CHN v. CCY

FCMC 1755 / 2020

[2024] HKFC 33

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MATRIMONIAL CAUSES

NO. 1755 OF 2020

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DECISION

( Variation of Costs:

Issue-based approach,

Communication at Mediation & FDR hearing,

Calderbank offer)

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A.  The Application

1.  After the trial on the Respondent husband’s (“H”) claim for ancillary relief (“AR Trial”), this court ordered that the Petitioner wife (“W”) do pay H a lump sum of $521,264 (“Lump Sum”) on a clean break basis.  The reasons are set out in the Judgment[1] (“Judgment”).

2.  The following two orders nisi were made:

2.1.  The Lump Sum be paid by W within 35 days from the date of the Judgment (“Payment Order Nisi”); and

2.2.  W do pay H the costs of the ancillary relief application to be taxed if not agreed, with certificate of two counsel (“Costs Order Nisi”).

3.  W took out a Summons (“Summons”) seeking to vary the above orders nisi:

3.1.  In respect of the Costs Order Nisi, W argued that there shall be no order as to costs up to the date of the mediation (i.e. 7 September 2021), and H shall pay W’s costs from 8 September 2021 onwards.

3.2.  In respect of the Payment Order Nisi, W argued that the Lump Sum shall be set-off against any costs order made against H, the balance after set-off would be subject to the Director of Legal Aid’s First Charge and be paid directly to the Director of Legal Aid. The payment be stayed pending the determination of her application for variation of Costs Order Nisi.

4.  By consent of the parties, W paid the Lump Sum into court pending the determination of the set off issue.

5.  The parties further agreed that the dispute on variation of the Payment Order Nisi be adjourned sine die with liberty to restore pending the determination on the liability of costs as the issue of set-off would only materialise if H is ordered to bear W’s costs. A consent order was made accordingly on 16 November 2023.

6.  This decision was on the variation of Costs Order Nisi only.

B.  W’s Ground for Variation of Costs

7.  W advanced the following grounds in support of her variation application[2]:

7.1.  Neither party is entirely successful in these proceedings, the starting point should be no order as to costs.

7.2.  H had acted unreasonably in the attempts to negotiate settlement. The Lump Sum does not beat the offers made by W since mediation. The subsequent legal costs (and emotional turmoil) could have been avoided had H reasonably accepted W’s offers, which were higher than the Lump Sum. Other unreasonable conducts including H’s delay to commence mediation should be taken into account.

8.  H argued that:

8.1.  He is the successful party of the ancillary relief application.   The starting point should be costs follow the event.

8.2.  His non-acceptance of W’s offers at various stages of the proceedings was due to W’s deficient disclosure and lack of sincerity in settlement. The offers made during mediation were disclosed by W in breach of the Mediation Ordinance and therefore shall not be admitted in evidence.

C.  The Issues

9.  In my view, there are the following issues in this application:

9.1.  Who is the successful party? H or none of the parties?

9.2.  If H is the successful party, whether his failed allegations have an impact on costs order?

9.3.  Shall H bear the costs after his non-acceptance of W’s offers? On this arose the question of whether the communication made during mediation and the FDR hearing (“FDR”) shall be admitted in evidence for this application?

9.4.  Whether H’s conducts have an impact on costs order?

D.  Applicable Legal principles

10.  The court has a board and unfettered discretion on the question of costs: EJB v CJB[3]. This discretion shall be exercised judicially.

11.  The proposition that costs follow the event shall be the starting point (but not a general rule) has been widely adopted and has been applied in ancillary relief disputes in matrimonial cases: Hung Fung Enterprises Holdings Ltd v Agricultural Bank of China[4], KJ v KMLM [5], Order 62 rule 3(2) of the Rules of District Court.

12.  The principles on the award of costs in an ancillary relief dispute have been summarised in Gojkovic v Gojkovic[6]:

“That starting point, in my judgment, is that costs prima facie follow the event … but may be displaced much more easily than, and in circumstances which would not apply, in other Divisions of the High Court. … In applications for financial relief the applicant (usually the wife) has to make the application in order to obtain an order. If the financial dispute can be resolved it is usual, and normally in the interests of both parties, that the applicant should obtain an order by consent: and if money is available and in the absence of special circumstances, such an agreement would usually include the applicant’s costs of the application. If the application is contested and the applicant succeeds, … if there is money available and no special factors, the applicant spouse is prima facie entitled to, and likely to obtain, an order for costs against the respondent. The behaviour of one party, such as in material non-disclosure of documents, will be a material factor in the exercise of the court’s discretion in making a decision as to who pays the costs.”[7]

