XCHRX Citic Ka Wah Bank Ltd. v. Au King Wah

DCCJ9232/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 9232 OF 2001

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J U D G M E N T

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1. This is an application to set aside an Order 14 Judgment entered by default by the Plaintiff against the Defendant for the total amount outstanding under a term loan of 36 months borrowed by the Defendant from the Plaintiff bank.

2. The Order 14 summons was taken out on 24 July 2001. It was heard on 13 August 2001. On that day, the Defendant did not turn up and Order 14 Judgment by default was entered against the Defendant. Subsequently, the Defendant, a solicitor, made an application to set aside the default Order 14 Judgment.

3. That application was heard by Master Yu on 22 October 2001 and he dismissed the application. The Defendant now appeals to this court asking me to set aside the default Order 14 Judgment. He said he had explanations or understandable excuses for his failure to attend the hearing for the Order 14 application, and more importantly, he said he has good merits.

4. In this sort of application, the court uses the same test as that used in an Order 13, Rule 9 application, as per the Court of Appeal decision in O Mark Polyethylene Products Fty Limited v Reap Star Limited [2000] 2 HKC 330. In other words, the court would require a defendant to show that he has a real prospect of success in the action. Furthermore, in line with the development of the authorities, the court would expect to receive some explanation for the default or the delay in applying to set aside the judgment in question. (See Hung Ling Chun v Chow Yung Fong HCA 10172/94 Recorder Ma SC (20/4/2001)). But in my judgment, that would only be a subsidiary consideration (unless in an extreme case like Hung Ling Chun where the delay was most substantial), the primary consideration being whether there is a real prospect of success on the part of the Defendant. Bearing those principles in mind, I approach the facts and arguments raised in the present case.

5. As I say, the action arose out of a term loan of 36 months. The loan was lent by the Plaintiff pursuant to an application made by the Defendant under a standard form Personal Instalment Loan Application of the Plaintiff. The form is a two-page document printed on both sides of a piece of paper. On the front page there are boxes for the applicant of the loan to fill in. Among other things, the applicant would need to fill in his personal particulars, the amount of the loan applied for, his occupation, his bank references, personal reference, and he needs to submit, together with his application, his income proof and he needs to sign a declaration, and in the declaration itself it says:

"I agree to repay the loan and interest and loan arrangement fee thereon by way of monthly repayments specified in this application and further agree to comply with and be bound by the terms and conditions stated in this application form and overleaf and the subsequent due amendments by the bank..."

These are in small print, but in the context of the form they are not particularly difficult to read and they precede immediately the place where the applicant is supposed to sign the application and fill in the date. Moreover, the form is in both English and Chinese and the equivalent Chinese wording can be found in the same box containing the declaration and the signature and I would say that the Chinese characters are in fact easier to read than the English words which are in slightly smaller print. But in any event, I would say that both the English and Chinese are legible and can be read, if one is minded to read them, without any difficulty. The declaration refers to terms and conditions stated in the application form as well as overleaf. Then, at the back of the form, one finds the standard terms and conditions in both English and Chinese. Again, I would say that if one is minded to read the terms, they are not difficult to read at all, they are really legible, and the translation, i.e. the Chinese version which is secondary to the English version, so far as I can see, is accurate and correct.

6. The terms and conditions refer to the customer's repayment of the term loan by instalments and the bank's right to charge interest in case of default on the outstanding amount as well as its right to employ a debt collection agency to collect the overdue amount and so on and so forth. But the more important or the most important clause amongst the terms and conditions is Clause 9. It begins by reading:

"Notwithstanding the above, the loan together with interest accrued thereon will be subject to the bank's overriding right of repayment."

The clause goes on to provide that if the borrower fails to repay the amount demanded, then interest at a certain rate would be charged on the amount demanded.

7. The Defendant in the present case defaulted in repaying the monthly instalments in question, so the action was taken out by the bank against him. At the time of the writ, or according to the Statement of Claim, as at 25 May 2001, the total amount outstanding was $63,471.71. Bearing in mind that this was a personal loan of $120,000, so quite obviously, the bank was not only suing for the monthly instalments in arrears, the bank was suing for the whole amount outstanding under the loan. This the bank did, apparently, pursuant to its right to require repayment upon demand, as set out in Clause 9 of the terms and conditions and this formed the crux of today's argument before me.

8. The Defendant, acting in person, submitted that the bank could not sue him for the whole outstanding amount but, apparently, only the instalments in arrears because he said Clause 9, or the beginning of Clause 9, i.e. the so-called overriding right of repayment, could not be utilised against him.

9. He mounted this argument basically on two premises: one is that he said the clause or the overriding right of repayment was an onerous or unusual term and according to Chitty on Contracts, 28th Edition, Volume 1, paragraph 12-015,

"Although a party receiving a contractual document knows it contains conditions, if the particular condition relied on is one which is a particularly onerous or unusual term or is one which involves the abrogation of a right given by statute, the party tendering the document must show that it has been brought fairly and reasonably to the other's attention."

