LI CHIU WAH JOSEPH v. HONG KONG SOCIETY OF NOTARIES

FAMV No. 270 of 2023

[2023] HKCFA 34

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 270 OF 2023 (CIVIL)

(ON APPLICATION FOR LEAVE TO APPEAL

FROM CACV NO. 394 OF 2020)

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REASONS FOR DETERMINATION

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Mr Justice Fok PJ:

1.  Having heard counsel for the applicant, we dismissed this application for leave to appeal without calling on counsel for the respondent, indicating that we would hand down the reasons for our determination in due course, which we now do.

2.  The applicant is a solicitor and notary public, who has practised as such in Hong Kong since 1987 and 1995 respectively. He joined the respondent society (“the Society”) in 2005. The Society has powers under its articles of association, which apply to its members, to prescribe the conditions of membership and rules for the renewal of membership.

3.  By virtue of s.40D(1)(d) and (2) of the Legal Practitioners Ordinance (Cap.159), a solicitor who holds a practising certificate from the Law Society of Hong Kong and a membership certificate from the Society may practice as a notary public.

4.  The applicant sought to practice as a notary public for 2019 on the strength of his holding a practising certificate as a solicitor and a membership certificate of the Society. Under the requirements prescribed by the Society, similar to those applicable in previous years, the deadline for applying for a membership certificate from the Society for 2019 was 5.30 pm on 30 November 2018. By that time, practising certificates from the Law Society would not have been issued for 2019 and so the Society’s membership application form included an undertaking to provide a member’s practising certificate as a solicitor by 12 noon on 11 January 2019. The circular, dated 18 September 2018, advising members of the process for membership renewal for 2019, included a condition that, in the event a member failing to honour the undertaking to provide his solicitor’s practising certificate by noon on 11 January 2019, an additional administrative charge of HK$3,000 would be payable. The circular also stated that, in that event, the member might be subject to disciplinary proceedings for breach of undertaking, as the Society’s Council might decide.

5.  The applicant objected to the administrative charge and sought the Society’s agreement to waive it. The Society considered his request but declined to waive the administrative charge. The applicant eventually paid the administrative charge under protest. Thereafter, the applicant brought judicial review proceedings to challenge the decision of the Society to impose the administrative charge and to make renewal of his practising certificate as a notary public conditional on payment of that charge, in the sense that the Society would consider revoking his practising certificate if he did not pay the administrative charge. The applicant contended that the administrative charge was a financial penalty and therefore not lawfully imposed.

6.  In the Court of First Instance, Alex Lee J granted leave to the applicant to apply for judicial review of the Society’s decision on the ground that the administrative charge was an arbitrary penalty, bearing no relationship to the actual expenses incurred by the Society in dealing with the applicant’s late submission of his solicitor’s practising certificate. After considering the parties’ arguments and evidence on this point, however, the Judge concluded that the HK$3,000 administrative charge was not a penalty in disguise but, to the contrary, was satisfied that it was a genuine administrative charge based on a general approximation of the costs involved in the Society processing a case in which a member breached the undertaking in question. He therefore dismissed the applicant’s judicial review application.

7.  The applicant’s appeal from the Judge’s dismissal of his application for judicial review was in turn dismissed.[1] Having identified the applicant’s grounds of appeal, the Court of Appeal proceeded on the basis that the crux of the matter turned on the applicant’s contention (which was ground 3 of his grounds of appeal below) that the administrative charge was in substance a penalty.

8.  On that issue, the Court of Appeal rejected the applicant’s argument that the administrative charge was intended to be part and parcel of the disciplinary regime against a member who breached his undertaking. Applying the approach set out in Law Ting Pong Secondary School v Chen Wai Wah (“Law Ting Pong”),[2] which in turn applied the UK Supreme Court’s decision in Cavendish Square Holding BV v Makdessi and ParkingEye Ltd v Beavis (“Cavendish”),[3] the Court of Appeal was satisfied that the administrative charge served a legitimate purpose, namely compliance with the undertaking, and the amount of HK$3,000 was plainly not out of all proportion to that purpose. It concluded that the administrative charge was therefore not a penalty in nature.

9.  The applicant’s application for leave to appeal to the Court of Final Appeal was dismissed by the Court of Appeal[4] and the applicant renewed his application to the Appeal Committee of this Court. The applicant contends that the case involves the questions of law set out in the Annex to these Reasons for Determination which, by reason of their great general or public importance, or otherwise, ought to be submitted to the Court of Final Appeal for decision.

10.  Question 1 reflects the applicant’s ground of appeal 3 below and, as in the Court of Appeal, that issue is the crux of the applicant’s case for leave to appeal to the Court of Final Appeal. However, it is important to note that it was common ground in the Court of Appeal that the test to be applied in determining if a contractual term is unenforceable as being a penalty is that laid down in Cavendish as applied by the Court of Appeal in Law Ting Pong. It was not suggested in the Court of Appeal, as Question 1 now does, that there was a distinction in approach between two types of case, namely “straightforward” cases and others.

