PCLL Conversion Examination August 2007 Commercial Law Extracts from the Examiner s Report

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1 PCLL Conversion Examination August 2007 Commercial Law Extracts from the Examiner s Report Candidates that answered well were very strong generally and had a good grasp of fundamental principles and applied them to the question. Those that did not score highly had failings of technique and/or a shaky grasp on fundamentals. One of the biggest problems noted is that some candidates did not understand the facts or answered the question to a different fact situation to suit his or her knowledge of the law. It is extremely important for all candidates to answer the question based on the facts as presented in the question and not to assume, add, or delete any facts to the factual scenario presented. Candidates would be well-advised to consider a timeline where date or event chronology is important and a very brief outline or bullets identifying the issues and law applicable to the call of the question. This will ensure a thorough discussion of all pertinent issues and avoid the tendency to "shotgun" the answer. Answers should be focused on the facts and directly respond to the questions as presented. A "shotgun" response will not earn any extra points or points if it is not directly responsive to the issues raised in the question. A "shotgun" answer will only take valuable time away from the candidate and force them to rush through other questions. It is important that candidates budget their time as they answer each question. A candidate is not required to have a specific format or form to his or her answer(s), but must discuss the law applicable to the call of the question and apply the law to the facts of the case. Whilst substance rather than form is the core focus, this does not mean that a candidate should respond with "bullet" type answers and statements. It is important that candidates budget their time to accurately discuss the law applicable and apply it to the facts. Under no circumstances should a candidate not answer a question. In summary, whilst it appears that many candidates did not fully understand the question or did not identify the issues properly so that they were unable to answer the question properly, in contrast some of the best answers were the result of a thorough understanding of the facts, a specific discussion of the law applicable, and an application of the facts to the law with a specific conclusion. Good candidates discussed aspects of the following: Part A Question 1 Against Harry Potter: Is the sale by Harry Potter in the course of business within SOGO section 16(2)? (as presumably Harry Potter s main business is painting houses rather than selling 1

2 paint). Stevenson v Rogers a one-off venture incidental to business of the seller is still in the course of business. Is paint of merchantable quality under section 16(2)? Merchantable quality is defined in section 2(5). Price is a relevant factor (Rogers v Parish). Against Professor Minerva McGonagall: Whether there a breach of section 16(3). Issue of partial reliance on seller s judgment Cammell v Manganese. Damage caused due to peculiarity in use by buyer (unusually damp conditions) Griffith v Peter Conway, Slater v Finning, Vacwell v BDH. Question 2 Against Cho Chang: Damages for non-acceptance under SOGO section 52. Should actual resale price be taken into account or should market price rule under section 52(3) be applied? To consider Campbell v Barnett, Jamal v Moolla and to distinguish Pagnan v Corbisa. Against Lavender Brown : Time generally of essence in commercial contracts (Bowes v Shand, Hartley v Hymans), thus Tom Voldmort can reject goods. To comment on resulting unfairness as buyer is allowed to get of contractual obligations on grounds of technical breach even when buyer did not suffer any real loss as consequence of breach. Against Delores Umbridge: To consider issue of breach of implied term with regard to description under section 15. If there has been a breach, to consider whether Delores Umbridge could be said to have lost her right to reject the goods due to acceptance following lapse of reasonable time under section 37(4). Part B Question 1 (a): Nemo dat rule. Whether any exceptions to the nemo dat rule applies, in particular, whether the sale by mercantile agent or sale in market overt exceptions are applicable (cf Au Muk Shan v Choi Chuen Yau) Penelope Clearwater s remedies against Cedric Diggle for breach of bailment, including in conversion Carl s remedies against Cedric Diggle for breach of implied undertaking as to title (SOGO s 14): acceptance of the remaining goods and damages under s 55(2); or 2

3 rejection of the goods for breach of condition and damages under s 53(2) (there being no market in second-hand goods). (b): Whether the buyer in possession exception (s 27(2)) to the nemo dat rule applies In particular, whether Draco Malfoy had taken possession of the goods and whether there has been delivery of the goods to Severus Snape Even if s 27(2) applies, whether Severus Snape obtains a good title as against the true owner Penelope Clearwater. Question 2 Good candidates discussed the rights of Marcus Flint and Fleur Delacour upon the making of the bankruptcy order in light of the points below. Regarding the book debts: Whether assignment effective at law under LARCO s 9 Whether equitable assignment (William Brandt s Sons v Dunlop Rubber) Assignment in relation to future property (Tailby v Official Receiver) Creation of mortgage on assignment Bills of Sale Ordinance (Cap. 20) not applicable Registration requirements under Bankruptcy Ordinance s 48 and effect of failure to register Regarding the goods: Whether property had passed to Arabella Figg: SOGO ss In particular whether there has been an unconditional appropriation of the goods to the contract: cf Pignataro v Gilroy and Carlos Fiderspiel v Charles Twigg and Co. Part C Question 1 Good examination candidates concluded that Mr and Mrs Samwise Gamgee can rescind the contract. And they were expected to include a discussion of part or all of the following: Contract law - consumer contracts - timeshare - contract - whether unconscionable - whether misrepresentation - Unconscionable Contracts Ordinance (Cap.458) s.6 (1) Consumer protection - marketing - timeshare - scheme - unethical and unfair marketing tactics - contract unconscionable - Unconscionable Contracts Ordinance (Cap.458) s.6 (1) 3

