HANG SENG FINANCE LTD. v. LIU KWOK MAN

    Hire Purchase - Punctual payment of instalment made essence of contract - Default by hirer of 2 instalments - Repudiation - Acceptance by owner - Recovery of damages other than arrears of instalments.

IN THE DISTRICT COURT OF HONG KONG

CIVIL JURISDICTION

CASE NO. 8750 OF 1991

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BETWEEN

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J U D G M E N T

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1. This is an assessment of damages pursuant to an interlocutory judgment entered in default of defence.

2. The Plaintiff is a finance company. By an Agreement dated 12th June 1990 ("the Agreement") the Plaintiff and the Defendant entered into a hire purchase agreement of a Mazda 121 motor vehicle. Under the Schedule of the Agreement, the Defendant agreed to make an initial payment of $29,825 on the making of the agreement and to pay 36 monthly instalments of $2,973.00 each payable on the 12th day of each succeeding month beginning on the 12th July 1990.

3. The Defendant paid the initial payment of $29,825.00 and one instalment in the sum of $2,973.00 but had failed to make further payment under the Agreement.

4. By a letter dated 14th September 1990, the Plaintiff informed the Defendant that as he had failed to pay two instalments under the Agreement, he had repudiated the Agreement and the repudiation was accepted by the Plaintiff.

5. The vehicle was repossessed and on 5th January 1991 the Plaintiff sold the vehicle at the sum of $44,500.00

6. The Plaintiff is seeking damages set out as fellows :

Total hire purchase price					$136.853
Less	(i)	Initial cash payment	$29,825.00
	(ii)	1 instalment paid	2,973.00
	(iii)	Net proceeds of sale of the vehicle after deduction of $495 repossession charges, $1,120 storage charge $5,500 fixed traffic penalty and $13,600 policy excess	23,335.00
	(iv)	Rebate of hire charges in accordance with the Rule of 78	22,766.82	$78.899,82
				$57,953.18

7. The principle governing damages for hire purchase agreements is that when an owner determines a hire-purchase agreement in exercise of a power so to do given him by the agreement on non-payment of instalments, in the absence of repudiation he can recover damages for any breaches up to the date of termination but not thereafter and a 'minimum payment' clause which purports to oblige the hirer to pay larger sums than this is unenforceable as a penalty (Financings Ltd v. Baldock [1963] 2 Q.B. 104. Ordinarily, a mere failure to pay one or two instalments, even after receiving a reminder or warning letter, would not amount to repudiation by the hirer (United Merchant Finance Limited v. Tang Woon Wing [1980] D.C.L.R. 53.

8. Mr. Kwok, solicitor for the Plaintiff, in a thorough and well reasoned submission, argued that the punctual payment of the instalments was treated as essence of the agreement by the provisions of Clause 1. The failure to do so by the Defendant amounted to repudiation which entitled the Plaintiff to recover, apart from the arrears of instalments up to the time of the termination of agreement, damages.

9. I will set out some of the relevant clauses of the Agreement :

10. Clause 1. The Hirer shall pay to the Owners (a) on the signing hereof the sum shown as Initial Payment set out in the Schedule and (b) thereafter the hire rent as specified in the Schedule promptly so long as this Agreement shall continue notwithstanding that no demand therefor shall have been made by the Owner. Punctual payment of each and every amount of hire rent shall be the essence of this Agreement (emphasis added). Any payment sent by post shall be at the Hirer's risk. In default of punctual payment (but without prejudice to the Owners' rights hereunder) the Hirer shall pay interest on any overdue rent or other payments at the rate of 2% per calender month from the due date thereof to the date of actual payment (whether before or after judgment). The Hirer hereby expressly agrees that any sums received from the Hirer may be appropriated by the Owners for the payment of any money due by the Hirer to the Owners hereunder whether as hire rental, as interest or for reimbursement of any payments made by the Owners under this Agreement or otherwise howsoever.

