LUEN WAI CRANE ENGINEERING CO. v. AJAX PONG CONSTRUCTION EQUIPMENT LTD.

1992, No. A5972

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. The plaintiff sues the defendant for the return of their deposit in the sum of $100,000 paid under a contract in the Chinese language, entered into with the defendant for the supply of a second-hand crane. The plaintiff relies on a number of grounds for the recovery. The plaintiff has now conceded on liability with reference to the mechantability of the crane. The only matter left in the hands of this court is the nature of the provision for the payment of the $100,000 deposit. The defendant counterclaims for damages, having maintained that the $100,000 deposit had been rightly forfeited. I will dispose of the second issue in the counterclaim first. The Chinese contract provided, inter alia, as follows :

"Time of delivery : Delivery will take place within 25 days after receipt of the deposit. If late delivery by the seller, the seller shall compensate the purchaser in the sum of HK$1,000 per day as compensation. If the purchaser had (sic) not accepted (sic) delivery as scheduled, the purchaser shall pay HK$1,000 per day as rental to the seller."

It is common ground that the Chinese characters translated as "rental" mean more appropriately "warehouse charges". Special damages have not been pleaded in the counterclaim. It is argued by Mr Sakhrani, counsel for the defendant, that the above quoted provision in the Chinese contract provided the yardstick for assessing damages for breach. Counsel argues that it would be open to this court to go by the rate of $1,000 per day as, or in the form of, liquidated damages sustained by the defendant in the circumstances of this case.

2. To that contention of Mr Sakhrani, there exist at least three constructural problems in opposition. First, it is reasonably clear, in my view, that the provision for the seller to claim $1,000 a day is one predicated by delay in acceptance. The provision envisaged that the Chinese contract had been completed. The first part of the provision dealt with delay in the defendant making delivery, and the second part of the same provision dealt with delay in the plaintiff's taking delivery. Time for delivery was the essence of the provision. It would violate the language of the provision to regard the stipulated $1,000 as the rate for assessing damages. The second constructural problem is that the $1,000 to be paid by the plaintiff to the defendant as seller was only for warehouse charges. It is inconceivable for any party, in my view, to seek to rely on warehouse charges as criterion for assessment of damages. Thirdly, the whole provision came under the rubric "Time of Delivery". The rubric focused on delivery. In my view, the claim mounted by the defendant on the basis of this provision for damages against the plaintiff cannot succeed.

3. Next I turn to the more substantial issue. The parties have not put their houses together, as it were. The gravamen of the disagreement between the plaintiff and the defendant lies in the nature of the provision for payment of the $100,000 deposit. Under another rubric in the Chinese contract "Mode of Payment", it was provided :

"Deposit in the sum of HK$100,000 shall be paid upon signing of this contract."

From the tenor of the entire provision under that rubric "Mode of Payment", it can readily be seen that the $100,000 was a payment as deposit and/or part payment of the purchase price. Mr Sham, counsel for the plaintiff, also concedes that the use of the term "deposit" would be sufficient to support the prima facie implication of an agreement that the same shall be forfeited on default. Mr Sham invites the court to converge on the reasonableness of the sum as an earnest for encouraging performance of the Chinese contract. Counsel relies on the passages commencing from slightly above letter E at p.706 in the speech of Lord Browne-Wilkinson delivered on behalf of the whole House in the Privy Council Appeal of Workers Trust and Merchant Bank Ltd. v Dao Jap Investments Ltd. [1993] 2 WLR 702 at p.706. Lord Browne-Wilkinson was there merely explaining in passing the historical background of a deposit. A deposit clause in a contract is no more than a provision for payment of a sum of money by one party to another. In fact in Workers Trust, Clause 13 of the contract between the parties in Jamica was a clause for payment of a deposit. The Board nevertheless decided the case on the basis of a provision for payment of a sum of money under the contract by the buyer to the seller. In para.503 of McGrego on Damages, 15th edn., the following passage also lends support to my analysis of Workers Trust and it reads as follows :

"A provision that money paid shall not be recoverable on the payer's default may be either expressed or implied. An express provision of this type generally takes the form of a forfeiture clause, a clause stating that money shall be forfeited on default; on the other hand a provision of this type is generally implied from the fact that the money is stated to be paid as a deposit."

4. Consequently the crux of the matter shall have to be decided on the basis of whether the provision for the payment of $100,000 deposit in this case was a penal provision or whether it was a pre-estimate of loss enforceable by the defendant on the plaintiff's default. In Workers Trust, supra. at p.705D, Lord Browne-Wilkinson was of the firm opinion that "unless it can be justified as a genuine pre-estimate of the loss, generally forfeiture of a sum of money for breach of contract is an unlawful penalty". Mr Sham, counsel for the plaintiff, is correct in submitting that in the speech of Lord Browne-Wilkinson in the same case at p.709A-B, the clear inference is that the party seeking to uphold the deposit provision would carry the burden of proof. What then is the degree of proof? It was conclusively laid down as early as 1914 in Dunlop Type Co. Ltd. v New Garage & Motor Co. Ltd. [1915] AC 79. The so-called "Dunlop Approach" has recently been echoed in Phillips Hong Kong Ltd. v A.G. [1993] 1 HKLR 269 at p.277, line 28 to p.278 line 23 in the speech of no less a personality than Lord Woolf. I hardly need make any specific reference to the "Dunlop Approach" encapsulated in the speech of Lord Dunedin.

