LI CHIU WAH JOSEPH v. HONG KONG SOCIETY OF NOTARIES

CACV 394/2020, [2023] HKCA 809

On Appeal From [2022] HKCA 1482

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 394 OF 2020

(ON APPEAL FROM HCAL NO 2658 OF 2019)

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J U D G M E N T

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Hon Au JA (giving the Judgment of the Court):

A.  INTRODUCTION

1.  This court handed down judgment on 30 September 2022 (“the CA Judgment”)  dismissing the applicant’s appeal against a judgment of Alex Lee J (“the Judge”)  dated 30 July 2020 ([2020] HKCFI 1789)  (“the CFI Judgment”).  By the CFI Judgment, the Judge refused to grant leave to apply for judicial review (in part)  and dismissed the applicant’s application for judicial review (for the part in respect of which leave was granted)  following a rolled-up hearing on 24 April 2020.

2.  By a Notice of Motion filed on 28 October 2022, the applicant now seeks leave to appeal to the Court of Final Appeal (“CFA”)  against the CA Judgment.

3.  After reviewing the Notice of Motion and the written submissions lodged by the parties[1], we see no reason to deviate from the usual practice of considering this application on paper pursuant to paragraph 3 of Practice Direction 2.1.

B.  BACKGROUND

4.  The background leading to these proceedings has been summarised at [4] - [20] of the CA Judgment, and will not be repeated here.  Unless otherwise stated, we also adopt in this judgment the abbreviations used in the CA Judgment.

5.  To recap, these proceedings arose from the applicant’s application (“the 2019 Application”)  to the Society for a 2019 Certificate of Membership (“Membership Certificate”)  in order to be qualified to practise as a notary public in 2019.  In breach of the Undertaking previously given by the applicant, he failed to deliver a copy of his 2019 Solicitor Practising Certificate to the Society by the deadline on 11 January 2019 and only submitted the same on 14 January 2019.  As a result, the Society required him to pay HK$3,000 as the additional administrative charge (“the Late Charge”). The applicant applied to judicially review the Society’s decision not to waive the Late Charge and to impose certain conditions in the Membership Certificate in the event of its non-payment on the basis that the Late Charge was a penalty and therefore ultra vires, and the decision was in any event Wednesbury unreasonable, unlawful and tainted with procedural irregularity.

6.  By way of the CFI Judgment, the Judge refused to grant leave to apply for judicial view on all grounds except the “illegality ground”[2], in respect of which the substantive application for judicial review was dismissed on the merits.

7.  As we observed at [27] of the CA Judgment, the applicant then appealed to this court advancing three grounds of appeal[3], contending that the Judge erred in holding that (a)  the Society’s decision not to waive the Late Charge was not amenable to judicial review; (b)  the Late Charge was not a penalty and was a genuine administrative charge based on general approximation of the costs involved; and (c)  it was not arguable that the amount of HK$3,000 fixed for the Late Charge was Wednesbury unreasonable.

8.  By way of the CA Judgment, this court rejected all the above grounds of appeal as without merits for the reasons set out therein.

C.  THIS APPLICATION

C1.  The Notice of Motion questions

9.  Section 22(1)(b)  of the Hong Kong Court of Final Appeal Ordinance, Cap 484 (“the HKCFAO”)  provides that an appeal shall lie to the CFA at the discretion of this court or the CFA if the question involved in the appeal is one which, by reason of its great general or public importance (“GPI”), or otherwise, ought to be submitted to the CFA for decision.

10.  By way of his Notice of Motion, the applicant says the intended appeal involves the following four questions which by reason of their GPI, or otherwise, ought to be submitted to the CFA for decision:

(1)  Whether, and to what extent, notions of whether a straightforward damages clause in a “standard form” contract has a deterrent purpose or whether it is a genuine pre-estimate of loss would, in Hong Kong, be subsumed by the broader enquiry into the legitimacy of the innocent party’s interest that supports the impugned clause as stated by this court in Law Ting Pong Secondary School v Chen Wai Wah [2021] 3 HKLRD 185 applying Cavendish Square Holding BV v Makdessi and ParkingEye Ltd v Beavis [2016] AC 1172 (“Question 1”);[4]

