HANG SENG CREDIT CARD LTD. v. TSANG NGA LEE

HCA13228/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.13228 OF 1999

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J U D G M E N T

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1. The plaintiffs in the ten actions before the court are seeking to appeal on the decision of Master C. Chan on 16 December 1999. Master Chan ordered that the costs of each of the actions should be the fixed costs as set out in the Second Schedule to Order 62 as opposed to costs on indemnity basis as claimed by the various plaintiffs in the actions on the basis of the agreement as specified in the Card Members Agreement of various credit cards. These ten actions involved three different plaintiffs, namely : Hang Seng Credit Card Limited, Standard Chartered Bank and Pacific Finance (HK) Limited. All the defendants in these actions did not seek to defend the same and default judgment was entered against them for various amounts of outstanding debts incurred under their credit card account.

2. The appeal was first heard on 6 January 2000 whereby only Mr Herbert Au Yeung appeared for the plaintiffs. As a point of law concerning public interest is involved, the court invited an amicus curiae to be present for full argument on those issues. On the next hearing fixed in consultation with counsel's diaries on 5 and 7 May 2000, Ms Audrey Eu, SC appeared as amicus and Mr Paul Shieh appeared for the plaintiffs/appellants.

3. The main issue in these appeals is whether the indemnity cost provision ("the cost provision") in the agreement is unreasonable and there is an implied term of reasonableness in the enforcement of the agreement as decided by Master Chan, or, in the circumstances of this case, as presented by Ms Eu, the amicus, that the cost provision is null and void and thus unenforceable under the Unconscionable Contracts Ordinance, Cap.458 ("UCO"). In the determination of the aforesaid issue, the following issues became relevant which called for the decision of the court, namely :

1. The court's discretion in ordering costs order;

2. The difference between fixed costs and indemnity costs;

3. The requirement of reasonableness in indemnity costs;

4. The applicability of the UCO;

5. The correctness of the decision in Inchape Hong Kong Limited v. Performa (Asia Limited) [1992] 2 HKC 364.

In the decision of the afford issues, it would be encumbent for the court to further consider the following issues :

6. The difference of taxation on High Court basis v. District Court basis;

7. Taxation of non-litigation related charges;

8. Banks' recovery of damages from customers in respect of expenses and special costs;

9. The high interest rates charged by the plaintiffs; and

10. The Money Lenders Ordinance.

4. I shall first of all consider the cost provision.

The cost provision

5. Each of the Statement of Claim pleaded that it is a term of the agreement that the defendants shall be responsible for all costs and expenses including, without limitation, legal fees on a full indemnity basis incurred by the plaintiffs in enforcing the agreement and/or recovering any sum owned by the defendants to the plaintiffs which may be debited to their account.

6. There are decisions which held that this type of provision is not by itself against public policy, namely :

1. GTE Directories (HK) Ltd v Mo Yung Kwok Wah CA 155 of 85, overruling [1985] 1 HKC 485

2. GTE Directories v Lee Wai Ming VCJ 2410, 2483 of 86

3. Credit Agricole v Crossland [1988] HKC 676

7. However, costs to be awarded is always subject to the discretion of the court according to section 52A, High Court Ordinance, Cap.4 (Order 62, r 2(4), r 32(4), Second Schedule, Part I paragraph 1(b)). This is also the decision in Donald Cambell v. Pollack [1927] AC 732 at 811.

8. Further, the contractual provision cannot override the discretion of the court as decided in :

1. Chekiang First Bank v. Fong Siu Kin [1997] 2 HKC 302 at p.308 E-F

2. Gomba Holdings v. Minories Finance Ltd [1993] CH 171 at p.188 E-G, 194A-D.

9. In normal course of events, the court will give effect to contractual provisions according to the aforesaid cases in Chekiang and Gomba. It is also the decision in Church Commissioners v. Ibrahim [1997] 1 EGLR 13.

10. It is against the aforesaid background that the court is entitled to look at all the circumstances of the case in the exercise of its discretion and in particular, the provisions in the UCO.

