice where such would result from enforcement of a contract in its literal terms after a significant change in circumstances."

6. In my view, the total destruction of the vehicle was an event which prima facie, significantly altered the obligations of the parties under the agreement. Although the agreement was, in my view, a conditional sale of goods, continuous use of the vehicle by the defendant, under the hiring constituted by the agreement, was clearly an important objective or feature of the agreement. It ceased to exist upon the accidental destruction of the vehicle, just as frustration of a lease of land may occur by an event which prevents use of the land, despite the fact that the lessee still has an estate in land (of. per Lord Roskill in National Carriers Ltd v. Panalpina (Northern) Ltd [1981] AC 675 at 714).

7. When I posed this question at the outset of the trial, Miss Burgess referred to certain provisions of the agreement (clauses 2(11), 3 and 5) to support her contention that the agreement already made express and sufficient provision for the event in question. In the amended particulars of Claims, the plaintiff merely referred to clauses 4(2) and 5 of the agreement. Nevertheless, I consider that the plaintiff's essential contention is that clause 5 embodies a complete and sufficient provision for the event in question, and I conceive that I must construe that provision in the context of the other provisions of the agreement, even though they are not expressly referred to in the pleadings.

8. It seems to me that the following provisions of the agreement are or may be relevant to the question whether the parties made complete or sufficient provision for the consequences of the supposedly frustrating event : -

"2.

Clause 3 is a somewhat complicated provision designed to govern the procedure for dealing with the situation where the vehicle is, inter alia, destroyed by the "negligence or wrongful act of a third party". As such, it is not in my view, directly relevant to the present situation, which is one of truly accidental destruction. At most, it may have some bearing on what the parties intended when making express provisions for insuring the vehicle.

9. On behalf of the plaintiff, Miss Burgess contended that these provisions, particularly that part of clause 5 which I have emphasised, demonstrated a clear intention by the parties to provide expressly for the event which has happened and, more particularly, that, if the proceeds of the policy of insurance did not actually result in a surplus for hirer or settlement of the plaintiff's interest (i.e. receipt of the balance of the hire purchase price), the agreement was to remain in force.

10. Miss Burgess did not refer me to any authorities, but I considered whether the agreement contained a complete and sufficient provision for the frustrating event in the light of Metropolitan Water Board v Dick Kerr & Co. Ltd. [1918] AC119; Bank Line Ltd v. Arthur Capel & Co [1919] AC435; Josephine Constantine S. S. Line v Imperial Smelting Corporation Ltd. [1942] AC154; and Wong Lai Ying v. Chinachem Investment Co. Ltd. [1980] HKLR 1. For my part, I consider that the provisions of clause 5 which I have emphasised, upon their proper c truction, were probably only intended to be operative during the period between the destruction of the vehicle and final settlement of the insurance claim, with the consequence that the defendant's liability to pay the monthly instalments would cease when the insurance claim was settled, or at the date when it was, for all practical purposes, clear that no "insurance moneys" would be received. In the events which have happened, however, this construction would have no appreciable effect on the plaintiffs claim herein. It would still be entitled to receive the unpaid balance of the "Hire Purchase Price" and interest under clause 5.

11. I have little doubt that neither party ever contemplated that the "approved" insurance company would become insolvent. They certainly did not expressly provide for this subsequent event in their agreement. However, I do not think that I can regard this event as frustrating the agreement. To do so would be tantamount to disregarding provisions which allocate the risk of damage to or destruction of the vehicle. In my view, although this was a conditional sale agreement, under which property in the vehicle was not to be transferred to the defendant until the total "Hire Purchase Price" was paid, risk was transferred to the defendant immediately upon his entering into the agreement. Parties who assume certain risks under contracts frequently seek to cover those risks by insurance. It would, in my view, constitute nevel doctrine to relieve them of those contractual risks simply because their insurers have become insolvent. Accordingly, I do not consider that the defendant can resist the plaintiffs claim in the present case.