4 Sale of goods - unconscionable contracts - timeshare - contract - Unconscionable Contracts Ordinance (Cap.458) ss.5, 6 Unconscionability Here, good candidates stated that the timeshare contract was a consumer contract for the sale of goods or the provision of services. And, in deciding whether such a contract was unconscionable, the court could have regard to a number of factors, including, but not limited to, the tests laid down in s.6(1) of the Unconscionable Contracts Ordinance (Cap.458). Applying the tests: (1)The first factor was the relative bargaining powers of the parties to the contract. Mr and Mrs Samwise Gamgee bargaining power was obviously much weaker than that of Gollum. Mr and Mrs Samwise Gamgee had no power to challenge the terms of the standard contract prepared by Gollum. (2)The second factor was whether Mr and Mrs Samwise Gamgee understood the relevant documents. Gollum s staff had purported to explain the terms of all the voluminous documents relating to the contract, some of which referred to complicated legal concepts, within a relatively short time period. In these circumstances, it was impossible for Mr and Mrs Samwise Gamgee to truly understand the content and legal consequences of the contractual documents. (3)The third factor was that the contract put Mr and Mrs Samwise Gamgee at a special disadvantage. First, there was no clear written contract which guaranteed Mr and Mrs Samwise Gamgee entitlement to the alleged holiday resorts as represented by Gollum. Second, Mr and Mrs Samwise Gamgee had no right to enjoy the holiday resorts unless they had fully paid up the membership fee, but meanwhile, they were liable to pay the annual management fee. Thus, Mr and Mrs Samwise Gamgee could only find out whether Gollum was capable of providing the services alleged upon fully paying up the requisite fees. Third, Mr and Mrs Samwise Gamgee got little protection in return for a substantial payment. If they had to sue Gollum for failing to perform its duties, Mr and Mrs Samwise Gamgee could encounter immense difficulties in relation to forum, choice of law and choice of defendants, if the contractual documents involved numerous companies, and the relationships among them were unclear. (4)The fourth factor was that, in view of the complex nature of the contractual documents, as well as the large amounts and extensive obligations involved, Mr and Mrs Samwise Gamgee should have been able to seek independent advice. Absent such advice, Mr and Mrs Samwise Gamgee could not sensibly decide whether to enter into the contract or not. (5)The fifth and most important factor was that Gollum had acted unfairly and its marketing tactics had exerted undue influence and pressure on Mr and Mrs Samwise 4

5 Gamgee. Gollum s staff had kept persuading Mr and Mrs Samwise Gamgee for two hours and had not given them any opportunity to discuss and consider the matter calmly between themselves. Such tactics were contrary to commercial ethics. Misrepresentation Gollum had misled Mr and Mrs Samwise Gamgee into believing that they could assign or terminate the membership at any time before they fully paid the membership fee, and Mr and Mrs Samwise Gamgee had entered into the contract on account of such misrepresentation. In the circumstances, an award of monetary compensation could impractical. And the contract could be rescinded in its entirety. Excellent candidates might have mentioned that there is nothing wrong with the concept of timeshare per se. The problem lay in the marketing method. In view of the number of complaints filed in recent years against companies promoting timeshare arrangements, it may be high time the Hong Kong Government considers following other jurisdictions, such as England, and enact legislation to regulate the industry. This way consumer rights can be properly protected, and the industry can grow healthily. Question 2 Good candidates should have discussed the following: These conditions were imposed to ensure that a borrower was fully aware of and freely agreed to all the terms and conditions of the loan, and in particular knew exactly how much money he had borrowed and what interest he had to pay. On the other hand, the statute was not intended to stifle genuine money-lending transactions or to let the money lender lose all the money he had lent out and all the security he has because of a failure to comply with all such requirements, however trivial or unintentional the breach might be. Hence, where it was not inequitable to do so, the court would enforce the loan agreement with suitable variations, modifications and exceptions. This was the discretion given to the court by s. 18(3). Section 18(1) provides that no agreement and no security shall be enforceable unless the following conditions are satisfied: (1) there must be a note or memorandum of the agreement in writing; (2) the note or memorandum must contain all the terms as required under s.18(2); (3) the note or memorandum must have been signed personally by the borrower; (4) the borrower must have been given a copy of the note or memorandum including a summary of the prescribed provisions of the Ordinance at the time of signing; and (5) the note or memorandum must have been signed before money was lent or the security was given. (Emperor Finance Ltd v La Belle Fashions Ltd & Others (2003) 6 HKCFAR 402 ("the Emperor Finance case"), per Ribeiro PJ at para.70.) These conditions are imposed to ensure that a borrower is fully aware of and freely agrees to all the terms and conditions of the loan, and in particular knows exactly how much money he has borrowed and what interest he has to pay. 5