11. Clause 13(a). If the Hirer (i) shall make default in payment of any of the sums payable hereunder, .......... the owner may, without prejudice to any pre-existing liability of the Hirer to the Owners, by notice in writing to the Hirer determine this Agreement and thereupon this Agreement and the hiring thereby constituted shall for all purposes be determined (emphasis added) and thereafter the Hirer shall no longer be in possession of the goods with the Owners' consent and subject to the provisions of Clause 16 hereinafter and any pre-existing liabilities as aforesaid neither party shall have any rights against the other.

12. Clause 16. Upon the termination of this Agreement as provided in Clause 12(a), 13, 14 and 15 of this Agreement, the Owners shall be entitled to repossess themselves of and remove the Vehicle whereupon the Hirer shall deliver up to the Owners the licence, certificate of insurance and all other documents in relation to the Vehicle and the Hirer shall pay to the Owners :

(a) all arrears of hire (apportioned if necessary) together with interest accrued thereon pursuant to Clause 1 hereof up to the date of determination of this Agreement; and

(b) all costs incurred by the Owners in repossessing the Vehicle, storage charges incurred up to the date of the sale of the vehicle by the owner; and

(c) all storage charges incurred or accrued up to the date of the sale of the Vehicle by the Owners; and

(d) any sums payable by the Hirer pursuant to the provisions of Clause 6, 7 and 11 hereof; and

(e) the expenditure (if any) incurred by the Owners in putting the Vehicle into good repair and resaleable condition; and

(f) all fixed penalty payment and/or other fines in relation to the Vehicle whether incurred before or after the determination of this Agreement until the tram for of registration of the Vehicle out of the name of the Hirer.

(g) any legal costs incurred by the Owners to enforce any provision hereof and/or to recover any money payable hereunder whether incurred before or after commencement of legal proceedings on lawyer-own-client basis including but not limited to any costs for letters of demand.

(h)    a sum for damages suffered by the Owners which shall be equal to the sum which is equal to the actual sum advanced by the Owners (as stated in the Schedule) at the commencement of this Agreement plus interest thereon calculated at a rate of 2 per cent per month up to the termination hereof LESS the aggregate of the following items :

(i)    all instalments of rental paid prior to the date of repossession plus any sums recovered under sub-clause (a) above.

(ii)    the best price obtainable by the Owners on the resale of the Vehicle less any deductions for expenses incurred in such resale PROVIDED THAT the Hirer expressly agrees that the Owners in reselling the Vehicle shall be obliged to offer the same only to persons whose business is that of dealing in motor vehicles and that the best offer received and accepted by the Owners from such a dealer for the Vehicle shall be agreed by the Hirer in all circumstances to be the best price obtainable as aforesaid.

13. In Lombard North Central plc v. Butterworth [1987] 1 All E.R. 267, the plaintiffs, a finance company, leased a computer to the defendant for a period of 5 years on payment of an initial sum and 19 subsequent quarterly instalments. Clause 2(a) of the hiring agreement made punctual payment of each instalment of the essence of the agreement and under Clause 5 failure to make due and punctual payment entitled the plaintiffs to terminate the agreement. By Clause 6, the plaintiffs were entitled on termination to all arrears of instalments and all future instalments which would have fallen due had the agreement not be terminated. Although the defendant paid the first two instalments promptly, the next three were paid very belatedly, and on four occasions payment made by direct debit was recalled by the bank. When the sixth instalment was six weeks overdue the plaintiffs wrote to the defendant terminating the agreement. Subsequently the plaintiffs recovered possession of the computer and sold it, the plaintiffs brought an action against the defendant claiming the amount of the unpaid sixth instalment and the 13 future instalments or alternatively, damages for breach of contract.

