Archive for the ‘liquidated damages’ Category

Agreement determines whether landlords must give credit for security deposit when enforcing a judgment against tenant

February 3, 2017

In Power Plus Ltd v Fruit Design & Build Ltd ([2016] 5 HKLRD 707, LT) the tenant of a flat paid a security deposit of HK$150,000 at the commencement of the tenancy. The forfeiture clause provided that this would be forfeited to the landlord ‘as liquidated damages’ should the tenant be in breach of its obligations under the terms of the lease. The tenant fell into arrears with the rent and the landlord obtained judgment for the sum of HK$105,000. The question was whether the landlord could forfeit the deposit and, in addition, enforce the judgment.

The Lands Tribunal (Judge Wong King Wah) decided that whether this was possible or not depended on the terms of the lease. In this case, on a proper interpretation of the forfeiture clause, the landlord was not entitled to forfeiture and to enforce the judgment without giving credit for it ([15]). The parties’ intention was that the security deposit should be liquidated damages in respect of any claim that the landlord might have against the tenant in respect of the lease.

Michael Lower

Delay in accepting repudiatory breach.

June 27, 2013

In Cheung Ching Ping Stephen v Allcom Ltd ([2010] 2 HKLRD 324, CA) S and P entered into a provisional sale and purchase agreement. P paid an initial deposit of $1 million. The agreement provided that if S were to fail to complete it would refund the deposit and pay a further $1 million as liquidated damages.

S failed to complete on time. P wrote twice to S, reserving its rights but seeking information as to S’ progress in dealing with the matters that had to be attended to before completion could take place. After two months, P wrote to S to withdraw from the transaction. P sought the return of the deposit and the further sum of $1 million by way of liquidated damages.

The first question was whether P had lost the right to accept the repudiatory breach by waiting for two months. It was held that this delay did not mean that it had lost the right to accept the breach. The question was whether the delay was only consistent with an affirmation of the contract (or perhaps whether something material had happened in the interval between the breach and the acceptance of it) ([21]). P was entitled to accept the breach despite the delay.

P was not entitled to the $1 million by way of liquidated damages. There was nothing to show that this was a genuine pre-estimate of the damage caused by S’ breach. This was an application for summary judgment. There was to be an enquiry as to damages and the question as to whether $1 million was a genuine pre-estimate could be argued at that enquiry.

Michael Lower

Deposit or penalty? The court can order repayment of a penalty that has already been paid.

June 26, 2013

Workers Trust & Merchant Bank Ltd v Dojap Investments Ltd ([1993] AC 573, PC) was an appeal to the Privy Council from the Court of Appeal of Jamaica. A purchaser had paid a 25% deposit and this had been forfeited by the vendor when the purchaser failed to complete on time (time being of the essence for completion). The purchaser successfully sought relief from forfeiture of the deposit.

Lord Browne-Wilkinson explained that in general a provision that a party in default is to pay or forfeit a sum of money is an unlawful penalty unless the sum in question can be shown to be a genuine pre-estimate of damages. There is an exception to this general rule in the case of deposits; these can be forfeited even where they bear no relation to the anticipated loss of the innocent party (p. 578).

For a sum to be treated as a deposit it must be a sum that can reasonably be described as a deposit. Since it is difficult to say what sum would be a reasonable deposit, the approach is to accept (without searching for any further explanation) that it is long established custom and usage in the United Kingdom and Jamaica to accept a 10% deposit as being reasonable in those jurisdictions. It is for a seller wishing to rely on any larger sum to show what special circumstances would justify the larger deposit (p. 580). A reference to market practice at the time of the contract does not amount to such a justification (pp. 579 – 580).

Here the vendor had not been able to show why a larger (25%) deposit was justified. As a result, the entire sum (not merely the excess over 10%) was treated as a penalty. The court had jurisdiction to order the vendor to repay the entire sum less the amount of any damage actually suffered by the vendor as a result of the purchaser’s breach (p. 582).

Michael Lower

Can the standard requirement to pay a sum equivalent to the deposit as liquidated damages be enforced?

June 25, 2013

In Chan Yuen Ka Crystal v Chu Cheong Kit Raymond ([2009] HKEC 1705, CFI) the provisional sale and purchase agreement provided that should the seller fail to complete the sale then he was to refund the deposits paid and pay an additional sum equivalent to the deposit as liquidated damages. The clause went on to provide that if the seller were to do this then the purchaser had no right to claim damages or seek specific performance.

The seller was unable to complete. The question was whether the buyer could require the seller to make the payment of liquidated damages just referred to.

There was no doubt that the deposit(s) had to be returned. Rogers V-P was of the view, however, that the buyer could not enforce the requirement to pay the equivalent sum as liquidated damages; this was a penalty unless the buyer could show that it was a genuine pre-estimate of damages.

Unless the buyer could do this, the seller had an option either (i) to comply with the clause (repay the deposits plus the additional sum) as an alternative method of performance of the contract or (ii) to return the deposit(s) and accept that the buyer might bring an action against him for damages for breach of contract ([31] – [32]).

