BANK OF CHINA (HONG KONG) LTD v. HONGKONG XIN DU WEAVE CO., LTD AND OTHERS

HCA 1034/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1034 OF 2009

_________________________

__________________

J U D G M E N T

__________________

(I)    ACTIONS ARISING OUT OF HIRE-PURCHAE AGREEMENT (ORDER 84A)

1.  Order 84A, Rules of the High Court (Cap. 4A), prescribes a procedure for the obtaining of default judgment against the hirer or a guarantor if the claim is not for unliquidated damages or for the amount of any instalment or instalments of hire-purchase price due and unpaid (Order 84A rule 1).

2.  The procedure is by way of affidavit evidence, and particulars are required (Order 84A rule 2), which suggested particulars are[1]:

(i)   the parties;

(ii) the date and material terms of the agreement relied upon;

(iii) the performance or part performance of the agreement;

(iv) the fact of the breach of the repayment or other terms;

(v)  the amount outstanding as at the date of the breach;

(vi) whether the goods have been recovered;

(vii) the amount of interest rebate as a result of early termination of the agreement;

(viii) the monies recovered, if any, on the sale of the good recovered;

(ix) to whom the goods were sold, and the efforts made to ensure that they were sold at the best available price, in mitigation of the plaintiff’s loss;

(x)  the amount presently outstanding;

(xi) the relief claim.

(II)  THE CLAIM

3.  The claim arose out of a hire-purchase agreement dated 3 January 2008 (“the Agreement”).  According to a document attached to the Agreement of the same date (signed by the Plaintiff and the 1^st Defendant), the Plaintiff – upon becoming the owner of a lot of machines (“the Goods”) after the 1^st Defendant had sold the Goods to the former for a consideration of $1,950,000 – in turn leasedthe same goods to the latter (a limited company).  The 2^nd and 3^rd Defendants (who were shareholders and directors of the 1^st Defendant) are guarantors for the 1^st Defendant’s liabilities under the Agreement by virtue of a Deed of Guarantee (“the Guarantee”) of the same date as the Agreement.

4.  According to the Statement of Claim (“SOC”), the hire-purchase price of the Goods was $1,950,000. The Goods were required to be kept at a designated premises in Mainland China (“the Premises”).  The Agreement also provided for instalment payments (48 in total) with interest.  An option to purchase at a fee of $500 at the end of the term is also provided in the Agreement (SOC, paragraph 5).

5.  After the 1^st Defendant was found to have removed the Goods from the Premises, and defaulted in paying the monthly instalment since 10 December 2008, the Plaintiff instituted the present action for unliquidated damages against the 1^st Defendant’s for repudiatory breach of the Agreement, and against the 2^nd and 3^rd Defendants for indemnity under the Guarantee.

6.  None of the Defendants filed any notice of intention to defend within the prescribed time limit.  The Plaintiff obtained an interlocutory judgment for damages to be assessed, and then leave from a Master to set the action down for assessment of damages.

(III) DAMAGES SOUGHT

7.  In connection with the assessment of damages, the Plaintiff had filed two witness statements of the Plaintiff’s employees.  For clarity, I highlight below evidence pertinent to the assessment with reference to the requirements of Order 84A:

(A)  RELEVANT EVIDENCE

(i)  The date and material terms of the agreement relied upon

8.  The material terms of the Agreement pertinent to the quantum of damages include:

(a) The 1^st Defendant must pay interest calculated on daily balance on any mount, which the 1^st Defendant has failed to pay on time for the period it is unpaid, and the rate of interest applying to each daily balance is a rate the Plaintiff determines from time to time (clauses 11.1 and 11.2).

(b)  The 1^st Defendant must fully indemnify the Plaintiff against any liability or loss arising from and any costs (including those associated with funds borrowed, contracted for or used to fund any amount payable by the Plaintiff in connection with the Plaintiff’s purchase of the Goods or the Agreement and legal fees and expenses) incurred in connection with exercising a right under the Agreement (clause 12.1).

(c)  It is one of the fundamental provisions of the Agreement that upon termination of the Agreement, the 1^st Defendant must immediately reimburse and pay the Plaintiff the full amount of all commissions, costs and expenses reasonably incurred by the Plaintiff in collecting, suing or enforcing payment of all sums due including (without limitation) legal costs and expenses on a fully indemnity basis, and other sums reasonably incurred by the Plaintiff in recovering possession or preserving the Plaintiff’s rights in the Goods (clause 20.4(d)).