The UCO

11. None of the aforesaid cases were decisions concerned with the UCO or similar provisions in the UK Act. Some of the Hong Kong cases cited hereinbefore were decided prior to the passing of the UCO which came into effect on 20 October 1995. This was the result of the Law Reform Commission Report on Sale of Goods and Supply of Services.

12. Both Mr Shieh, for the plaintiffs and Ms Eu, the amicus agreed that the Credit Card Agreement herein is an agreement for the supply of services and hence UCO applies to the agreement. The question to be decided is whether the costs provision is unconscionable.

13. The UCO does not define the word "Unconscionable", however, it provides a non-exhaustive list of matters to be considered in section 6. Section 5(2) provides that it is for the person claiming that a contract is unconscionable to prove that it is. The onus of proof herein is on the defendants. It does not mean, however, that when a defendant fails to appear, the issue cannot be raised. It does not preclude the court in a proper case from looking at all available circumstances in order to decide whether the costs provision is unconscionable. This is particularly when the matters to be considered by the court under UCO can be decided on circumstances not necessarily specific to individual consumers or defendants but apply generally and on matters not in dispute. The following circumstances are, in my view, relevant to the consideration of whether the cost provision is unconscionable according to the non-exhaustive list in section 6 of the UCO.

1. The first consideration is the relative strengths of the bargaining positions of the defendants and the plaintiffs. There is no doubt the plaintiff credit card company or bank is in a much stronger bargaining position. As in the case of all standard form agreements, they are drafted with no negotiation or consultation with the consumer. They are drafted with the interest of the company in mind, leaving no choice to the consumer at all.

2. The second consideration is whether the defendant was able to understand the cost provision. According to a survey conducted and published by the Consumer Council and reported in the 240th issue of the Choice Magazine, the Hong Kong credit card companies do not inform the consumers of this type of provision in the application form for the card. There is no control over the size of the font or the language of the terms and conditions. It can be seen from the following examples of the plaintiffs :

(a) For the Hang Seng credit card cases, it is pleaded (in para.3 of the Statement of Claim) that the defendant expressly acknowledged that the defendant had read and agreed to be bound by the terms and conditions, but there is no plea that a copy of the terms and conditions was in fact provided at the time of the application or that the cost provision was drawn to her attention or that it had been explained to her in a language or in a way that she would understand. It appears from a copy of Hang Seng card application form that a copy of the terms and conditions is probably not supplied at the time of the application and has to be requested.

(b) There is no similar plea in the Statement of Claim by Standard Chartered Bank or Pacific Finance (Hong Kong) Ltd. Their application forms also provide that the consumer accepts terms in force from time to time. Thus, the cost provision and the effect of such clause was again most probably not drawn to the attention of the consumer.

3. Whether the defendant could have acquired the identical service from a person other than the plaintiff. According to a survey conducted by the Consumer Council in May 2000 on 16 most common credit cards in use in Hong Kong, all of them contained terms in relation to reimbursement of costs, or expense in some form or other. Although these are the currently available terms and conditions, it is reasonable to assume that these terms probably remained more or less the same at all relevant time. The lack of choice adds to the unequal bargaining position between the parties. In short, the consumer has no real choice. Services are supplied on a take it or leave it basis. Credit Card Companies are able to dictate terms which can operate harshly against the consumer.

4. Whether the cost provision is unconscionable also depends on its meaning and effect. The cost provision is extremely wide, for example :

(a) In case of Standard Chartered, it includes all costs and expenses directly or indirectly incurred by the Bank in demanding, collecting or attempting to collect or otherwise in enforcing or attempting to enforce the agreement, including without limitation the charges of any agent or service provider (e.g. debt collectors) on a full indemnity basis.

(b) In case of Hang Seng Bank, it also includes all costs payable to debt collectors.

(c) In case of Pacific Finance (Hong Kong) Ltd, the pleaded cost also includes administrative costs.

14. Counsel for the plaintiffs, Mr Shieh, submitted that Master Chan was wrong to imply a term that the plaintiffs have to act reasonably. I accept Ms Eu's submission that it is precisely because of this that the cost provision are unconscionable. The plaintiffs can act harshly unreasonably. For example, they can use their associate companies to run up direct or indirect administrative or other charges, they can go to the most expensive debt collecting agency or advisor. They can keep on running up charges, there is no upper limit for such cost or expense.