11.  The Court of Appeal materially held, at [32], 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.”

12.  It is therefore clear that, in the Court of Appeal, the parties agreed that the approach to apply in this case was that stated in Cavendish as applied in Law Ting Pong. That test requires the court to consider whether the provision impugned 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”, as the Court of Appeal noted at [32(1)]. That being the case, the applicant’s case that the questions for which leave is sought “arise because the CA wrongly allowed the Society to advance a totally new case before it by adopting the legitimate interest approach in Cavendish …, instead of the conventional approach in Dunlop …”[5] is without substance.

13.  The applicant’s complaint, that the Court of Appeal mis-stated the applicable principles, essentially focuses on the words “an innocent party generally has a legitimate interest in the performance of the contract or some appropriate alternative to performance that goes beyond compensation” in [32(3)] of the Court of Appeal’s judgment. There may be some cases in which an innocent party has no legitimate interest to protect by way of a contractual payment clause beyond compensation and, to that extent, the Court of Appeal might have said that an innocent party “could have”, rather than “generally has”, a legitimate interest in the performance of the contract or some appropriate alternative to performance that goes beyond compensation. But, in such cases, the inquiry as to whether a clause is unenforceable as a penalty will simply depend on the court’s assessment of whether the clause has a deterrent purpose or is a genuine pre-estimate of loss and not on a different legal test.

14.  In the present case, on the issue of whether the late charge was a penalty, the Court of Appeal concluded (at [40]) that it was not intended to be imposed by the Society as part of the disciplinary regime to punish and deter its members. It also concluded (at [45]-[49]) that the Society had a legitimate interest in imposing the late charge, viz. to ensure members’ compliance with their undertaking to produce their solicitor’s practising certificate (which certificate entitled them to be registered as practising notaries).

15.  The Court of Appeal held (at [51]), applying the principles in Law Ting Pong, that the late charge was not a penalty in nature. For that reason, the Court of Appeal did not separately go into the question of whether the late charge represented a general approximation of the extra expense involved since, as noted at [52], “this exercise has been subsumed into the question of whether the sum itself is so extravagant and out of all proportion to the legitimate purpose it is to serve”.

16.  In the circumstances, in particular the way the applicant argued his case before the Court of Appeal, we do not accept that Question 1 arises and, furthermore, there is no proper basis for allowing the applicant to advance a new and different case in the Court of Final Appeal to that advanced below. In any event, it is not reasonably arguable that the late charge is a penalty, whether the traditional Dunlop test or the Cavendish approach adopted by Law Ting Pong is applied. On the facts of this case, it was plainly open to the Court of Appeal to conclude that the Society had a legitimate interest in ensuring its members’ compliance with their undertaking to provide their solicitors’ practising certificates in a timely manner that went beyond mere notions of compensation. Furthermore, the applicant never challenged the evidence of the Secretary General of the Society, Ms Margaret Lau, which the Judge had examined in detail in the Court of First Instance and accepted, and which provides a cogent basis for concluding that the late charge is an attempt to estimate the Society’s costs of dealing with the late submission of a practising certificate in breach of the undertaking given. The Court of Appeal dealt (at [41]-[43]) with the applicant’s complaints based on the late disclosure of minutes of the Council of the Society concerning the imposition of the administrative charge. In our view, the Court of Appeal was right to conclude that these did not assist the applicant.

17.  In light of our refusal to grant leave to appeal in relation to Question 1, any basis for granting leave to appeal in respect of Questions 2, 3 or 4 substantially falls away. Question 2 is, in any event, fact specific and, for the reasons set out above, it is not reasonably arguable that the administrative charge was unenforceable as a penalty. Question 3 is framed too broadly and, in any event, does not arise from the Court of Appeal’s judgment. Question 4 proceeds on a false premise, since the way the case was argued in the Court of Appeal was because of the parties’ common stance as to the applicable test. In any event, whether the Society has a legitimate interest in ensuring members’ compliance with the undertaking in question is a fact specific question and, in our view, it is not reasonably arguable that the Court of Appeal was wrong to conclude in favour of the Society on this issue on the evidence before it.

18.  For these reasons, we dismissed the application with costs to the Society.

ANNEX

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 (“Law Ting Pong”) applying Cavendish Square Holding BV v Makdessi and ParkingEye Ltd v Beavis [2016] AC 1172 (“Cavendish”). (“Question 1”)
 

2. Whether the Late Charge is an unenforceable penalty. (“Question 2”)
 

3. Whether the Decision of the Society as a whole (including the imposition of the Late Charge) is amenable to judicial review. (“Question 3”)
 

4. Whether the Respondent should be allowed to argue a new case, which was not raised by the Respondent or supported by evidence before the Court of First Instance (“CFI”), but asserted only by counsel for the Respondent at the hearing of the appeal before the CA, 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 CFI), but for the purpose of “ensuring the members’ compliance of the Undertaking”. (“Question 4”)