(d)  The Plaintiff may but not obliged to give the 1^st Defendant a certificate regarding any matter concerning the Agreement including the applicable interest rate for floating rate payments; or the rate of interest under clause 11.2 or any amount payable by the 1^st Defendant to the Plaintiff (clause 27.1).  The certificate is sufficient evidence of the accuracy of its contents, unless it is proved to be false (clause 27.2).

(e) The applicable interest rate means the applicable interest rate specified in the section entitled “Details” of the Agreement – which provides that the first rental instalment being $46,469.33 to be paid on 10 February 2008, and the balance of the hire-purchase price by 47 monthly instalments (being $46,469.33) (inclusive of interest) each if the HK$ prime rate was to remain unchanged) commencing on 10 March 2008 and thereafter on the 10^th day of each succeeding month (Part L).

9.  The usual terms of the Guarantee relied on is the joint and several liability of the 2^nd and 3^rd Defendant for all sums owing and payable to the Plaintiff by the 1^st Defendant.

(ii)  The performance or part performance of the agreement

10.  In part-performance of the Agreement, the 1^st Defendant paid the 1^st instalment of $46,469.33, and continued to pay 9 additional monthly instalments up till November 2008 in the total sum of $371,747.96.

(iii)  The fact of the breach of the repayment or other terms

11.  After having paid the November 2008 instalment, the 1^st Defendant has failed to pay any instalments since December 2008.

12.  In addition, the 1^st Defendant, after a visit was made to the Premises by the Plaintiff’s staff on 25 November 2008, was further found to have breached the term of the Agreement by removing the Goods from the Premises.

(iv)  The amount outstanding as at the date of the breach

13.  According to the witness statement of Lee Man King in support of the damages claimed, the amount outstanding as at the date of the breach was $1,578,252.04 ($1,950,000 – $371,747.96). In it, the Plaintiff also asked to have interest calculated at the rate of 6% per annum over the Prime rate (at 11% per annum at the time) from 10 December 2008 (mature date of the monthly rental instalment).

(v)  Deductions

14.  Order 84A requires a plaintiff to deduct rebate interest and the value of the goods repossessed.  The Plaintiff has not given any deductions either in respect of the Goods (because the Goods were not repossessed) or interest rebate.

(vi)  The amount presently outstanding and relief claimed

15.  According to the Plaintiff’s record, the amount outstanding as at 3 March 2009 is $1,727,798.97, which comprises the principal sum of $1,578,252.04, accrued interest of $134,046.93 and expenses of $15,500 ($15,000 was in respect of the cost of obtaining legal opinion from a Mainland lawyer).

(B)  REQUISITIONS BY COURT

16.  The damages claimed (as evidenced by the witness statements) by the Plaintiff are only in respect of the unpaid instalments (calculated with reference to the applicable rate of interest), which sumscould be ascertainable, and the claim thus should have be liquidated at the time of the filing of the SOC.  Hence, the procedure laid down in paragraph 2 above for obtaining judgment ought to have been adopted.

17.  In the first assessment hearing, since the Plaintiff has not provided any evidence in support of the rate of interest claimed (6% over prime) in the witness statement (referred in paragraph 13 above) and further that I had raised the issue on interest rebate, I therefore adjourned the hearing to enable the Plaintiff to deal with these two matters.

18.  Given the much simpler procedure provided in Order 84A (which should have been followed), and for the sake of economy on costs and procedure, I dispensed with the attendance of witnesses at the adjourned hearing, and directed evidence be adduced by way of affidavit.

(i)  Rate of Interest

19.  The Affirmation of Lee Man King – which is almost a reproduction of one of the witness statements by the same deponent- was subsequently filed before the adjourned hearing.  Apart from an assertion that the overdue interest rate being claimed at 6% above Prime Rate is the pre-estimate of loss of the Plaintiff, the Plaintiff has not produced any shred of documentary evidence in support of the rate claimed.

(ii)  Interest Rebate

20.  The Plaintiff refuses to give any discount for rebate interest.

21.  Miss Cheung, counsel for the Plaintiff, submits that the discount for rebate interest, by either using the traditional so-called “Rule of 78” method of calculation or otherwise, is inappropriate because the Plaintiff has not repossessed the Goods.  There is (as Miss Cheung further submits) therefore no “accelerate receipt by the owner of its capital outlay” when the Plaintiff has not received any proceeds of sale upon early termination of the Agreement.