(2)  Whether the Late Charge is an unenforceable penalty (“Question 2”);[5]

(3)  Whether the decision of the Society as a whole (including the imposition of the Late Charge)  is amenable to judicial review (“Question 3”);[6] and

(4)  Whether the respondent should be allowed to argue a new case, which was not raised by the Society or supported by evidence before the Judge, but asserted only by counsel for the Society at the hearing of the appeal before this court, viz, that the Late Charge was imposed not as a “general approximation of the extra costs that would be incurred by the Society” (as argued before the Judge), but for the purpose of “ensuring the members’ compliance of the Undertaking” (“Question 4”).[7]

11.  In relation to these four Questions, it is worth noting that:

(1)  It is the applicant’s case that leave is sought for Question 1 on the basis that it is a GPI question; and Questions 2 to 4 on the “or otherwise” limb, although he accepts that Questions 2 and 3 stand or fall with whether or not leave is given for Question 1.[8]

(2)  These questions relate in substance to this court’s conclusion, in applying the principles derived from Cavendish and adopted in Hong Kong in Law Ting Pong, that the Late Charge is not a penalty as it serves “a legitimate purpose and the amount of $3,000 charged is plainly not out of all proportion to this purpose”.  See [45] - [51] of the CA Judgment.

12.  With these observations in mind, we will now consider these questions in turn.

C2.  Question 1

13.  As submitted by Mr Lee SC for the applicant, this question relates to what this court regarded as the principles derived from Cavendish in determining whether a subject clause amounted to a penalty.  We summarized those at [32] of the CA Judgment as follows:

“32.  It is common ground in this appeal that the applicable guiding principles in determining whether an impugned provision is in nature a penalty have recently been stated by this Court in Law Ting Pong Secondary School v Chen Wai Wah [2021] 3 HKLRD 185 at [69] - [71] per Chu JA, applying Cavendish Square Holding BV v Makdessi and ParkingEye Ltd v Beavis [2016] AC 1172.  Relevantly for present purposes, they are as follows:

(1)  In determining whether an impugned provision is in nature a penalty, the true test is whether the provision is a secondary obligation that imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.

(2)  Applying this test, the Court should thus first identify the legitimate interest of the innocent party that is being protected by the clause, and then assess whether the measure adopted under the subject clause is out of all proportion to the legitimate interest by considering the circumstances in which the contract was made.

(3)  In this respect, an innocent party generally has a legitimate interest in the performance of the contract or some appropriate alternative to performance that goes beyond compensation.  Notions of whether the subject clause has a deterrent purpose or whether it is a genuine pre-estimate of loss as traditionally adopted by the Court to determine whether the impugned measures is a penalty would be subsumed by the above broader inquiry.”

14.  In relation to this, Mr Lee contends that this court is wrong in saying at [32(3)] that “[n]otions of whether the subject clause has a deterrent purpose or whether it is a genuine pre-estimate of loss as traditionally adopted by the court to determine whether the impugned measures is a penalty would be subsumed by the above broader inquiry.”

15.  The crux of Mr Lee’s argument is that, properly understood, a distinction is drawn in Cavendish as to the tests applicable to determine whether a subject contractual clause is a penalty or not.  In particular, counsel submits that Cavendish covers two different approaches for two types of damages clauses:

(1)  For straightforward damages clauses, the traditional approach of whether the subject clause represents a genuine pre-estimate of loss involving Lord Dunedin’s four tests as stated in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79 “would usually be perfectly adequate”; and

(2)  For those “rare” and “more complex” damages clauses, the new approach based on inquiring whether the clause proportionately serves a legitimate purpose of the innocent party would apply.

16.  Mr Lee further submits that both approaches co-exist and that there is no holding or suggestion at all in Cavendish that the “traditional approach” would be or has been “subsumed” by the “new approach”.  Counsel says it is only the “traditional approach” that should be applied to the present case.  In support of this analysis, Mr Lee relies on the observation of the UK Supreme Court at [32] of Cavendish as follows:

“The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some appropriate alternative to performance. In the case of a straightforward damages clause, that interest will rarely extend beyond compensation for the breach, and we therefore expect that Lord Dunedin's four tests would usually be perfectly adequate to determine its validity. But compensation is not necessarily the only legitimate interest that the innocent party may have in the performance of the defaulter's primary obligations. …” (emphasis added)

17.  Counsel therefore further says this question is a question of law and of GPI which relates to the proper understanding and application of the principles enunciated in Cavendish and adopted by this court (differently constituted)  in Law Ting Pong.  Leave to appeal should thus be granted.