15. According to a study published by the Consumer Council, in the 234th issue of the Choice Magazine, the debt collection charges can amount to 25% to 30% of the indebtedness. As for legal costs, the plaintiff argues that this permits taking proceedings in the High Court, even though the proceedings are within the District Court jurisdiction. In fact, from 19 October 1999, they would be within the Small Claims jurisdiction (I shall consider the effect of a claim which is within the District Court jurisdiction but instituted in the High Court later on hereinbelow). It is precisely because such banks and financial institutions have these indemnity cost provisions that they do not have to think twice before suing in the right court. To say that they are entitled to do so and recover such cost on full indemnity taxation would render the clause unconscionable.

16. In the court below, it was suggested that the court could order taxation on the District Court's scale. However, a subsequent and voluntary waiver of part of the alleged entitlement under the clause does not affect the meaning or effect of the cost provision itself. Whether the provision is unconscionable is judged at the time of the contract was entered into, not the subsequent conduct in given up part of the full extent under the clause. In the natural and ordinary meaning of this cost provision, it can extend to all costs and expenses (not just legal cost) even unreasonably incurred. There is no upper limit. Such clause is capable of being applied unconscionably. It just leaves the consumer to the mercy of the other party.

17. From the totality of all the circumstances, I consider that there is only one conclusion to this matter and that is the cost provision is unconscionable. This is evidently one of the reasons that led to the introduction of the UCO, according to the Law Reform Commission Report paragraph 7.6.2.

18. The UCO is meant to give the court new power to do justice in consumer contract where the bargaining power is unequal, the consumer has no choice over terms contained in standard form contracts. They are often printed in small fonts that discouraged reading. Further, the consumer often has little or no choice, let alone understanding the effect and consequences of such terms which are capable of being unfairly applied. In applying the UCO, the court is not shackled by the traditional or classic theories in contract law. On the aforesaid consideration, the appeal of the plaintiffs must be dismissed. Of course, it is inappropriate for this case to grant any declaratory relief concerning the unconscionable cost provision which is not the subject matter of any counterclaim by the defendants. It is sufficient to allow the learned master's order to stand and that all the plaintiffs are entitled to are the fixed costs. I consider that it is fair and just in the circumstances of this case by further taking into account the following factors :

(a) The rules of the court provide for a fixed cost as being fair in cases where a defendant fails to appear.

(b) The amount is relatively small, it was within the District Court (now within Small Claims) jurisdiction, yet the proceedings were brought in the High Court. In HCA13228, the amount claimed was just $18,968.76. I was told the defendant has already paid the full outstanding amount of $19,000 odd. However, full indemnity costs can run up to between $25,000 and $32,000!

(c) Taxation would delay the matter and would incur another set of costs hardly justified in light of the small amount involved in the case.

(d) No particulars of damages have been pleaded (I shall expand on this hereinbelow).

(e) There is little complexity and such proceedings should be routine for the plaintiffs, and in some cases there may also be economy of scale or discount on a number of similar cases.

(f) Awarding fixed cost on a High Court scale is fair in the circumstances.

Failure to give particulars of special damage

19. Since the plaintiffs claim legal costs as damages and this is special rather than general damages, they should give particulars (see the White Book 18/12/43). Thus the plaintiffs must state clearly whether or not their solicitors have rendered a fee note, and whether or not the plaintiffs had paid such fee note. There is no doubt the plaintiffs' solicitors must have done work up to the time of the issue of the proceedings and the application for judgment. Thus the liability for such cost have already been incurred and the plaintiffs cannot avoid or postpone the giving of particulars for their special damages already incurred by merely asking for assessment. In giving such particulars, the defendants would know the amount before deciding whether to defend the action or not. Further, the court is also entitled to be told what the amount involved was so that it could decide whether or not to order taxation and assessment or fixed costs or gross sum under Order 62, rule 9(4). In the absence of particulars, the normal rule is to award no or nominal damages only. Since the plaintiffs have not supplied the necessary particulars, it cannot complain that the court does not order an assessment by way of taxation.