(IV) DISCUSSION

(i)  Outstanding Principal Sum

22.  On the evidence, I am satisfied that the principal amount outstanding from the date of the termination on 10 December 2008 is in the sum of $1,578,252.04.

(ii)  Interest

23.  The interest rate claimed is 11%, which is calculated at the rate of 6% above the Hong Kong dollar Prime Rate.  In the Agreement under the section entitled “Payments”, the provisions governing instalment paymentsand interests can be found in the column described as “Floating rate payments”.  In that section, the rate of interest is stipulated as follows:

(a)       Margin: 0%

(b)       Applicable interest rate: HK$ prime rate

(c)       “Subsequent rent instalments to be calculated by us by applicable interest rate plus margin”.

24.  The interest rate for the subsequent intalments, according to the provisions above, should be “applicable interest rate plus margin”.  The applicable interest rate according to the said provisions is HK$ prime rate.  The margin is 0%.  Hence, had the 1^st Defendant continued to fulfill the hire-purchase terms of the Agreement, the applicable interest rate for the calculation of the subsequent instalments should be the HK$ prime rate.

25.  Relying on clauses 11 and 27 of the Agreement (as set out in paragraph 8 above), the Plaintiff claimsfor overdue interest at the rate of 6% over the Prime rate.  There is, however, no explanation on why and how the said rate came about.

26.  The Plaintiff, albeit having been given an opportunity to file further evidence to support its claim for overdue interest, has not been able to, unfortunately, produce a single piece of evidence to support the rate claimed.  According to clauses 11 and 27, the Plaintiff - in order to charge a rate of interest other than the rate provided in the Agreement (Hong Kong $ Prime) – would be required to either determine interest for overdue payments (Clause 11) or stipulate a rate of interest by issuing a certificate (clause 27).

27.  The Plaintiff however has not adduced any evidence of determination of or produced a certificate to stipulate thedefault interest rate.

28.  In the circumstances, I do not think that the Plaintiff should be entitled to be awarded interest on the unpaid instalments at a rate other than the HK$ Prime Rate as stipulated in the Agreement.

(iii)  Interest Rebate

29.  In Hong Kong, all hire-purchase agreements are still entirely governed by their terms and by common law.

30.  The measure of damages under a hire-purchase agreement in respect of an early termination of the agreement – according to the settled legal principles at common law – should include a discount of the appropriate amount (usually by way of interest rebate calculated with regard to a formula called “Rule of 78”[2]) as a result of receipt by a plaintiff of its capital outlay within a shorter period than otherwise provided under the agreement.

31.  The rationale for the discount has been succinctly pronounced in a line of English authorities involving hire-purchase agreements.  I cannot do better than quoting what I think the most pertinent reasons given in two of the often-quoted judgments below:

“It seems to me, therefore, that, in assessing the damages suffered by the plaintiffs as a result of the defendant's breach of the hire-purchase agreement, the court should make a reasonable allowance or discount for the accelerated receipt by the plaintiffs of part of their capital outlay, a sum which represents a reasonable percentage on the amount of the capital received in respect of the period between the date of its receipt and the date of the expiry of the agreement.

Moreover, the accelerated receipt of the proceeds of sale represents moneys in the hands of the plaintiffs which they would, in the ordinary course of their business as a finance company, put to use again to earn a further profit or interest; it is difficult to imagine or believe that the plaintiffs would allow these moneys in their hands, however small in amount, to remain idle.  If, therefore, in assessing the damages suffered by the plaintiffs, no reduction is to be made in the amount of their hire charges, the plaintiffs would, in effect, be receiving two amounts of profit or interest at the same time on the same sum of money.  In my view, it would be wrong in principle to award damages which would produce this result, for the plaintiffs would be getting as damages more than the amount of the loss they have in fact suffered.”

(Yeoman Credit v McLean [1962] W.L.R. 131 per Master Jacob at 133)

“Some discount should be allowed on the ground that the plaintiffs had received back their money earlier than they would have done if the contract had been fulfilled; see per Jenkins L.J. in Interoffice Telephones Ltd. v. Robert Freeman Company Ltd.

Master Jacob in Yeoman Credit Limited v. McLean had to assess the damage in similar circumstances. As a means of arriving at the correct figure, he calculated the interest rate implicit in the hire-purchase charges, and gave credit at that rate for sums received by the owners before their due date.”