“But the starting point in a case where there has been an offer is that, prima facie, if the applicant receives no more or less than the offer made, she/he is at risk not only of not being awarded costs, but also of paying the costs of the other party after communication of the offer and a reasonable time to consider it. That seems clear from the decided cases … I cannot, for my part, see why there is any difference in principle between the position of a party who fails to obtain an order equal to the offer made and pays the costs, and a party who fails by the offer to meet the award made by the court. In the latter case prima facie costs should follow the event, as they would do in a payment into court, with the proviso that other factors in the Family Division may alter that prima facie position.”[8]

13.  In the absence of special circumstances, the applicant spouse who obtained financial relief after trial is prima facie entitled to an order for costs against the respondent.

14.  Order 62 rule 5(1) and 5(2) set out the special matters to be taken into account on the issue of costs. These include the parties’ conduct before and during the proceedings; whether a party has succeeded on his case or part of it; whether it is reasonable for a party to raise, pursue or contest a particular allegation or issue; the manner in which a party has pursued or defended his case or a particular allegation or issue; whether a successful claimant has exaggerated his claim; any payment into court; and any written “without prejudice save as to costs” settlement offer.

15.  The ambit and extent of the court’s discretion on costs in matrimonial disputes is far wider that in other civil proceedings due to its special feature.  The incidence of costs will diminish the matrimonial pot which is to be shared by the parties and the children of the family, if any.  It has a marked impact on the availability of sufficient funds to meet the family’s needs in many cases. In matrimonial disputes, the court would often also take heed of the impact of a costs order on the assets that would be available to meet the family’s needs: Gojkovic v Gojkovic, L v C [9], HK v BD (Ancillary Relief)[10].

16.  Order 1A of the Rules of District Court is applicable to the Family Court: Practice Direction 15.12 [8].

17.  Order 1A rule 3 provides that the parties and their legal representatives have a positive duty to assist the court in furthering the underlying objectives set out in Order 1A rule 1, including to facilitate settlement of disputes and to promote a sense of reasonable proportion and procedural economy in the conduct of proceedings.[11] Settlement negotiations can be done by making Calderbank offers, participating in mediation, FDR and other alternative dispute resolution proceedings.  The court may sanction a party on costs for a failure to participate in mediation in good faith: LLC v LMWA[12].

18.  As Butler-Sloss LJ said in Gojkovic[13], settlement offers require to have teeth in order for them to be effective. Parties ought to be conscious of a risk as to costs if reasonable offers are refused. If there is a material non-disclosure on the financial condition of a party and therefore the other party is not able to fairly assess whether the offer is reasonable, the court may not award an adverse costs order against the refusing party.

19.  In the exercise of discretion on costs, the making of settlement offer often carries significant weight, though it is not determinative. The court is also cautious of not turning it into a form of “spread betting”.

20.  I approached the issues in this application with the above principles in mind.

E.  Who is the successful party

21.  This is H’s claim for ancillary relief.  There is no cross claim by W.  All along, W’s stance is that H is not entitled to any ancillary relief.  H succeeded to achieve an award of Lump Sum after trial. He is the successful party in the ancillary relief proceedings.

F.  Whether the failed allegations raised by H have an impact on costs

22.  The starting point of costs follow the event does not cease to apply only because the successful party argued issues or made allegations on which he failed. The court is more readily to adopt the issue-based approach on costs since the Civil Justice Reform. Where the failed allegation raised by the successful party has caused a significant increase in the length or costs of the proceedings, the court may deprive him of his costs or even order him to pay the other side’s costs. It is not necessary to show that this party has acted unreasonably or improperly. The practice commonly adopted is to make a global order in terms of the overall percentage of costs to be awarded to a party instead of giving separate orders for different issues: Keen Lloyd Holdings Ltd & Ors v Commissioner of Customs and Excise[14], Hung Sau Fung v Lai Ping Wai[15].