Michael Lower

Deposits, liquidated damages and penalties

October 12, 2012

In Polyset Ltd v Panhandat Ltd [2002] 3 HKLRD 319, CFA) S agreed in May 1997 to sell property to P for HK$115 million. Completion was due to take place nine months after the date of the contract. P paid a deposit of HK$40.25 million (35%  of the purchase price). The contract expressly justified the larger than usual deposit on the basis of the longer than usual period between contract and completion. P later alleged a breach of contract and refused to complete. The Court of Final Appeal agreed with the Court of Appeal that S was not in breach of contract. The question was whether S could keep the deposit which exceeded S’s actual loss (HK$ 33million) by just over HK$ 7 milion. It held (Litton NPJ dissenting) that the deposit in this case was excessive and so the seller was not entitled to forfeit it.

The Court of Final Appeal distinguished between a liquidated damages clause and a deposit. A liquidated damages clause is intended to replace a claim for breach of contract. If it represents a genuine attempt to quantify the damages that might be payable in the event of breach then effect will be given to it. It then prevents any claim to the effect that the amount is too large or too small. If the liquidated damages payable are excessive so that they cannot be said to be a pre-estimate of the damages payable but are, instead, an attempt to terrorise the other party into performance then the liquidated damages clause is a penalty and the court will strike down the liquidated damages clause.

A deposit is quite different from a liquidated damages clause. A payment in advance is properly classified as a deposit if  it is intended both as part payment of the purchase price and as a proof that the buyer is serious about the transaction. It is not intended to substitute for a claim for breach of contract; in principle, a seller can keep the deposit and bring an action for breach (giving credit for the deposit if the claim is successful). If the deposit is not excessive then effect will be given to the contractual intention in its regard (usually that the seller can keep the deposit if the purchaser fails, without legal justification, to complete).

Where, however, the deposit is excessive the seller will not be allowed to keep it. When deciding whether or not a deposit is excessive, it is not appropriate to ask whether or not it represents a genuine pre-estimate of loss. That question is relevant to the evaluation of a liquidated damages clause but not to the contractual provisions concerning a deposit.  A deposit that is in line with usual practice (10% of the purchase price in Hong Kong) is not excessive. A deposit that is larger than the customary deposit is excessive unless there were special circumstances to justify it.

Ribeiro PJ summarised the position thus:

‘In the light of the foregoing authorities, the proper approach to unusually large deposits may be stated as follows.

(a) Where (in the absence of fraud or vitiating factors other than excessiveness) the amount of an agreed deposit matches or is less than the conventional amount, its forfeiture will not attract judicial scrutiny, whether or not the innocent party has suffered any loss as a result of the other party’s breach.
(b) Where the deposit exceeds the conventional amount, that is, 10% in Hong Kong, forfeiture is only permitted if the party seeking to forfeit can show that exceptional circumstances justify the higher amount.
(c) Such exceptional circumstances must relate to a true deposit’s purpose as an earnest of performance and as compensation for the vendor’s withdrawal of his asset from the property market pending completion, providing an objective justification for the higher sum.
(d) If such justification is not forthcoming, the courts will not recognize the amount as a true deposit but will treat it as an advance payment towards what was payable under the contract and recoverable as such, subject to the innocent party’s entitlement to deduct damages for any actual loss suffered as a result of the other party’s breach.’ (para. 90)

A 35% deposit was excessive.  The lengthy gap between contract and completion might justify a larger than usual deposit but not a deposit as large as that paid in the present case.  Hence, P could not be allowed to forfeit the deposit but was only entitled to its actual loss. The safest course for a seller is to accept the customary deposit and to have a clause that allows him to re-sell and to claim the loss on sale and the costs of sale as liquidated damages. A seller should accept that a deposit that is several times larger than the customary deposit is likely to be impermissible (para. 108).

Seller seeking to rely on liquidated damages clause after due date for completion had passed

August 7, 2012

In Earnest Enterprises Ltd v Yip Fung ([2012] HKEC 1096, CFI) B entered into a provisional sale and purchase agreement to buy a flat from S. As provided for in the agreement B paid HK$200,000 by way of deposit and then a further deposit of HK$210,000. No formal agreement was entered into other than the provisional agreement. B gave several extensions of time for completion but the date was eventually fixed.S failed to complete.  B sought specific performance and / or damages in lieu. S offered to refund the deposits paid and a further HK$200,000 by way of liquidated damages. S sought to invoke the liquidated damages clause in the sale and purchase agreement. S failed for two reasons. First, it was no longer possible to rely on the liquidated damages clause as drafted once the completion date had passed. Second, in any event S would have to offer liquidated damages of HK410,000 (the total of the deposits paid) and not merely an amount equal to the first of the deposits. B was entitled to specific performance and damages.

Effect of a liquidated damages clause in a sale contract (Roman-Dutch law)

May 3, 2012


Abdul Cader Abdeen v Abdul Careem Mohamed Thaheer ([1958] 2 W.L.R. 350, PC) was an appeal to the Privy Council from the Supreme Court of Ceylon (Sri Lanka). It concerned an agreement to sell land. The agreement was governed by Sri Lanka’s Roman-Dutch law. Under this system of law there is a legal right to demand specific performance (that is, specific performance is the legal default and not the result of an equitable discretion). The contract provided for the sale of land and for the payment of liquidated damages in default. The sellers refused to proceed and the buyer sought specific performance. This was refused. On its proper interpretation, the contract gave the sellers two equally valid ways of performing the contract; they could either execute the conveyance or pay the liquidated damages. There was no room for specific performance of the former mode of performance; the latter was equally available to the sellers.