GILMAN OFFICE AUTOMATION v. GL DESIGN LTD. & ANOTHER

HCSA33/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

SMALL CLAIMS APPEAL NO.33 OF 2001

(APPEAL FROM SMALL CLAIM NO. 6164 OF 2001)

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J U D G M E N T

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1. This is an appeal by the 2nd defendant against the award made by the adjudicator of the Small Claims Tribunal on 28 May 2001, whereby she ordered that the defendants to pay the claimant a total sum of $41,651.80, together with interest and costs.

Dispute

2. The dispute arose out of an agreement entitled Easy Print Plan Agreement dated 28 September 1999 ("the Agreement"), under which the claimant agreed to provide the 1st defendant with exclusive possession and use of the subject photocopying machine for charge as stated therein. The 2nd defendant signed a guarantee also dated 28 September 1999 as guarantor to secure the 1st defendant's liabilities under the Agreement.

3. Under the Agreement, upon the default of the 1st defendant, the claimant was entitled to terminate the Agreement, repossess the machine and clam for damages. It is not in dispute that the 1st defendant defaulted in payments of the charges and the machine was repossessed on 3 February 2000. The remainder of the terms under the Agreement was 42 months. At the proceedings below, the 1st defendant was not represented. The 2nd defendant is obviously liable under the guarantee. The only question is on the extent of his liability which turns on a proper assessment of the loss and damage the plaintiff had suffered by reason of the 1st defendant's breach of the Agreement.

4. Under Clause 17 of the Agreement, if the claimant gave notice of termination, the 1st defendant must inter alia immediately pay the claimant the payout value for the machine calculated as at the day of the notice as liquidated damages for the loss of bargain. In short, the payout value claimed was the aggregate of the charges for the reminder of the terms under the Agreement. Under Clause 17.5, when the 1st defendant paid the claimant the payout value, the claimant would refund to the 1st defendant the amount calculated to be a fair allowance of any savings to them, because it is no longer required to provide maintenance service under the Agreement.

5. The claim originally lodged with the Small Claims Tribunal consisted of several heads : (a) arrears of charges in the sum of $4,797.90, which was not in dispute; and (b) loss of bargain, calculated pursuant to Clause 17 of the Agreement.

6. The machine, after repossession, laid idle for two months until the claimant managed to enter into another Easy Print Plan Agreement, in similar terms, with Dah Chong Hong Limited on 30 March 2001 for a period of 60 months ("the DCH Agreement").

Assessment by the adjudicator

7. How the Adjudicator assessed the damages suffered by the claimant can be seen at page 5 of her reasons for decision where she said :

"This Tribunal has also noted that the Claimant, being one of the well-known office machine companies in Hong Kong, also have a large stock of machines other than the subject machine, and that by involving the subject machine in the new agreement, there is an opportunity cost suffered by the Claimant because the Claimant could have used another machine instead of the subject machine and earned the same income. Of course, there is promotion costs, such as commission, involved as well. This Tribunal has arbitrarily set 30 per cent of the income derived from the subject machine for the remaining 42 months as the opportunity costs of the Claimant."

Then she went on to make the calculation.

8. It is clear from the transcript of the proceedings below that the claimant did not advance their case on loss of opportunity costs or promotion costs. In my view, there is simply no factual basis for the Adjudicator to approach the assessment in the way she did. She did not cite any authority in support of this approach, and Ms Yeung, counsel appearing for the claimant did not cite any authority in support either. In the course of submissions, I have indicated the correct approach to the assessment, which counsel did not seek to disagree.

Proper approach

9. The proper approach, in my view, is this. One starts with the Agreement first. The question is whether the provisions in the Agreement governing the calculation of liquidated damages are genuine provisions for damages or penalty clauses. Unfortunately, it would appear that this issue was not in the mind of the Adjudicator. She had not carried out any proper investigation into the matters pertaining to this issue and there is no finding by her, one way or the other, whether the clauses are genuine provisions for liquidated damages or penalty.

10. If the clauses are found to be penalty clauses and are, therefore, liable to be struck down, one should next consider how the damages should be assessed under the common law. Such damages would be those within the reasonable contemplation of the parties and, in the present case, they are the loss of profits that the claimant had suffered as a result of the 1st defendant's breach. For the first two months after repossession of the machine, the calculation of profits should be by way of deduction from the charges the maintenance costs. After the DCH Agreement was made, the position became more complicated. In essence, the loss of profits is the difference between (1) the profits the machine would have been able to generate under the Agreement for the remainder of the terms but for the 1st defendant's breach; and (2) the profits it will generate under the DCH Agreement for the same period. The calculation of (1) is relatively straightforward : the maintenance costs are to be deducted from the charges for the remainder of the terms. For (2), there is some difficulty. Under the DCH Agreement, there are altogether 12 machines. Ms Yeung submitted that it would be very difficult to make an appropriate apportionment and come to an exact figure on the profits generated by this particular machine. That may well be the case, but the Adjudicator ought to have made proper inquiry in this respect and did the best she could with regard to all the circumstances. In principle, the charges and maintenance costs attributable to the subject machine have to be worked out and the difference between the two figures represent the profits.

Conclusion

11. In my view, that is how the matter should be approached. Since the Adjudicator's assessment of the damages is not supported on either factual or legal basis, and she had approached the matter wrongly, her award cannot stand and should be set aside. This matter ought to be revisited by adopting the approach that I have just outlined above. The parties also agree that this is the appropriate course to take. I will therefore allow the appeal, set aside the award of the Adjudicator and remit the case back to the Small Claim Tribunal for retrial by another adjudicator.

12. In light of my ruling, I do not propose to make any order on the costs of this appeal.