23.  These principles have been applied in ancillary relief disputes. In KJ v KMLM[16], To J (as he then was) has held that:

“17. … the starting point does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, but where that has caused a significant increase in the length or costs of the proceedings he may be deprived of the whole or part of his costs. Since CJR, the court is more ready to take an issue-based approach. It is no longer necessary for a party to have acted unreasonably or improperly to be deprived of his costs of a particular issue on which he has failed … Nor is it necessary to show that the successful party has deliberately wasted time and costs … For the purpose of this guideline, a significant increase in the length or costs of the proceedings means one that can be estimated as a more than trifling proportion of the total costs. The costs need not be assessed with precision. It suffices if the court can give an estimate of the proportion of these costs … A party may be deprived of part of his costs on the failed issues even if such costs overlap with those of the succeeded issues …”

18. … where the successful party raises issues or makes allegations improperly or unnecessarily (or unreasonably, in the United Kingdom), the court may not only deprive him of his costs but may order him to pay the whole or part of the unsuccessful party’s costs: Order 62 rule 7(1). …”

24.  In Zhuhai International Container Terminals (Jiuzhou) Limited v Lo Tong Hoi[17], Kwan JA has held that:

“33 … On the established principles, it is not necessary to establish that a successful party has acted unreasonably or improperly in raising an issue for it to be deprived of the whole or part of its costs. The court may so order where the failed allegation of the successful party has caused a significant increase in the length or costs of the proceedings … By the amendments introduced to Order 62 rule 5, litigants should bear in mind the possible costs implications. There is incentive to conduct litigation in a responsible way and be selective as to the issues raised.”

25.  Although H succeeded in achieving an award after trial, he failed in various issues which are central to his case. The pertinent examples are:

25.1.  H contended that the refusal of W to have physical intimacy with him and W’s treatment of him during marriage are gross and obvious marital misconduct. He adduced a bulk of evidence about W’s harsh treatment of him during his marriage and the impact of such treatment on him. Much emphasis was placed on this issue during trial in connection with his claim for compensation for relationship generated disadvantage. H failed in this argument: Judgment [149] – [153]. 

25.2.  H advanced a case against W’s financial conduct. A substantial part of the discovery and arguments at court were focus on the money transactions between W and her father, the Parental Loans, the Trust Money as well as the withdrawals questioned by H.  H formally retracted his claim on “add-back” at the closing submission and shifted to invite the court to take this into account on distribution of the matrimonial assets. As it was held that this is not a “sharing” case, the issue of asset distribution did not arise: Judgment [60] – [61], [162]. 

25.3.  H argued that this is a “sharing” case, but failed.

26.  These failed allegations casused a significant increase in time and costs. This should be reflected in the award of costs by giving a discount on the costs that H may be entitled to.

G.  H’s non-acceptance of W’s offers, which are higher than the Lump Sum awarded

G1.  Offers exchanged

27.  W set out a summary of the without prejudice offers exchanged by the parties before trial as follows[18]:

Date	Event	Party	WP Offer
7 September 2021	Mediation	W	Redacted
		H	Redacted
20 September 2021	Letter	H	$7,000,000
28 Sepetmber 2021	FDR	W	$1,000,000
		H	$3,000,000
8 August 2022	Letter	W	$1,000,000 + costs to be taxed if not agreed, except those costs already determined by the court
22 August 2022	Letter	H	$2,500,000 + costs to be taxed if not agreed

28.  On the first two days of the trial, the parties engaged in settlement negotiations again but failed.  There are factual disputes in regard to the offers or counter-offers made by H during these two days.  It suffices to note the undisputed fact that H refused to accept W’s offer to pay $1,550,000 and subsequently increased to $1,850,000 (out of which $300,000 be paid directly to H’s mother).

29.  Had H accepted any of the above offers made by W, much of the time and costs could have been saved.

30.  I shall consider the admissibility of the evidence on offers exchanged during mediation and the FDR.

G2.  Mediation Communication – Confidential and Without Prejudice

31.  H objected to admit in evidence the offers exchanged at mediation on the ground that this was disclosed in breach of the confidentiality protection under the Mediation Ordinance.

32.  The offer exchanged at mediation was protected not only by the confidentiality requirement under the statute, but also by the without prejudice privilege at common law.  These two concepts are separate and are governed by different legal principles although there is overlapping effect on admissibility of the evidence.

33.  The offers made by the parties during mediation are mediation communication as defined in Section 2 of the Mediation Ordinance. Such communication is protected by the confidentiality obligations under Section 8.

34.  Section 2 of the Mediation Ordinance reads:

“mediation communication means

(a) anything said or done;

(b) any document prepared; or

(c) any information provided,

for the purpose of or in the course of mediation, but does not include an agreement to mediate or a mediated settlement agreement.”

