Posts Tagged ‘penalty’

Building management: Management fee for handling renovation works needs owners’ approval

September 9, 2016

In Flora Garden (IO) v Li Do Wai ([2016] HKEC 1830, LT) the owners’ meeting approved the carrying out of renovation and improvement works at the estate. The incorporated owners added a 10% fee on top of the cost of the works to cover consultancy, contract and administrative fees and other ancillary costs (‘ancillary costs’). The owners’ meeting had approved the cost of the works but not the ancillary costs. When the works were complete, each owner was asked to pay the due share of the cost of the works including the ancillary costs. Deputy Judge Kot held that the ancillary costs could not be charged to the owners. They had not been approved by the owners nor had this aspect of the works been put out to tender. The incorporated owners’ submission that owners had paid such costs before without express approval and that this practice provided the necessary authorisation failed ([33] – [36]).

The DMC authorised the owners’ corporation to levy a 5% surcharge on late payers as well as a collection charge of HK$150. A demand for these sums was made of the owners who had paid late. They argued that these sums were a penalty and so irrecoverable. This argument failed. It did not matter that the sums were not a genuine pre-estimate of loss. The surcharge clause protected a legitimate commercial purpose of the incorporated owners and was not extravagant or unconscionable in amount ([47] – [48]).

Michael Lower

Penalty or pre-estimate of loss: an inadequate dichotomy.

January 20, 2016

In Cavendish Square Holding BV  v Talal El Makdessi and Parking Eye Limited v Beavis ([2015] UKSC 67]) the UK Supreme Court addressed fundamental issues concerning the law of penalties in two cases. One concerned provisions in a very substantial share sale; these provided for the sellers first to lose their entitlement to very substantial installments of the sale price and, second, to transfer their remaining shares to the buyers at a reduced price which left goodwill out of account. These provisions would take effect if the sellers defaulted by soliciting customers for a competing business or working for a competitor. The sellers defaulted and these provisions were invoked by the buyers. The sellers contended that these provisions were penalties and unenforceable. The other concerned a provision whereby motorists agreed that they would pay GBP 85 if they overstayed a two hour free parking limit. A motorist overstayed (by 56 minutes) and Parking Eye Limited (which operated the car park on behalf of its owner) demanded the GBP 85. The motorist contended that it was a penalty. The Supreme Court was unanimously of the view that none of the provisions just outlined amounted to a penalty.

Penalties are clauses that operate in the event of a breach of a primary obligation by a contracting party. They may provide for the payment of money, the transfer of property or the loss of the right to receive money (such as purchase price installments) from the other contracting party. Where any such provision: (a) serves a legitimate commercial interest; and (b) is not  unconscionable or extravagant then it is enforceable. Otherwise, it is a penalty and unenforceable. The idea that the sum payable or forfeited must always be a genuine pre-estimate of loss occasioned by individual breaches of contract is too narrow an approach to the question as to whether or not there is a penalty. One has to look more broadly at whether the provision in question protects some legitimate interest or purpose of the innocent party.

The common law concerning penalties and the equitable jurisdiction to grant relief from forfeiture have common origins and serve similar purposes. They are, nonetheless, distinct from each other and might each be applicable in a particular case. Thus, the court might determine that a particular provision is not a penalty and then go on to consider whether it should grant relief. There is a ‘safe haven’ for the forfeiture of deposits that are restricted to the amount that is customary in a given jurisdiction. If a provision is a penalty, it is completely unenforceable, the courts cannot allow the provision to be partially enforced.

In Cavendish Square, a large proportion of the very substantial purchase price was attributable to goodwill. The clauses restricting the sellers from soliciting clients or engaging in a competing business were designed to protect the goodwill. This was the legitimate commercial purpose of the provisions. Where the sellers broke these clauses, it was not extravagant or unconscionable for them to lose the right to receive payments of the purchase price that were intended to reflect the ongoing value of this goodwill. On balance, the Supreme Court was of the view that the sellers’ obligation to transfer their remaining shares in the company to the sellers at a reduced price could be justified on the same grounds.

As for the car parking case, the legitimate interest was to secure an adequate turnover of traffic on a car park that served a shopping outlet and to prevent the availability of free parking from being abused by people who were not shoppers at the retail outlet. The provision for overstaying also funded the operating costs of the car park and made the offer of free parking possible. The amount of the charge for overstaying was in line with industry guidelines for car park operators and was clearly publicised so that motorists would be aware of it before they entered the car park.

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