18.  With respect, we are not persuaded by Mr Lee’s submissions.

19.  First, it is pertinent to note that it had always been common ground between the parties in the appeal before this court that the guiding principles applicable to this case in determining whether the Late Charge is in nature a penalty are the ones stated in Law Ting Pong at [69] - [71], per Chu JA, applying Cavendish.[9]  There were never arguments or suggestions advanced by the applicant in the appeal before us (as now advanced in this application)  that somehow under Cavendish there are two different approaches for two types of damages clauses and only the traditional approach applied to the present case.

20.  Second, and more importantly, as we have set out at [52] of the CA Judgment, Lord Neuberger PSC and Lord Sumption JSC made the following observations in Cavendish at [31] and [32] as follows:

“31 In our opinion, the law relating to penalties has become the prisoner of artificial categorisation, itself the result of unsatisfactory distinctions: between a penalty and genuine pre-estimate of loss, and between a genuine pre-estimate of loss and a deterrent. These distinctions originate in an over-literal reading of Lord Dunedin’s four tests and a tendency to treat them as almost immutable rules of general application which exhaust the field. In Legione v Hateley (1983)  152 CLR 406, 445, Mason and Deane JJ defined a penalty as follows:

‘A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation …’

All definition is treacherous as applied to such a protean concept. This one can fairly be said to be too wide in the sense that it appears to be apt to cover many provisions which would not be penalties (for example most, if not all, forfeiture clauses). However, in so far as it refers to ‘punishment’ and ‘an additional or different liability’ as opposed to ‘in terrorem’ and ‘genuine pre-estimate of loss’, this definition seems to us to get closer to the concept of a penalty than any other definition we have seen. The real question when a contractual provision is challenged as a penalty is whether it is penal, not whether it is a pre-estimate of loss. These are not natural opposites or mutually exclusive categories. A damages clause may be neither or both. The fact that the clause is not a pre-estimate of loss does not therefore, at any rate without more, mean that it is penal. To describe it as a deterrent (or, to use the Latin equivalent, in terrorem)  does not add anything. A deterrent provision in a contract is simply one species of provision designed to influence the conduct of the party potentially affected. It is no different in this respect from a contractual inducement. Neither is it inherently penal or contrary to the policy of the law. The question whether it is enforceable should depend on whether the means by which the contracting party’s conduct is to be influenced are ‘unconscionable’ or (which will usually amount to the same thing)  ‘extravagant’ by reference to some norm.

32 The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some appropriate alternative to performance. In the case of a straightforward damages clause, that interest will rarely extend beyond compensation for the breach, and we therefore expect that Lord Dunedin’s four tests would usually be perfectly adequate to determine its validity. But compensation is not necessarily the only legitimate interest that the innocent party may have in the performance of the defaulter’s primary obligations. This was recognised in the early days of the penalty rule, when it was still the creature of equity, and is reflected in Lord Macclesfield LC’s observation in the Peachy case 1 Str 447 (quoted in para 5 above)  about the application of the penalty rule to provisions which were ‘never intended by way of compensation’, for which equity would not relieve. It was reflected in the result in the Dunlop case [1915] AC 79. And it is recognised in the more recent decisions about commercial justification. And, as Lord Hodge JSC shows, it is the principle underlying the Scottish authorities.” (emphasis added)

21.  From these passages, it is clear that what we have set out at [32] of the CA Judgment is a correct and proper understanding and summary of the principles laid down in Cavendish.  As clearly stated by Lord Neuberger PSC and Lord Sumption JSC at [31] - [32] of Cavenish after looking at the underlying rationale and reasons of the authorities, in deciding whether an impugned provision is a penalty, the “real question” is whether “it is penal, not whether it is a pre-estimate of loss” and the “true test” is “whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.”  As submitted by Mr Yu SC for the Society, the UK Supreme Court does not propose that there are two separate tests applying to two different types of damages clause as contended by Mr Lee now.