Mr Au, the Defendant, also relied on Interfoto Picture Library Limited v Stiletto Visual Programmes Limited [1989] QB 433 in support of the preposition cited in Chitty.

10. The second premise relied on by Mr Au, the Defendant, was that in any event, the so-called overriding right of repayment was repugnant to the instalment loan contract in question and, therefore, unenforceable against him.

11. I shall deal with the first point first. For my part, I do not find the overriding right of repayment insisted on by the bank an unusual term. It is seen in many ordinary banking documents and loan documents. This is a fairly well known right and very often it is referred to as a bank's "customary" overriding right of repayment on demand and there are many cases concerning the term in question, some of them were referred to me in this hearing today. So, in my judgment, I do not find the term to be unusual.

12. As to whether it is an onerous term, in my judgment, this really ties-in with the second point raised by Mr Au and therefore I would deal with the two together. Mr Au submitted in relation to his second point that this was an instalment loan, and in fact, it was a personal instalment loan, a sort of consumer type of instalment loan as opposed to a commercial type. From the application form as well as the subsequent drawn-down notice, the reference to repayment by monthly instalments, i.e. 36 monthly instalments of $3,000-odd, was all over the place. So Mr Au submitted that the bank's so-called overriding right of repayment on demand was really repugnant to the very essence of the loan contract in question, i.e. that this was an instalment loan.

13. He relied on a number of authorities, all conveniently referred to and dealt with by Deputy Judge Longley in Hongkong & Shanghai Banking Corporation Limited v Ling Lee-kang, Philip [2001] 3 HKC 420, a case concerning a facility letter comprising three term loans. Those authorities in question suggested that at least in principle, a right to require repayment of the whole loan upon demand may be so inconsistent with the underlying purpose of a loan contract that it should be struck down and not enforced, or at least enforced subject to certain qualification. See, for example, the decision of Goff J (as he then was) in Titford Property Company v Cannon Street Acceptances, an unreported decision of his Lordship on 22 May 1975, referred to at page 424 C to E of Deputy Judge Longley's Judgment in the Hongkong Bank case. And there are other authorities as well, such as William & Glyn's Bank v Barnes, a decision by Gibson J [1981] Com LR 205, all to the same effect. And in Deputy Judge Longley's own case, the same argument was run before the learned Judge, i.e. that an overriding right to payment on demand was repugnant to the facilities obtained from the bank. In that case the facilities comprised three term loans. The learned Judge, after reviewing the authorities, came to the conclusion at page 425H that:

"There is no consistency, in my view, between a term loan which both parties anticipate to last the duration of the term and the lender retaining a right to call for repayment at any time on demand. This is particularly so when the term is, as in this case, for a number of years and circumstances may change."

14. As I read the decision, the Hongkong Bank case was a fairly strong case because in that case, apparently the borrower had committed no default in repaying the term loans in question. There had been an extension of the time for repaying the instalments which had been approved by the bank and subsequently, apparently, circumstances changed and the bank decided to demand full repayment of the term loans; yet the court held that there was no inconsistency between that right and the nature or the essence of the facilities, i.e. three term loans. So as I say, that was a fairly strong case on this type of situation or argument and a case binding on this court, it being a High Court case.

15. Mr Au sought to distinguish the case by arguing that in our present case, we are not dealing with a commercial bank loan situation but a consumer type of situation. Whereas a businessman or a commercial person may readily understand the term "repayable on demand" and its significance and must be taken to have accepted the loan as it is, bearing the inherent or attendant risk in question, for a consumer instalment loan type of situation which may be made use of by all walks of life including, for example, a housewife, to tell the consumer that the instalment loan for a period of time is nonetheless liable to be, as it were, brought to an end by the bank's exercising its so-called overriding right to repayment of the whole loan would be most astonishing and startling. So from that premise, Mr Au argued that this right was really repugnant to this type of consumer instalment loan situation and should not be enforced.

16. For my part, I can see the force of this argument, but in my judgment the whole rationale behind the argument of repugnancy is that the overriding right to repayment should not be repugnant to the essence of the loan contract in question. It all depends on the circumstances and one should not adopt a simplistic approach towards the right in question. Even if one can think of situations in which the exercise of this right may not be fair, just or expected, or put another way, that to do so may be startling or surprising, it does not necessarily follow as a matter of logic, common sense or good law that the whole clause should be struck down so that it may not be resorted to even in other circumstances where the exercise of the right would not excite such reaction. So, for instance, like the present case, if the right was sought to be exercised when the consumer was repaying the instalments punctually, then one could say, as Mr Au tried to argue, that the exercise of that right would be most startling and surprising and unexpected, particular vis-à-vis a consumer like a housewife who might not appreciate the full significance of a term like "overriding right to repayment on demand". So in that sort of situation, a bank purporting to exercise the right in that way might find that the court would be rather hostile towards its purported exercise of the right and might be met with an argument that such exercise of the right would really be quite repugnant to the type of contract in question, bearing in mind the identity of the consumer borrower and bearing in mind that the essence of the loan was an instalment loan. So one could say that in those situations, it might be an arguable defence to the bank's purported exercise of its right to repayment on demand.