5. I am therefore to consider whether the evidence given in these proceedings is sufficient to confer on the defendant the benefit of the provision for payment of deposit, implicitly forfeitable upon default. I am left with the evidence placed before this court. It matters not whether there are any good or sound excuses for leading no other evidence. Mr Tam, the then Assistance Sales Manager of the defendant came forward to testify. He told the court that guidelines for negotiation and policy matters were not his primary responsibility in this case. He came into it intermittently and at virtually the end of the negotiation. Mr Ng, the Manager of the plaintiff, in his admitted statement stated that at the last stage of the negotiation he did, having accepted in general principle the defendant's offer, commence "to discuss the general terms of the contract". After the signing of the contract, as Mr Ng recalled in his statement, "HK$100,000 was paid to Mr Tam as downpayment for the purchase of the crane". Mr Tam disclosed in his evidence that at one time the defendant demanded a deposit of up to 20% of the purchase price of $880,000. Eventually, the defendant came down to $100,000 by way of deposit representing, in arithmetic terms, 11.36%.

6. Mr Tam further told this court that a deposit would normally have had to be sought for goods to be ordered so as to protect the defendant from any default of its customer. In the words of Mr Tam "to safeguard any excuse by the customer to reject the machine on arrival". The crane in question was a second- hand machinery which had to be imported from Japan. Mr Tam explained that it was the company's policy, he knew not why, of taking 20 to 25% deposit from buyers of small machines and 10 to 20% deposit on a large machine, such as the crane ordered in this case. The then Assistant Sales Manager of the defendant further explained to this court that a deposit was normally demanded or taken, not on any percentage basis, but in a lump sum, as in this case eventually at $100,000. According to Mr Tam, the gross profit for the crane to be sold by the defendant to the plaintiff was about 10% of the purchase price. He explained that any rejection would lead to losses to the defendant in terms of banking interest on the remaining balance of the purchase price, which would continue to run, subject probably to the risk of losing the banking charges of some $60,000 odd which would have had to be incurred by the time of resale, storage charges until resale, the likelihood of a resale at a loss and the possibility of reducing the company's turnover profit. Mr Tam conceded that there were no statistics to establish the precise extent of the company's loss in turnover, but he explained that normally with the usual vacancy in the company's Yard B where the crane in question was being stored, the defendant company would be able to have turnover business fourfold per year. The inability to resell the crane for, in this case, a period of some seven months, fortunately not at a loss, would definitely affect the profitability in the turnover of the defendant.

7. Apart from Mr Tam's information, there is no direct evidence from the management of or elsewhere in the defendant to substantiate the quantum of $100,000 as being the pre-estimate of loss in the present business transaction between the plaintiff and the defendant. But again I am left without evidence on this score from the plaintiff. It is correct to say, as I have accepted, that it is for the defendant to satisfy me that the $100,000 deposit in the provision was a genuine pre-estimate of loss.

8. The evidence given by Mr Tam in conjunction with the information from Mr Ng himself as regards negotiation, taken together and evaluated objectively, has, in my view, sufficiently demonstrated that the provision of $100,000 in this case was not by way of penalty. The parties negotiated at arm's length and general terms were discussed; there was also negotiation on the amount of the deposit. As indeed it was said by the Board in Privy Council in Phillips Hong Kong Ltd. v A.G. that the court should be disinclined to put asunder the bargain struck between the contractual parties on a level playing field. Neither of the parties in this case was under oppression nor was either of them suffered from any disadvantage at the negotiation table. The defendant was, in my view, entitled to forfeit the deposit under the enforceable provision for payment of the $100,000. In effect, the plaintiff's claim for the return of the $100,000 fails.

9. I need make no further order in the counterclaim. The plaintiff conceded liability virtually at the conclusion of the proceedings. The defendant maintained at one time that the $100,000 deposit represented approximately a third of its substantive claim. To take a bird's-eye view of the matter, I propose, subject to what counsel have to say, to order the plaintiff to pay the defendant 4/5ths of the costs of the proceedings.

(Submissions made on costs)

10. As to costs, it may be said that these proceedings, action and counterclaim, were contested on two separate causes of action : the nature of the deposit provision and the provision for $1,000 per day for warehouse charges which were intended to be used as the yardstick for assessing damages. The defendant fails in one and succeeds in another. The ratio In re Elgindata Ltd. The Time Law Report, 18 June 1992 will have no application. Mr Sakhrani would otherwise make no submission on the proposed 4/5ths or 80% of the costs of the entire proceedings, action and counterclaim, to go to the defendant. Mr Sham, counsel for the plaintiff, strongly resists the proposal of the court on the ground that the manufacturer's letter which conclusively displaces any possible complaint made on the part of the plaintiff came late in the proceedings. The surveyor for the defendant had misgivings himself at the inception, but he concluded that matters were found to his satisfaction. He was confident enough to issue the certificate and to make his report. The crane in question had been hired out to Komatsu twice, once at the end of 1992 and once in March 1993 for two periods of six day and ten day respectively. The plaintiff's surveyor made only a cursory inspection. The matter could have been put an end to right from the early stage of these proceedings. In fact at one time I very gently hinted by a query as to what the plaintiff was hoping to gain. The manufacturer's letter came out in the testimony of the surveyor of the defendant. He said that after the proceedings had been instituted, he requested the defendant to approach the manufacturer for confirmation so as to make it doubly sure that his survey report could bear close examination. The late production of the manufacturer's report could not be that decisive as submitted by counsel for the plaintiff. In all the circumstances, the defendant being successful in part, a fair order for costs should, in my view, be 4/5ths or 80%. Both counsel agree that I need make no further order save as to dismiss the claims of the plaintiff, and I order : (1) claims of the plaintiff in the action be dismissed; (2) no order need be made in the counterclaim; and (3) costs of the action and the counterclaim be costs to the extent of 80% of the defendant against the plaintiff.