35.  Section 8(1) of the Mediation Ordinance prohibits the disclosure of mediation communication subject to two categories of statutory exception. The first category is under Section 8(2) where disclosure is permitted without leave of the court. The second category is under Section 8(3) where leave of the court is required for disclosure.

36.  None of the statutory exceptions apply to the offers which W has disclosed.

37.  In W’s reply submissions, she argued that H had waived the right to confidentiality by having referred to the offer made by W at mediation in his 6^th affirmation[19]. She also argued that the disclosure is justified for the purpose of showing H’s failure to participate in mediation in good faith.

38.  The reference to W’s offer by H, without more, does not lift the confidentiality obligation under the statute. Under Section 8(2)(a) of the Mediation Ordinance, mediation communication can be disclosed without leave if there is consent of all parties and the mediator and, where the communication was not made by a party or the mediator, consent of the maker of the communication. Consent of the parties alone is therefore not sufficient.

39.  The offers made by W during mediation is not an information relevant to the argument of a lack of participation in mediation in good faith due to H’s delay in commencing the mediation.

40.  W invited this court to grant leave under Section 10(2)(c) of the Mediation Ordinance if necessary.  I decline to accede to this invitation.

41.  Firstly, no application for leave has been made.  The other party does not have an opportunity to respond to this matter.

42.  Secondly, I am not satisfied that leave should be granted.

43.  Under Section 10(1), this court may grant leave for mediation communication to be admitted in evidence. Section 10(2) provides that the court must take into account the following matters in deciding whether to grant leave for a mediation communication to be admitted in evidence:

“10(2) (a) whether the mediation communication may be, or has been disclosed under section 8(2);

    (b) whether it is the public interest or the interests of the administration of justice for the mediation communication to be disclosed or admitted in evidence;

    (c) any other circumstances or matters that the court … considers relevant.”

44.  Offers made during mediation is not a Calderbank offer. There is no reason for this court to depart from the provision in the Ordinance as well as the parties’ agreement and understanding that discussions at the mediation are confidential and without prejudice. There is no circumstance or matter in favour of granting leave under Section 10(2)(c) of the Mediation Ordinance.

45.  The rules of without prejudice privilege is a rule on admissibility of evidence in legal proceedings. It applies to exclude all negotiations genuinely made for the purpose of settlement from being admitted in evidence: Rush & Tompkins v Greater London Council[20]. The rationale stems primarily on the public policy of encouraging the parties to negotiate and settle their disputes out of court.

46.  The offers exchanged at mediation were made at a time when there was existing dispute between the parties, the legal proceedings in relation to the dispute had commenced, and the offers were made in a genuine attempt to further negotiations to settle the dispute. These offers are protected by without prejudice privilege. It is not necessary for the communication to bear the label of “without prejudice”: Re Jinro (HK) International Ltd[21], per Kwan J (as she then was). 

G3.  FDR Proceedings - Without prejudice privilege

47.  The FDR is without prejudice. Practice Direction 15.11 [8c] stipulates that “evidence of anything said or of any admission made in the course of the [FDR] hearing shall not be admissible in evidence in a court, save upon the trial of a person for an offence committed at the hearing.”

48.  In Jackson v Minstry of Defence[22], the English Court of Appeal upheld the trial judge’s refusal to admit in evidence the discussion at a court-appointed pre-trial Joint Settlement Meeting (which is part of a pilot scheme for personal injury actions in the Manchester area) when dealing with costs after the trial. The reason is that the settlement scheme makes it clear that the settlement meetings are confidential, and thus are without prejudice.

49.  Without prejudice communication made during the FDR shall not be admitted in evidence unless acceptable exceptions apply.

50.  Both parties have unreservedly elaborated in their respective affirmations filed for this application their offers made at the FDR. They have also made submissions in connection with these offers without any claims for without prejudice privilege. This evidenced both parties’ consent (albeit post-event) to rely on the discussions at the FDR for the purpose of this application. On this basis, I admit in evidence the facts adduced by the parties in regard to the FDR.

51.  At the FDR, H rejected W’s offer of $1,000,000, which is higher than the award achieved after trial.  This should be taken into account on costs order.