(Overtone v Shipway [1962] 1 W.L.R. 117 (C.A.) per Holroyd Pearce L.J. at 124)

32.  In the present claim, the total period of instalment payment is 4 years.  Had the 1^st Defendant performed the Agreement, the Plaintiff would only have received back all the money (the hire-purchase price plus interest) after a period of 4 years, i.e. on 10 January 2012.  The accelerate receipt, according to the authorities above, represents its capital outlay.  Hence, an appropriate discount ought to be given.

33.  In the premises, I am unable to agree with Miss Cheung’s submission that a discount should only be given when hired goods are recovered.  Such argument cannot sit comfortably with the reasoning given in the English authorities discussed above.

34.  Accordingly, the Plaintiff must provide the appropriate allowance for early receipt, and the amount (according to the usual practice adopted in Hong Kong) is to be calculated in accordance with the Rule of 78 formula.

35.  Unfortunately, I have no information on the amount of the interest rebate as the Plaintiff has disregarded my direction requiring it to provide the calculation.  Instead of complying with my direction, it has chosen to unreasonably insist on claiming for the entire overdue sum without deduction.

36.  In the circumstances, I direct the Plaintiff to comply with my direction by filing and serving an affirmation setting out the amount of the interest rebate within 7 days of the handing down of the judgment.

(V)   CONCLUSION

(i)  Amount entitled

37.  For the reasons above, I find that the Defendants are liable to pay the Plaintiff a total sum calculated as follows:

(a)       All arrears of the outstanding amount as of 25 November 2008, $1,578,252.04.

(b)       Less the appropriate interest rebate calculated in accordance with the Rule of 78.

(c)       Interest at 5% per annum at the net amount from 10 December 2008 until payment.

38.  The Plaintiff also claims other expenses, which include a sum of $15,000 for the cost of obtaining legal advice from Mainland China.  These items in my view are in the nature of costs, which I would deal with below.

(ii)  Costs

39.  The costs of obtaining liquidated damages in respect of an action under a hire-purchase agreement under Order 84A are usually – by the practice having developed in the High Court –gross-sum assessed, and the amount allowed at indemnity basis (as claimed in this claim) is $13,800.

40.  In this claim though the Plaintiff has in its SOC claims for unliquidated damages, there is simply no justification for it to do so.  The Plaintiff’s reason that it “was not in a position to ascertain the total amount at the outset” (paragraph 15, Affirmation of Lee Man King) is, in my view, not valid.

41.  As I have already found in paragraph 16 above, the Plaintiff, at the time of filing the SOC, should have been able to ascertain the total amount of the unpaid instalments regardless of which interest rate is to be applied – be it the HK$ Prime Rate (as provided in the Agreement) or 6% over HK$ Prime Rate for overdue rate of interest (as claimed by the Plaintiff).  This action should be a liquidated claim for unpaid instaments, and the application for judgment should be governed by the procedure laid down in Order 84A, which procedure the Plaintiff ought to have followed instead of resorting to the more cumbersome and expensive way of having its damages assessed.

42.  Therefore, the Plaintiff should only be entitled to costs usually allowed for obtaining judgment under Order 84A.  Further, I also find that the costs incurred for obtaining a legal opinion from a Mainland lawyer has unreasonably incurred, and it should not be allowed in any event even if the procedure for assessment had been regular.

(VI) ORDER

43.  Upon the Plaintiff having duly complied with the direction at paragraph 36 above, I direct judgment be entered in favour of the Plaintiff for the amount and interest calculated in accordance with paragraph 37.

44.  I further grant a costs order nisi that the Plaintiff do have the costs of the action and the assessment on indemnity basis, which are gross-sum assessed at $13,800 (in accordance with the amount usually allowed for an Order 84A application).

[1]     Hong Kong Civil Procedure 2010, at 84A/2/1, p.1378.

[2]     In an article by Bob Allcock “Hire Purchase Deficiency Claims” (HKLJ, Vol.16 of 1986 at p.235), the writer explains, “A more sophisticated and fairer method of calculating the discount is the ‘Rule of 78’.  The discount is based on the number of instalments which had not fallen due by the time of termination.  It takes into account the fact that under normal circumstances the capital sum is constantly being reduced and, as a result, the proportion of each instalment attributed to the hire charge is being reduced.  This formula is commonly adopted by Hong Kong court”.