Other matters

20. Another consideration in these cases is that the interest charged was extortionate . In HCA 14635 and 149887, the effective interest rate is 2% per month which amounted to 53.69% per annum and 2.2% per month, i.e. 59.65% per annum respectively. A calculation of the interest rate as submitted by the Consumer Council is annexed to the judgment hereto as a demonstration of how extortionate these interest charges are (see Annex I and II). These rates obviously exceed 48% and are very close to 60%. In fact, the effective interest rate claimed may well be even higher as the overdue interest rate claimed is 3% per month. In an ordinary case, the transaction should be re-opened under section 25 of the Money Lenders Ordinance which provides that where proceedings are taken for recovery of any money and if there is evidence that the transaction is extortionate, the court may re-open the transaction to do justice between the parties. If the effective interest rate exceeds 48% per annum, the transaction shall, having regard to that fact alone, be presumed to be extortionate. Section 25 provides that any person who lends at an effective rate of interest which exceeds 60% per annum commits an offence and no such agreement shall be enforceable.

21. However, the plaintiff banks or institutions are operating under a restricted licence and they are not subject to the Money Lenders Ordinance. Although they are under the control of the Monetary Authority, they are not controlled in respect of interest rate, i.e. there is no control of the interest rate charged by these institutions. The fact that these institutions are already charging very high interest rate, is yet another factor which adds to the decision that the cost provision is unconscionable. It is not, however, appropriate for me to decide in this case whether this is unconscionable by itself.

22. Further, it is not clear, according to the pleading, what was the amount of principal due and what was the amount of interest due. For example, in HCA13228, the amounts due were as follows :

1. 19.7.99 $18521.62 (paragraph 8)

2. 10.8.99 $18968.76 (paragraph 6)

The period was less than a month, yet the amount increased by $447.14 or 2.4%. The pleaded interest rate is 2% per month. However, it is impossible to work out how the amount could have been increased by 2.4% in three weeks' time, since the earlier amount already included interest and it is not known whether interest had been calculated on a simple or compound basis.

High Court or District Court

23. Lastly, I would also like to consider here the fact that the plaintiffs have instituted all these actions in the High Court when they are clearly within the District Court jurisdiction and some are now even in the Small Claims Tribunal jurisdiction. It has been decided in the case of Inchape v. Performa (Supra) that it is open to the plaintiffs to do so and the master had no jurisdiction to make an order for the transfer of the proceedings to the District Court in what can only be described as an arbitrary manner for the purpose of administration convenience. It was further decided that the jurisdiction to transfer proceedings can only be exercised in Hong Kong in the absence of an earlier application by any of the parties at the stage of the hearing of the summons for directions, and then only after the hearing, the parties had been given an opportunity to make representations. There are four points involved and I am grateful for counsel appearing before me for their helpful submissions on this case.

24. In the first place, it should be noted that the case of Inchape was decided on an ex-parte basis in that the defendant did not appear and the court only heard argument from the plaintiff's side. There is no adversarial argument to oppose that argument. The four points raised in that case are as follows :

1. Section 40 of the District Court Ordinance provided that :

" Where an action or matter commenced in the Court of First Instance is within the jurisdiction of the Court or has been brought within such jurisdiction by payment, admitted set-off or otherwise, the Court of First Instance or a judge thereof may, if it or he thinks fit, order the transfer of such action or matter to the Court and thereupon the Court shall have jurisdiction and authority to proceed therein."

The judge, of course, includes the master according to the Rules of the High Court. It has been agreed by both Mr Shieh and Ms Eu that the master does have such jurisdiction to transfer the case to the District Court.

2. Order 25, rule 3(c) provides that :

" On the hearing of the summons for directions the Court shall in particular consider, if necessary of its own motion, whether any order should be made or direction given in the exercise of the powers conferred by any of the following provisions, that is to say-

.....

(c) section 40 of the District Court Ordinance (Cap.336)."

Again it has been accepted by both counsel that Order 25, rule 3 is directive in that it only lists the matters which the court shall consider at the stage of the summons for direction, but it does not prohibit the court from considering the listed matters on other occasions.