22.  For these reasons, Question 1 is plainly not arguable.  No leave to appeal should be granted for it.

C3.  Questions 2 and 3

23.  On the applicant’s own case, whether leave should be granted for Questions 2 and 3 depends on whether leave is granted under Question 1[10].  As we have refused to grant leave under Question 1, no leave should be granted under Questions 2 and 3.

C4.  Question 4

24.  As mentioned, the applicant seeks leave to appeal under Question 4 on the “otherwise” basis.  It is not the practice of this court to grant leave under this ground but to defer to the views of the Appeal Committee of the CFA.[11]  We see no reason to depart from that practice in the present application.

25.  In any event, under this ground, the applicant mainly repeats arguments previously advanced before us[12], which had already been considered and dismissed: see [47] - [53] of the CA Judgment.  It is well established that the Court of Appeal will not allow an application of this nature to be deployed as an occasion for re-running the arguments which had already been canvassed at the appeal: Ho Sin Ying v Chan Yui Ling & Another (unreported, CACV 221/2013, 14 November 2014)  at [2] and [3].

26.  Further, the applicant now seeks to argue that the Society’s submission (which was accepted by the court)  that the Late Charge served the legitimate purpose in enforcing “the members’ compliance of the Undertaking” is circular, as its interest in enforcing the Undertaking was, according to the Society, to enforce the Undertaking (which itself was unilaterally imposed by the Society in a “standard form” contract)[13].

27.  However, the applicant’s argument of “circularity” also goes nowhere.  As we have already noted at [48] of the CA Judgment, the legitimate purpose as advanced by the Society arises objectively from common and commercial sense, and it must be plain and obvious that a charge so imposed would have the effect of encouraging compliance with the Undertaking by the members.  Moreover, we have explained at [49] of the CA Judgment why the purpose of ensuring compliance with the Undertaking is a legitimate one:

“49.  In our view, the Society’s purpose of ensuring compliance with the Undertaking is plainly a legitimate one:

(1)  As mentioned at [32(3)] above, the Court generally recognises that the innocent party has a legitimate interest in enforcing the contract.  The inquiry is only whether ‘the means by which the contracting party’s conduct is to be influenced are ‘unconscionable’ or (which will usually amount to the same thing)  ‘extravagant’ by reference to some norm.’

(2)  In the present case, a breach of an undertaking given in a professional context is clearly a serious matter, in particular, when the person giving the undertaking is a practising notary public and senior solicitor of at least seven years standing.  As recorded in the July 2016 Minutes, the Council had noted incidents of members breaching the Undertaking and not taking their undertakings seriously.  In these circumstances, it must a fortiori be legitimate for the Society as a professional body to ensure such compliance.

(3)  It is the practice and policy of the Society to deliver to its members their respective Membership Certificate in mid-December, about two weeks prior to the commencement of a new practice year, so that the members may perform notarial acts immediately upon the commencement of the practice year.  This practice is to facilitate the members’ practice as a notary public and thus for their benefit, and is built upon the trust that they would honour their Undertaking.  It is therefore plainly legitimate that the Society seeks to ensure such compliance.”

28.  There is nothing in the applicant’s present submissions to suggest why we are wrong on these points.

29.  The applicant then says (again)  the material issue under this question is rather whether it was open to and fair in all the circumstances for the Society to run a case on legitimate interest when all it had relied upon was that the Late Charge represented a “general approximation of the extra expenses incurred”[14].

30.  We have dealt with these complaints at [47] of the CA Judgment and rejected them for the reasons set out at [48] of the CA Judgment:

“47.  In relation to this, Mr Lee first objects that it is not open to the Society to advance this submission since:

(1)  This was not the case the Society had advanced in the Court below.  Its only case before the Judge and set out in its opposing affidavit is that the Late Charge is a genuine pre-estimate by way of general approximation of the extra expense to be incurred for the stated additional works that need to be undertaken by the Society in a late submission case.  The applicant will therefore suffer prejudice if the Society is allowed to raise it for the first time now; and

(2)  In any event, there is no evidence to support the so-called legitimate purpose.

