Hang Seng Credit Card Ltd v Tsang Nga Lee

Overview

Hang Seng Credit Card Ltd v Tsang Nga Lee [2000] 3 HKLRD 33 is a landmark decision of the Court of First Instance of Hong Kong in which Yam J held that a clause in a credit card agreement obliging a defaulting cardholder to pay, on a full indemnity basis, all costs and expenses incurred by the card issuer in enforcing the agreement was unconscionable under the Unconscionable Contracts Ordinance (Cap. 458), and therefore unenforceable. The decision disposed of ten undefended debt actions brought in the High Court by card issuers and banks, and the court decided the question of unconscionability although none of the defendants had taken part in the proceedings, hearing argument instead from an amicus curiae. It has since been regarded as an exceptional case in which the court declined to give effect to a contractual agreement as to costs. The judgment also remarked on the high effective rates of interest charged by the plaintiffs and declined to follow an earlier decision permitting claims of small value to be pursued in the High Court rather than in the District Court. Within three months the Hong Kong Monetary Authority issued proposals, later incorporated into the Code of Banking Practice, under which costs indemnity clauses in banking agreements were to be limited to costs of a reasonable amount that had been reasonably incurred.

The Unconscionable Contracts Ordinance

The Unconscionable Contracts Ordinance was the result of the 1990 report of the Law Reform Commission of Hong Kong on the sale of goods and supply of services, which recommended that a provision modelled on section 52A of the Australian Trade Practices Act 1974 be adopted to control harsh or unconscionable terms in consumer contracts for the sale of goods and the supply of services. Among the examples the Commission gave of terms that might be considered harsh or unconscionable was "the provision providing for a defaulting borrower to indemnify the costs of obtaining judgment against him" in credit card agreements. It observed that such provisions were "unpopular with the High Court Masters", and that solicitors acting for card issuers often sued in the High Court even where the debt was well within the jurisdiction of the District Court, so that the costs which the debtor was ordered to pay on a full indemnity basis were inflated. The Ordinance came into operation on 20 October 1995 and applies only to contracts made after that date. Section 5(1) provides that where, in a contract for the sale of goods or the supply of services in which one party deals as consumer, the court finds the contract or any part of it "to have been unconscionable in the circumstances relating to the contract at the time it was made", the court may refuse to enforce the contract, enforce the remainder without the unconscionable part, or limit, revise or alter that part so as to avoid an unconscionable result. By section 5(2), the burden of proving unconscionability lies on the party alleging it. The Ordinance does not define unconscionability; section 6(1) instead lists, without limitation, matters to which the court may have regard, namely the relative strengths of the parties' bargaining positions; whether the consumer was required to comply with conditions not reasonably necessary to protect the other party's legitimate interests; whether the consumer was able to understand the relevant documents; whether undue influence, pressure or unfair tactics were used; and the amount for which, and the circumstances in which, the consumer could have obtained identical or equivalent goods or services elsewhere.

Contractual costs and the court's discretion

In Hong Kong, as in England, the costs of High Court proceedings are in the discretion of the court under section 52A of the High Court Ordinance (Cap. 4) and Order 62 of the Rules of the High Court. Where the parties have agreed that costs are to be recovered on a particular basis, the court will ordinarily exercise its discretion so as to give effect to the agreement, but the contract cannot oust the discretion; the Court of Appeal had so held in Chekiang First Bank Ltd v Fong Siu Kin (1997), adopting the English decision in Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2). In an undefended action, the Rules of the High Court provide for modest fixed costs; in 2000 these were $1,550, against $1,380 in the District Court.