6 In resolving any dispute between the money lender and the borrower, there should be no pre-conceptions either in favour of or against the money lender or the borrower. Section 18 had sought to strike a fair balance between the two parties. In applying its provisions, the court had to bear in mind, among other things, the parties respective rights and obligations under the statute as well as the agreement made by them (Celestial Finance Ltd v Yu Man Hon & others (2004) 7 HKCFAR 450 at para. 21. considered) Construed in its context, s.18 did not and was not intended to refer to only one single document by the words "a note or memorandum in writing of the agreement". A loan agreement might be made orally or in writing, or partly orally and partly in writing. All that s.18 required was that there must be something in writing so that the borrower can know all the terms and conditions of the loan. It mattered not whether they were contained in one document or more than one document. If a contract contained all the terms and conditions of the loan, as is usually the case, it was as good as anything and clearly meets the requirements of the section. It would be absurd to ask for another note or memorandum to set out all the terms and conditions again just to satisfy the requirements. Such construction was inconsistent with the letter and spirit of s.18 (Holiday Credit Ltd v Erol [1977] 1 WLR 704 considered) Looking at the statutory requirements of s.18 (1) and (2), it was immediately apparent that money lending transactions to finance margin trading must find compliance difficult if not impossible. In such a situation, as in the present case, money is lent, repayment is made and interest is charged on a continuous basis by way of credit and debit entries in the account statements. But as discussed in the Emperor Finance case, in para.95, 104 and 105, the granting of each credit constitutes a separate loan and requires the compliance of s.18 (1) and (2), including the execution of a fresh note or memorandum personally signed by the borrower before the credit is given. Apart from the fact that this is impracticable and almost impossible to achieve, neither the money lender nor the borrower (who needs this facility for trading in securities on margin) would want to see this happen. Yet the statute clearly requires strict compliance by the money lender or he has to face the consequence of having the loan agreement unenforceable unless the court exercises its discretion under s.18(3) in his favour. In the recent Hong Kong of Strong Offer Investments Ltd v Nyeu Ting Chuang, Court of Final Appeal, Final Appeal No 21 of 2006 (Civil) Before: Bokhary, Chan and Ribeiro PJJ, Mortimer and Lord Scott of Foscote NPJJ, Date of Judgment: 30 Mar 2007 ("the Strong Offer case"), pro forma documents adopted by the lender did fail to meet some of the requirements of s.18 and the breaches were most probably repeated in relation to other customers. In that sense, at least, the breaches were deliberate, although there was no evidence that the use of such documentation was motivated by an intention to take advantage of the borrower or unscrupulous or ignorant customers. The fact that there were difficulties for money lenders who did business by providing margin trading facilities to comply with the s.18 requirements did not absolve the lender from the obligation to comply with those requirements or provide any excuse when it had, as in this case, failed to discharge such obligation. And there was no explanation for the absence of any effort made to apply for exemption under s.33b of the Ordinance. 6

7 (Emperor Finance Ltd v La Belle Fashions Ltd & Others (2003) 6 HKCFAR 402 considered). But such breaches did not automatically disentitle the lender from recovering its loans. The court had still to conduct a balancing exercise having regard to the equities in the case and decide whether it would be inequitable not to enforce the loan agreement. The breaches, which were in one sense deliberate and repeated and not merely technical, necessitated an appeal for an exercise of the court's discretion. In this context, there were two matters which must be taken into consideration. First, the borrower did not seem to have been prejudiced or affected in any way by these breaches. Secondly, there was the 2002 amendment to the Ordinance giving exemption for money lenders which were licensed to conduct business in securities margin financing under Part V of the Securities and Futures Ordinance. While this amendment did not avail the lender in the Strong Offer case, the fact that the legislature saw fit to grant such an exemption to this type of money lending transactions was clearly also a relevant circumstance which could not be ignored by the court. Further, in the Strong Offer case, the lender had the right under the terms of the loan agreement to liquidate the securities pledged to it at any time it might choose. And a creditor in the lender s position was entitled to choose when he would liquidate the security in his hands, and if and when he chose to do so, his only duty was to sell the security at the current market price (Richardson Greenshields of Canada (Pacific) Limited v Chou Tai Chuan Cecilia (CACV 130 of 1990, June , unreported, "the Richardson Greenshields case"). 7