48.  We reject Mr Lee’s objections:

(1)  Given Mr Lee’s acceptance that the relevant guiding legal principles as to whether a charge imposed on the breach of contract on the default party is a penalty are those now adopted in Law Ting Pong, it must be open to the Society to advance its case on what it says to be the legitimate purpose that the Late Charge is to serve. There is also no question that the applicant will be prejudiced by not having the chance to put forward any evidence in reply to this: Mr Lee has not been able to indicate and suggest what evidence the applicant might have been able to adduce to rebut this purpose if the Society had raised it in the Court below.

(2)  In any event, the legitimate purpose now advanced by Mr Yu arises objectively from common and commercial sense.  It must be plain and obvious that a charge so imposed would have the effect of encouraging compliance with the Undertaking by the members.” (emphasis added)

31.  As pointed out by Mr Yu, it is pertinent to note that even now, the applicant has not been able to suggest or indicate what evidence the applicant might have been able to adduce to rebut this purpose if the Society had raised it in the court below.

32.  Mr Lee however submits that the question is not so much on whether the applicant was prejudiced by not being able to file reply evidence. In support, he relies on Lehmanbrown Ltd v Union Trading Holding Inc (HCMP 977/2015, 17 June 2015)  at [10], which states as follows:

“10.  Whilst the Court of Appeal obviously has power to entertain new points in an appeal, it is also clearly and firmly established that new points which are fact sensitive or otherwise affect the course of evidence or conduct of the case at the hearing below should not be allowed. Though this principle is usually applied in situations where the new points necessitate further evidence to be adduced, it is not confined to such scenarios. Very often, the raising of new point by one party may lead to the other party raising counter arguments and the consideration of such counter arguments may involve factual assessment in a different light from that undertaken by the court below. Sometimes, it may involve a different weighing of factors in the exercise of discretion. Alternatively, the other party may embark on a different course of forensic conduct if the new point were taken earlier. The appellate court, in considering whether the new point would be entertained, is entitled to take these matters into account in order to avoid unfairness to the other party.” (emphasis added)

33.  In our view, the reliance on Lehmanbrown does not assist Mr Lee.  As stated at the end of the above quoted paragraph, the ultimate question that the appellate court needs to consider in deciding whether to entertain a new point is, after taking into account all matters, whether unfairness will be caused to the other party.  In the present case, Mr Lee has simply failed to show what other material unfairness the applicant had suffered in the circumstances if the “new” point was allowed to be argued.

34.  In his reply submissions, Mr Lee further argues that this court “eschewed the traditional penalty vs genuine pre-estimate of loss approach” and “did not invite the applicant to address this new approach which was clearly not adopted at the CFI”.[15]  Given our analysis above under Ground 1, this argument is equally misplaced. In any event, there is plainly no merit for counsel to now contend that there was unfairness to the applicant as the court did not “invite” counsel to address what he now asserts to be “the new approach” in Cavendish when (a)  throughout the hearing of the appeal before us, it was plain that the bone of contention before this court was whether the Late Charge proportionately served the legitimate interest of the Society, and substantive arguments were raised as to what the legitimate interest was and whether there was evidence in support of that, and (b)  as mentioned above, Mr Lee never advanced any submissions at the hearing on the “two approaches” that he now says could be derived from Cavendish.  In any event, we do not think counsel needed any “invitation” from this court to advance any such legal arguments if he had had those points in mind and thought them to be pertinent to the appeal.

35.  In the premises, Question 4 is similarly without merits.  We will not grant leave under this question on the “otherwise” limb in any event.

D.  DISPOSITION AND COSTS

36.  For all the above reasons, we refuse to grant leave to the applicant to appeal to the CFA and dismiss his application.

37.  There is no reason why costs should not follow the event.  We further make an order nisi that costs of this application be to the applicant with certificate for two counsel, which is to be assessed summarily.  For that purpose, the Society has lodged its Statement of Costs dated 25 November 2022 seeking a total sum of HK$157,448.  Having considered the Statements of Costs and the nature of this matter, we are of the view that the costs as sought by the Society are reasonable and thus assess them to be HK$157,448 on a nisi basis.