17. Yet, this is not such a case. Our case is that the consumer has defaulted in paying the monthly instalments and the bank is seeking repayment of the whole outstanding loan. I see nothing surprising with such an exercise of the overriding right to repayment. This is a very common situation. In many court settlement orders and in many compromise agreements there is typically found a similar clause, usually called a default clause, whereunder if a party liable to make instalment payments defaults in paying any of the instalment payments, the whole outstanding amount would immediately become enforceable or repayable. This really accords with good common sense and protects adequately the interests of the creditor or the judgment creditor in question.

18. So if the exercise of the overriding right to repayment is related to a default situation, I see nothing repugnant in that exercise of right by the bank to the purpose of the instalment loan which is really premised on the consumer performing his part of the contract to make repayment by instalments. Put another way, if the consumer is in breach of his fundamental obligation to make repayment by instalments, why should the bank be tied to its promise to allow the loan to be repaid by instalments?

19. So for my part, I do not accept Mr Au's argument and I would prefer to rest my decision on this slightly narrower ground than the very sweeping ground relied on by Deputy Judge Longley in the Hongkong Bank case. In other words, even on this narrower basis, in my judgment, a bank is entitled to exercise its overriding right to repayment on demand in case of default by a consumer in an instalment loan situation. I say nothing about the situation where there was no default yet the bank sought to exercise the overriding right, and I say nothing about whether in that sort of situation the fact that it was a consumer type of instalment loan situation would make a difference from a case like Hongkong Bank concerning a commercial loan situation.

20. So that not only disposes of the second argument raised by Mr Au, i.e. the repugnancy argument, that really also disposes of the remainder of the first argument, i.e. whether we are concerned with an onerous term in the present case. Interpreted in that light, I do not see how one could call this overriding right to repayment on demand an onerous term when it is restricted to a default situation which is the situation in the present case; and in any event, looking at the original of the application form which the parties agreed I can look at for the purpose of this hearing, the terms, both in English and Chinese, as I say, are very clear and can be read without any difficulty at all. The Chinese translation is correct and adequate and, for my part, I have no doubt that the relevant term in question has been incorporated into the loan contract.

21. I also bear in mind that one is not dealing with an ordinary Order 14 situation where a defendant should be given leave to defend if he can show an arguable case. One is really adopting the Order 13, Rule 9 test, i.e. that it is for the Defendant to show that he has a real prospect of success on the merits and the court has to come to a provisional view of the probable outcome of the case. Bearing in mind the test in question, I am of the view that the Defendant has not satisfied the requirement in this type of case.

22. So it really remains for me, for the sake of completeness, to mention briefly the explanations proffered for the default in attending the Order 14 hearing. Mr Au explained that he was only a consultant in the law firm which he once owned as a senior partner and the Statement of Claim as well as the Order 14 documents were served on his firm. He was away for a period of time and when he came back he was busy with his outside work and there was no one in the office to open his mail or whom he could call to find out whether any relevant court documents had been served on him, and therefore he allowed the hearing date to lapse without realising that there had been an outstanding Order 14 hearing for him to attend. Of course, this was no justification for not attending the hearing or for not finding out that there had been an application made against him. That said, I am quite prepared to take Mr Au's word as true and correct for the purpose of this hearing and I can understand the reason why he allowed the judgment to be entered in default against him.

23. Without condoning what he had done (or failed to do), I would simply say this: had Mr Au been able to demonstrate to the court a defence with a real prospect of success, I would have been very much inclined to give him a chance to defend the present action and set aside the default judgment, subject to an appropriate order as to costs, notwithstanding the unsatisfactory reasons why he allowed the default judgment to be entered against him in the first place. But since, as I have said, Mr Au has failed to do that, I am afraid, notwithstanding my understanding of the reasons he gave for his failure to attend the Order 14 hearing, I would not accede to his application to set aside the default judgment.

24. So I order that the appeal be dismissed.

(Submissions re costs)

25. So far as costs are concerned, there can be no question that costs should follow the event, so I order that costs of and occasioned by this appeal be paid by the Defendant to the Plaintiff, to be taxed if not agreed.

26. So far as certificate for counsel is concerned, I think it is quite apparent from the judgment which I have just delivered that this case and the arguments raised touched on some interesting if not important questions of law requiring some analysis of the case law as well as the documents involved in the present case. I am satisfied that the service of counsel is reasonable and I would not say the instruction of counsel by the bank was unnecessary. So I grant a certificate for counsel in the exercise of my discretion in the matter. Certificate for counsel.