DAIMLER CHRYSLER SERVICES CHINA LTD v. HARBOUR UNION INVESTMENTS LTD AND OTHERS

HCCL 34/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.34 OF 2002

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J U D G M E N T

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The application

1. This is an application for security for costs in the Third Party proceedings between the 1st defendant and the third party.

The background

2. The background is somewhat unusual. The plaintiff's claim against the 1st defendant in the head action is for repayment of a sum of money advanced pursuant to a loan facility. The 1st defendant is a Hong Kong company of which the 2nd defendant, a Hong Kong solicitor, is a director and shareholder.

3. The loan in question was secured by a mortgage over an 83 foot pleasure vessel, the "Sun Prince", owned by the 1st defendant, and was further secured by a personal guarantee from the 2nd defendant.

4. The third party was at all material times the insurer of the vessel, which is said to have been stolen on 21 August 2000 when moored at the Gold Coast.

5. Accordingly, the shape of the case is broadly thus : the plaintiff sues the 1st and 2nd defendants for repayment of the monies due, and in turn the 1st defendant proceeds against the third party for indemnity under the marine insurance policy issued by the third party covering the vessel, liability under the policy having been denied. Although for present purposes it does not greatly matter, the plaintiff lender also seeks to proceed under the policy against the insurer, Falcon, as 3rd defendant.

The argument

6. The jurisdictional basis for the application is section 357 of the Companies Ordinance, Cap 32. The third party contends that the 1st defendant is a company incorporated in Hong Kong, and that if the third party is successful in defence of the third party proceedings the 1st defendant will be unable to pay the third party's costs.

7. The contention on behalf of the third party that, if successful, the 1st defendant will be unable to meet the costs liability is not disputed.

8. Upon this application the real dispute between these parties is whether this application is oppressive, and has been taken out to stifle what is a genuine claim by the 1st defendant against its insurer under the marine insurance policy.

9. The 1st defendant further submits, on the basis of a 'mortgagee clause' within the policy, that the its claim against the insurer, at least to the extent of its reliance on this clause, has a good chance of success at trial, particularly since, in the course of an unsuccessful strike out application before Deputy Judge Tong in April 2002, it is said that counsel for the third party at that application accepted that the third party would have difficulty in resisting that part of the 1st defendant's claim as was based upon the 'mortgagee clause'. Accordingly, counsel for the 1st defendant, Miss Curzon Lo, now asks the court to exercise its discretion and to decline to order security for costs in favour of the third party.

10. On behalf of the insurer third party, Mr Kerry strongly disputes that this application has been made with 'oppressive' intent. He does not accept that any concession as to success on the basis of the 'mortgagee clause' was made at the strike out application before Deputy Judge Tong, nor that this clause provides the chance of success that the 1st defendant suggests, particularly in light of the breach of warranty defences under the policy which will be relied upon by his client at trial.

11. In response to questions from the Bench, Mr Kerry further confirmed that the vast bulk of the costs thus far incurred by his client in this case were costs incurred in connection with the third party proceedings as opposed to those incurred consequent upon the insurer's position as 3rd defendant in this case. This struck me as a salient consideration, since if like issues were also to be raised in the head action, wherein the third party is also named as 3rd defendant, the significance of security for costs in the third party proceedings would be correspondingly diminished.

12. Mr Kerry's primary contention was that the 1st defendant company clearly was no more than an 'asset holding' vehicle for its owner, the 2nd defendant, Mr Ho, and that if security was not to be ordered in this case a manifest unfairness would arise - if the 1st defendant were to be successful at trial against the third party insurer it could recover its costs, but on its own case, if unsuccessful, the 1st defendant could not meet the costs liability, and thus in effect would have been given a 'free ride'.

13. Mr Kerry did not dispute that the 1st defendant itself had no assets to meet a costs order - the admission now made on behalf of the 1st defendant had confirmed the evidence that he had put before the court in order to demonstrate that such in fact was the case but he submitted that the mere admission of an inability on the part of the 1st defendant to pay was insufficient, and that the burden was on the 1st defendant to establish that such an order for security indeed would stifle the action.

14. In which regard, he said, on the evidence before the court the burden had not been discharged, Mr Ho for the defendant company merely averring on oath that the 1st defendant was unable to pay the security requested. To the contrary, Miss Curzon Lo for the 1st defendant argued that the burden, which she accepted was on her client, had been met in terms of the sworn statement from Mr Ho that, should security be ordered, the company "would be forced to abandon the Third Party Proceedings". She relied also on the judgment of Nourse LJ in Trident International Freight Services Ltd v. Manchester Ship Canal Co and anr, [1990] BCLC 263, at 265-266, although it is fair to say that the facts of that case are clearly distinguishable from the present - the company in Trident was a very different animal from the 1st defendant - and in any event the passages thus relied upon did not sound to that aspect of the argument which became the focal point of this application.

15. Which was as follows. In support of his case Mr Kerry prayed in aid the observations of Sir Donald Nicholls VC (as he then was) in Re Unisoft Group Ltd (No 2), [1993] BCLC 532 at 535, observations which, he pointed out, had been cited with approval in an interlocutory decision of this court in 2001 upon an application for security for costs in Center Optical (Hong Kong) Limited v. Jardine Transport Services (China) v. Pronto Cargo Corporation (Third Party), HCCL 146 of 1999.

16. In Unisoft, op cit, the Vice Chancellor was considering a similar argument to that raised in the present case. He noted that the fact that a company cannot meet a costs order :

"... does not mean that no order for security should be made. Behind the company are those who own and control it. Depending on the circumstances it may be just that an order should be made having the effect of requiring them to put the company in funds, if they wish their company to go ahead with the litigation on which it has embarked. They have willed the end, and they must provide the company with the means ..."