Facts and procedural history

The ten actions, all commenced in the High Court in 1999, were brought by Hang Seng Credit Card Ltd, Hang Seng Bank Ltd, Standard Chartered Bank and Pacific Finance (Hong Kong) Ltd against individual cardholders for sums outstanding on their credit card accounts.{{efn|The judgment refers in its opening paragraph to "three different plaintiffs", namely Hang Seng Credit Card Limited, Standard Chartered Bank and Pacific Finance (HK) Limited; the titles of the actions also name Hang Seng Bank Limited as plaintiff in three of them (HCA 15039, 15041 and 15044 of 1999). None of the defendants defended, and default judgment was entered in each case. Each statement of claim pleaded a term of the card members' agreement under which the cardholder was responsible for "all costs and expenses including, without limitation, legal fees on a full indemnity basis" incurred by the issuer in enforcing the agreement or recovering sums owed. On 16 December 1999 Master C. Chan refused to give effect to that term and awarded the plaintiffs only the fixed costs prescribed by the Second Schedule to Order 62, holding that the plaintiffs were subject to an implied obligation to act reasonably in enforcing the agreement. The plaintiffs appealed to the judge in chambers. At the first hearing, on 6 January 2000, only counsel for the plaintiffs appeared. Considering that "a point of law concerning public interest is involved", the court invited an amicus curiae to attend so that the issues could be fully argued. At the adjourned hearing on 5 and 7 June 2000, Paul Shieh appeared for the plaintiffs and Audrey Eu SC as amicus curiae; the defendants were absent. According to the Hong Kong Monetary Authority, the Consumer Council supplied information and assistance to the amicus. The amount at stake in the lead action illustrates the issue. The plaintiff claimed $18,968.76, which the defendant had since paid in full; the costs of an undefended High Court action taxed on an indemnity basis, according to information supplied to the court by the Registrar, ranged between $25,000 and $32,000.

Judgment

Yam J dismissed the appeals. He framed the principal question as whether the costs provision was unreasonable, as the Master had held, or, as the amicus contended, unconscionable and so unenforceable under the Ordinance.

Costs provisions and the court's discretion

The judge accepted that a contractual provision for indemnity costs is not in itself contrary to public policy, and that the court will "in normal course of events" give effect to it. Because the contract cannot override the court's discretion as to costs, however, the court was entitled to "look at all the circumstances of the case in the exercise of its discretion and in particular, the provisions in the UCO". None of the authorities on contractual costs had concerned the Ordinance, and several had been decided before it came into force.

Application of the Ordinance

Counsel for the plaintiffs and the amicus agreed that a credit card agreement is a contract for the supply of services, so that the Ordinance applied. On the burden of proof, Yam J held that although section 5(2) placed the onus on the defendants, the court was not thereby precluded from raising unconscionability where a defendant failed to appear: "It does not mean, however, that when a defendant fails to appear, the issue cannot be raised." The court could consider all available circumstances, particularly where the relevant matters were not specific to an individual consumer, applied generally and were not in dispute.

Unconscionability of the costs provision

Applying the matters listed in section 6, the judge identified four considerations.