G4.  Calderbank offers

52.  H also refused to accept subsequent Calderbank offers made by W, which are higher than the Lump Sum.

53.  H argued that he was justified to refuse these offers as W had not made full disclosure, so he could not have a fair assessment of the offers. He also said that he did not accept the higher offers made at trial because he had incurred further costs by then.

54.  Prior to the FDR, W had answered the 4^th questionnaire in March 2021.  There was sufficient financial information for H to assess the offer at the FDR in September 2021. 

55.  The earliest Calderbank offer after the FDR was made on 8 August 2022 on the term that W would pay H a sum of $1,000,000 plus costs (except those costs order already made by the court) in full and final settlement of the dispute.

56.  By 8 August 2022, W had already answered H’s 5^th questionnaire (the last questionnaire) raised on the updated Form E. This offer also covers H’s costs. 

57.  I do not accept H’s argument that he could not assess the offers made at and after FDR due to W’s deficient disclosure. Neither do I accept that W was insincere in the negotiations for settlement.

58.  Further, escalation of legal costs cannot be a reason for rejection of a reasonable offer without risk of an adverse costs order. At trial, this court warned the parties of the risk on costs. H chose to reject the offers and took the risk, he has to bear the consequence.

59.  For the reasons set out above, H shall bear W’s costs incurred after the FDR.

60.  I would like to reiterate the importance of the confidentiality protection and without prejudice privilege in communication during mediation: Champion Concord Ltd v Lau Koon Foo (No 1)[23]; S v T[24]. With this protection, the parties can exchange and explore different ideas and views without fear in their attempts to reach settlement. This is fundamental to an effective conduct of mediation in line with the public policy of encouraging out of court settlement and the underlying objectives set out in Order 1A.

61.  Parties who wish to protect their position on costs after a failed mediation or failed FDR can make a Calderbank offer or other form of offer admissible in evidence for costs application.

H.  H’s conduct

62.  Some of the conducts raised by W (including the complaints about the time and costs spent in H’s failed allegations and H’s conduct in the out of court negotiations during trial) have been covered in the issues discussed above. A separate consideration of these matters under this heading will not achieve a different result on costs.

63.  I will deal with W’s complaint about H’s failure to participate in mediation in good faith, specifically his delay in commencing the mediation.

64.  In summary, the relevant facts are as follows:

64.1.  By letter dated 7 January 2019[25], W proposed to appoint a legally qualified mediator to conduct mediation.

64.2.  H responded on 26 February 2019 that it was pre-mature as W had not provided the answers to the questionnaire on her financial condition. 

64.3.  W filed her answers on 2 August 2019. Various chasers had been sent to H. 

64.4.  In the meantime, further questionnaires were filed in November 2019 and August 2020.

64.5.  By a letter dated 13 November 2020, H maintained that it was pre-mature to proceed to mediation. He disagreed to appoint the mediator nominated by W and proposed other candidate with background in the field of social services.

64.6.  In January 2021, H filed the 4^th questionnaire, which was answered in March 2021. 

64.7.  In June 2021, upon the parties’ application, the court appointed the mediator nominated by W since 7 January 2019.  The parties attended mediation on 7 September 2021.

65.  No doubt that an earlier conduct of mediation results in a settlement will save much costs of the parties. Yet, the timing of the mediation will affect the effectiveness of the mediation. I agree that the parties would have the benefit of mediation and would save costs if they reacted quicker and resolved their dispute on the identity of the mediator earlier.  Nonetheless, in the context of this case, I cannot criticise H for having the mediation conducted after completion of a substantial part of the discovery process.  Having considered the evidence before me, I do not find that H had failed to participate in mediation in good faith.

I.  Order

66.  The proper approach is to make a global costs order after considering the totality of evidence instead of awarding separate costs for separate issues.

67.  I concluded that H shall bear the costs of W in the ancillary relief dispute incurred after the FDR.  As to the costs of and prior to the FDR, the starting point is that H, being the successful party, is entitled to costs, but his entitlement should be reduced by reason of the significant increase in time and costs caused by his failed allegations. Taking the matter as a whole, I vary the Cost Order Nisi to the effect that H shall bear 75% of W’s costs in the ancillary relief dispute incurred after the FDR on 28 September 2021.

68.  W has successfully varied the Costs Order Nisi. The starting point of costs follow the event applies.  I order that H do pay W the costs of this application, to be taxed if not agreed, with certificate of two counsel. This costs order will become absolute in 14 days.

69.  It remains for me to thank for counsel’s assistance.