14. The Court of Appeal held that, in the absence of a repudiatory breach, Clause 6 created a penalty and was unenforceable in so far as it purported to require the defendant to make payment in respect of rental instalments which had not accrued at the date of termination regardless of the seriousness or triviality of the breach which resulted in the plaintiffs terminating the agreement. Furthermore, the repeated failure of the defendant to pay the instalments punctually did not justify the court drawing the inference that he had thereby evinced an intention not to adhere to his obligation under the agreement to make punctual payment and therefore, even bearing in mind the commercial objective of the agreement so far as it concerned the plaintiffs, the defendant's conduct in failing to make punctual payment did not amount to a repudiation by him of the agreement.

15. The Court of Appeal, however, accepted the Plaintiff's submission that time having been made of the essence by the agreement, it was opened to the plaintiffs, once default in payment of any one instalment on the due date had occurred, to treat the agreement as having been repudiated by the defendant, and claim damages for loss of the whole transaction, even though in the absence of this provision such a default would not have had that consequence. Nicholls L.J. held that,

    "On this, the question which arises is one of the construction : on the true construction of the clause, did the 'time of essence' provision have the effect submitted by the plaintiffs? In my view, the answer to that question is yes. The provision in clause 2(a) has to be read and construed in conjunction with the other provisions of the agreement, including clauses 5 and 6. So read, it is to be noted that failure to pay any instalment triggers a right for the plaintiffs to terminate the agreement by retaking possession of the goods (clause 5), with the expressed consequence that the defendant becomes liable to make payments which assume that the defendant is liable to make good to the plaintiffs the loss by them of the whole transaction (clause 6). Given that context, the time of the essence provision seems to me to be intended to bring about the result that default in punctual payment is to be regarded (to use a once fashionable term) as a breach going to the root of the contract and, hence, as giving rise to the consequences in damages attendant on such a breach. I am unable to see what other purpose the time of the essence provision in clause 2(a) can serve or was intended to serve or what other construction can fairly be ascribed to it."

16. It is to be noted that the Court of Appeal reached this conclusion with considerable dissatisfaction. Nicholls L.J. said that the difference between an agreement which entitles an owner to terminate the agreement on non-payment of instalments and one which made time to be essence is of drafting form and wholly without substance. He said that,

    "Yet under an agreement drafted in the first form, the owner's damages claim arising on his exercise of the power of termination is confined to damages for breaches up to the date of termination, whereas under an agreement drafted in the second form the owner's damages claim, arising on his acceptance of an identical breach as a repudiation of the agreement, will extend to damages for loss of the whole transactions. Nevertheless, as at present advised, I can see no escape from the conclusion that such is the present state of the law. This conclusion emasculates the decision in Financings Ltd. v. Baldock, for it means that a skilled draftsman can easily side-step the effect of that decision. Indeed, that is what has occurred here."

17. In the present case, Clauses 1, 13(a) and 16 are similarly to the clauses construed by Nicholls L.J.. Clause 1 made punctual payment of the instalments to be the essence of the Agreement and the effect of non payment would entitle the Plaintiff to terminate the Agreement and recover possession of the vehicle pursuant to Clause 13(a). Upon termination of the Agreement the Plaintiff was entitled under Clause 16 to recover damages therein stated. Clause 16 of the Agreement, in the absence of any repudiatory breach, was obviously a penalty clause. It required the Defendant to pay substantial sums of money, some of which were not due at the time of the termination of the Agreement, irrespective of the nature of the breach. However, applying the reasoning of Nicholls L.J., the combined effect of Clauses 1, 13(a) and 16 would have the effect of treating the failure by the Defendant to pay two instalments as a breach which went to the root of the Agreement and which would entitled the Plaintiff to recover the damages as claimed. This is indeed what the Plaintiff had done in the present case. It had accepted the repudiation of the Defendant who had failed to pay two instalments under the Agreement.

18. I find that the Plaintiff is entitled to the sum of $57,953.18 as damages. Interest at 10% per annum is awarded on this sum from 10th July 1991, which was the date of the service of writ, to date and thereafter at judgment rate until payment. The Plaintiff is further awarded costs of the assessment.

Dated the 3rd day of October 1991.