17. As the Vice Chancellor noted, much will depend upon the circumstances, and in this instance I consider that the circumstances of the present case do indeed merit adopting this approach. In terms of his theme of the 1st defendant company functioning merely as an asset-holding instrument for Mr Ho, the 2nd defendant, Mr Kerry pointed out that in addition to holding title to the large and extremely expensive 'Sun Prince', which had been insured in its name, the 1st defendant in the past was on record as holding title to a flat, which had earlier been sold. Mr Ringo Ho, said Mr Kerry, in effect was the company, and it is he who can dictate that the company pursue difficult and expensive proceedings from which, if unsuccessful, and absent security, it can choose simply to walk away.

18. I agree. In my judgment a case of 'oppression' has not been established in these particular circumstances.

19. Two other subsidiary points were raised on behalf of the company in resisting this application.

20. First, Miss Curzon Lo submitted that the application had come too late, and should fail on this ground. Little more remained to be done save for the trial of the action, she said, and it was now too late to attempt to obtain security for costs past as well as prospective.

21. I do not see why this should be so. This is not a situation, as was, for example, the case in Center Optical, op cit., in which the trial is imminent, and suddenly a significant sum is demanded in terms of security for costs. This action is in the Commercial List, and even with a following wind a five day case such as this will not come on for trial before the first half of 2005. And in any event, submitted Mr Kerry, the issue of security for costs was first raised in September 2001 - he pointed out that the firm of solicitors, Messrs Ho & Partners, which represents the 1st defendant, and of which the 2nd defendant, Mr Ringo Ho, is a consultant, at that time had stated that the 1st defendant's financial status was "fine". Whilst this assertion had not been accepted at face-value, said Mr Kerry, the issue was not then pursued because for a long period this case had lain fallow, although there could have been little doubt that this was an issue concerning his client.

22. Looked at in the round, I do not think that the issue of delay assists in the defence to the present application, or that this should be accorded any weight within the discretionary 'mix'.

23. Second, as earlier noted a good deal was made of the perceived 'merits' of the 1st defendant assured's case against the third party insurer, and in particular that which had transpired at the strike out hearing before Deputy Judge Tong which culminated in his judgment of April 2002.

24. In response Mr Kerry disputed the suggestion that the 'mortgagee's interest' clause in fact provided the assistance to the 1st defendant which was claimed, given that the mortgagee was not a party to the contract of insurance, although it is fair to say that in principle he declined to be drawn into an extended 'merits' debate. In the circumstances I consider that he was right to adopt this approach. In my view the issue of the broad merits is not demonstrable one way or the other, and should not therefore be permitted unduly to colour the issue of security for costs.

25. At the end of the day, therefore, I am persuaded, and so hold, that the third party has made out its case, and that the 1st defendant should provide the third party with security for costs of the third party proceedings.

26. Having thus decided, I turn now to the vexed issue of quantum. I describe it thus because it strikes me, yet again, that the costs of civil litigation in this jurisdiction are in danger of spiralling out of control. Some of the costs figures that are put before this court in applications such as this beggar belief, and can have no rational basis. I see no reason why such fantasies should be indulged.

27. The skeleton bill of costs submitted in this application underscores the point. The total amount requested is HK$2.8 million, covering work to-date and up to and including the trial of this action.

28. Of this sum, the amount of $1.67 million is sought to cover the costs of leading and junior counsel in terms of pre-trial conferences and trial. To his credit Mr Kerry was a little embarrassed by these figures, saying simply that this is what he had been quoted for a case of this sort by those specializing in marine insurance work.

29. These third party proceedings are not complex, by any stretch of the imagination. A vessel has been allegedly stolen, and on the present state of play insurers do not go so far as to allege fraud, but view the circumstances with suspicion, and put the owner to proof that this is a loss covered by the policy. In addition, certain breach of warranty defences will be maintained. For my own part I fail to see how a dispute of this dimension, within a case which should last no more than five days, should merit employing two counsel, as apparently is anticipated, nor why this case should be thought to merit such enormous and disproportionate fees.

30. This is a Commercial List case which is well within the compass of a competent civil junior, and there is no reason whatever why, in terms of counsel's fees, the 1st defendant should be visited with security for costs upon other than a sensible and appropriate basis. So far as the costs of trial counsel are concerned, I should be prepared to grant no more than the overall sum of HK$400,000, and I do so with the suspicion that even this may be somewhat generous. Anything greater, however, in my view would be nonsense.

31. I have reviewed the remainder of the skeleton bill, which in comparison with the estimate of future disbursements for counsel for trial strikes me as relatively moderate and in no sense excessive.

32. I have no intention of condescending to a line by line evaluation of the skeleton bill. It is tolerably well known that in applications of this venture that this court adopts a 'broad brush' approach.

Order

33. Looking at the matter in the round, in my judgment the appropriate sum to award in terms of security for costs in the third party proceedings, up to and including trial, is the amount of HK$1.45 million. I so order.

34. Absent agreement as to an acceptable mode of the provision of such security, as, for example, by provision of a first class bank guarantee, I further order that this sum be paid into court, to be held in an interest bearing account, within 28 days of the date hereof, such sum to be retained in court until further order.

35. As to costs, the third party has won the argument, and there is no evidence that there has been any attempt to do other than to fight this application. In the circumstances, I make an order nisi that the third party is to have the costs of this application, including the costs of the hearing, in any event, such costs to be taxed if not agreed.