Bargaining position. The card issuers were in a much stronger bargaining position. The agreements were standard forms drafted in the issuers' interest without negotiation or consultation, "leaving no choice to the consumer at all". Understanding. Relying on a survey published by the Consumer Council in its magazine Choice, the judge found that issuers did not draw this type of provision to applicants' attention in the application form, and that there was no control over the size of type or the language of the terms. The Hang Seng pleadings alleged only that the cardholder had acknowledged reading and agreeing to the terms, not that a copy had been supplied or the clause explained, and the application form suggested that the terms had to be requested; the other plaintiffs' forms referred to terms "in force from time to time". Alternative sources. A Consumer Council survey of the sixteen credit cards most commonly used in Hong Kong had found that all contained some form of costs reimbursement term. In the judge's words, "the consumer has no real choice. Services are supplied on a take it or leave it basis." Meaning and effect. The provisions were "extremely wide". Standard Chartered's extended to all costs directly or indirectly incurred in collecting or attempting to collect the debt, including the charges of debt collectors; Hang Seng Bank's included sums paid to debt collectors; and Pacific Finance's included administrative costs. Counsel for the plaintiffs submitted that the Master had erred in implying a term that the issuers must act reasonably. Yam J accepted the amicus's answer that it was precisely because no such limitation existed that the provision was unconscionable: an issuer could use associated companies to generate charges, engage the most expensive debt collector or adviser, and continue to incur expenses without any upper limit. Debt collection charges, according to a further Consumer Council study, could amount to 25 to 30 per cent of the debt; and the provision enabled issuers to sue in the High Court without regard to the cost, although the claims lay within the jurisdiction of the District Court and, from 19 October 1999, of the Small Claims Tribunal. The judge rejected the suggestion that the difficulty could be met by ordering taxation on the District Court scale. Unconscionability, he held, is judged at the time the contract was made, and a later, voluntary waiver of part of the entitlement does not alter the meaning or effect of the clause, which in its ordinary meaning extended to all costs and expenses, even those unreasonably incurred: "It just leaves the consumer to the mercy of the other party." He concluded that the costs provision was unconscionable, noting that such clauses were among the mischiefs that had led to the enactment of the Ordinance, and stated that in applying it "the court is not shackled by the traditional or classic theories in contract law".

Relief

Since the defendants had brought no counterclaim, the judge declined to grant declaratory relief and instead allowed the Master's order to stand, so that the plaintiffs recovered only the fixed costs prescribed for undefended actions. He considered that result fair having regard to the provision for fixed costs in the rules, the small sums involved, the delay and further expense that taxation would entail, the routine nature of the proceedings, and the plaintiffs' failure to plead particulars of the costs they claimed. On the last point, he held that legal costs claimed as damages under such a clause are special damage and must be particularised, so that a defendant may know the amount before deciding whether to defend, and the court may decide how costs should be assessed.

Interest rates

The judge further observed that the interest charged was "extortionate". In two of the Pacific Finance actions, the effective rates were 53.69 and 59.65 per cent per annum, figures which exceeded the 48 per cent threshold at which the Money Lenders Ordinance (Cap. 163) presumes a transaction to be extortionate and approached the 60 per cent rate at which lending is an offence and the agreement unenforceable. Because the plaintiffs were authorised institutions under the supervision of the Monetary Authority, the Money Lenders Ordinance did not apply to them, and their rates were not otherwise controlled. The level of interest was, in the judge's view, a further factor supporting the conclusion that the costs provision was unconscionable; but he expressly declined to decide whether the rates were unconscionable in themselves.

Choice of court

Finally, the judge considered the plaintiffs' practice of suing in the High Court on claims within the jurisdiction of the District Court. In Inchape Hong Kong Ltd v Performa (Asia) Ltd [1992] 2 HKC 364, Jones J had held that a plaintiff was entitled to do so, and that a master could not transfer such proceedings to the District Court of his own motion for administrative convenience. Yam J noted that Inchape had been decided without adversarial argument. Counsel agreed that a master had power to transfer under section 40 of the District Court Ordinance, and that Order 25, rule 3 did not confine the exercise of the power to the summons for directions. The amicus submitted that "[u]nless there are very good reasons to the contrary, cases within the District Court jurisdiction ought to be commenced in or transferred to the District Court", giving as an example of a good reason a connection with other proceedings in the High Court. Information obtained from the Registrar showed that undefended proceedings were not, as had been said in Inchape, cheaper or faster in the High Court. Yam J held that Inchape should not be followed.

Orders

The judge dismissed the appeals, making an order nisi of no order as to the costs of the appeal because the defendants were neither present nor represented. He stated his conclusions that the costs provision was unconscionable under the Ordinance and unenforceable; that all cases within the jurisdiction of the District Court should be transferred there by an order nisi of the master shortly after the action was commenced in the Court of First Instance; and that the plaintiffs were entitled only to fixed costs under Order 62, rule 32 and Part I of the Second Schedule.