3. Ms Eu submitted that there is nothing wrong with transferring cases as a matter of "administrative convenience", but any order to transfer is an exercise of a discretion that may depend on the circumstances of each case. Unless there are very good reasons to the contrary, cases within the District Court jurisdiction ought to be commenced in or transferred to the District Court. As an example of a good reason, the subject matter of the action may be connected with another matter in the High Court. However, it is not accepted that minor differences in the summary judgment applications in the District Court or the High Court constitutes a good reason for commencing the subject ten actions in the High Court. There was nothing to indicate that such minor difference would be material in the present cases.

4. Both Mr Shieh and Ms Eu agreed that the plaintiff in the case of Inchape was already given an opportunity to be heard by an order nisi and the plaintiff did show cause before the Master albeit his submissions were not accepted.

25. In fact, it is not true that cases commenced in the High Court is cheaper and faster than in the District Court as stated by Jones J in Inchape. The learned Registrar Chu in answer to an enquiry from this court has made the following reply on 6 April 2000 :

" The data required by your Lordship is as follows:

1. (a) the fixed costs for undefended actions in the District Court is $1,380 with an addition of $40 for each additional defendant after the 1st defendant : 2nd Schedule, District Court Civil Procedure (Costs) Rules, Cap.336.

(b) The fixed costs for undefended actions in the Court of First Instance is $1,550 : Schedule 2, Order 62 Rules of High Court, Cap.4.

2. (a) For undefended actions in the District Court, the Registrar of the District Court is unable to provide information on the level of costs allowed after taxation, presumably because no such data is being captured or collected at the moment.

(b) (i) For undefended actions in the Court of First Instance, it is extremely rare to have taxations on a party-and-party basis. This is because in the absence of express agreement between the parties for costs to be recovered on a higher scale, the practice has been to award fixed costs only.

(ii) the Chief Judicial Clerk, High Court Registry, has however advised that he had once conducted provisional taxation of an undefended action on a party-and-party basis and the costs allowed after taxation was around $18,000.

(iii) According to the experience of the Chief Judicial Clerk, High Court Registry, the costs allowed after taxation on indemnity basis for undefended actions in the Court of First Instance is between $25,000 and $32,000.

3. (a) The usual time involved for entering default judgment in both the District Court and the Court of First Instance is about 7 working days from the date the application is lodged. This is on the basis that the papers are in order and no requisition has been raised by the Court.

(b) As to the time involved for striking out defence and entering judgment in District Court actions, the usual time is about 14 days from the date of the filing of the application.

(c) In the case of application for summary judgment in the Court of First Instance, if the application can be disposed of at the first call-over hearing, then the time involved will be about 2.5 weeks from the filing of the application. If judgment is entered after full arguments, then the time involved is about 9.5 weeks from the filing of the application. The majority of the applications for summary judgment are resolved after full arguments."

26. It can be seen from the aforesaid data that in an undefended action, it is cheaper in the District Court than in the High Court. The time for entering default judgment is the same in District Court and the Court of First Instance which is about seven working days from the date of the application. However, it is faster to strike out defence and enter judgment in the District Court (which is about 14 days from application) than in the Court of First Instance which is 2.5 weeks at the first call-over or 9.5 weeks for full argument.

27. In short, after hearing full argument from both counsel, with respect the decision in the case of Inchape should not be followed.

Conclusion

1. This appeal is dismissed but since the defendants are not present and represented, I make an order nisi that there shall be no order as to costs.

2. I consider that the cost provision is unconscionable under the UCO and is therefore unenforceable.

3. All cases within the District Court jurisdiction should be transferred by an order nisi of the master to the District Court shortly after the institution of the action in the Court of First Instance.

4. The net result of this appeal is that the plaintiffs are only entitled to the fixed cost as provided by Order 62, rule 32, Part I of the Second Schedule, paragraph 1(b).

28. I am grateful for the assistance of Mr Shieh, counsel for the plaintiffs and Ms Eu, SC, amicus curiae, for their detail and in-depth submissions made to this court.

A diagram is put in here