IGAL DAFNI v. CMA CGM SA

HCA 1185/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1185 OF 2008

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DECISION ON COSTS

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INTRODUCTION

1. Towards the end of the trial of this action (on Day 8), the Defendant made an application to amend its Amended Defence and Counterclaim, and also to amend the Re-Amended Rejoinder (“the Amendment Application”).  By a decision notified to the parties on 22 October 2012, I granted leave to the Defendant to amend various paragraphs of the Amended Defence and Counterclaim, and also paragraph 11A of the Re-Amended Rejoinder. I refused the other proposed amendments sought by the Defendant.  On 16 November 2012, Reasons for Decision in respect of the Amendment Application was handed down.  This Decision on Costs should be read together with the Reasons for Decision, in which I gave my reasons for determining the Amendment Application in the way I did.  In this Decision on Costs, I shall adopt, unless otherwise indicated, the same abbreviations and expressions as defined and used in the Reasons for Decision.

2. It should be clear from the Reasons for Decision that the only amendments that I allowed were “the Responsive Amendments” and “the Miscellaneous Amendments”, as respectively defined in paragraph 24(a) and (c) of the Reasons for Decision, which were not contentious.  The proposed amendments that I disallowed are what I called “the Illegality Amendments” in the Reasons for Decision.  The Illegality Amendments were wholly rejected by the Court after hearing arguments.

3. At the time when I made my decision on the Amendment Application, the trial had not yet completed.  I adjourned the argument on costs relating to the Amendment Application to be dealt with at closing.  In the event, the Plaintiff made an application that the Defendant pay his costs of and occasioned by the Amendment Application on an indemnity basis.

4. Part of the proposed amendments subject of the Amendment Application related to the Counterclaim (as previously amended).  It is clear that if those proposed amendments were allowed, they would have been quite inconsistent with the claims originally made in the Counterclaim. The Defendant confirmed to the Court, in the course of arguing the Amendment Application, that it would not pursue the original Counterclaim in any event, i.e. if the Court were to refuse the amendments proposed to be made to the Counterclaim (as previously amended), the Defendant would abandon the Counterclaim altogether. In the event, I refused to allow the proposed amendments to the Counterclaim. The Plaintiff sought an order that the Counterclaim (as previously amended) be formally dismissed, and the costs of the Counterclaim be paid by the Defendant on an indemnity basis. 

5. I gave judgment in this action on 10 February 2014, in favour of the Plaintiff.

6. Separate written submissions have been filed by the parties to address the issues of costs mentioned above.  This is my determination on those costs issues.

COSTS OF THE AMENDMENT APPLICATION

7. As the Defendant has failed in all the contentious amendments proposed to be made by it in the Amendment Application, it is not in dispute that the Defendant should be ordered to pay the costs of and occasioned by the Amendment Application.  What is in dispute between the parties is whether the Defendant should pay the costs on an indemnity basis. 

Principles to be applied

8. The Court has full power to determine by whom and to what extent costs are to be paid (s.52A of the High Court Ordinance). It is also not in dispute between the parties that in awarding costs the Court “may in any case in which it thinks fit to do so order or direct that the costs shall be taxed … on the indemnity basis”: see, O.62 r.28(3) of the Rules of High Court.

9. The usual order for costs is, however, on the party and party basis.  That is usually the fair order to make unless there is some feature in the litigation such as to make it fair for the losing party to indemnify the other party’s costs, it is normally fair that he should only bear costs on the party and party basis. 

10. But the Court’s discretion on costs is broad, and it has been repeatedly emphasized that such discretion should not be unduly fettered.  The Court of Final Appeal, in the case of Town Planning Board v. Society for Protection of the Harbour Ltd (No.2) (2004) 7 HKCFAR 114, was at pains to re-iterate this.  Citing the cases of Macmillan Inc v Bishopgate Investment Trust Plc (unrep., 10 December 1993, per Millett J), Sung Foo Kee Ltd v Pak Lik Co. ([1996] 3 HKC 570 at pp575E-576F. per Godfrey JA), Choy Yee Chun v Bond Star Development Ltd ([1997] HKLRD 1327 at pp.1334G-1335I, per Stock J), the Court of Final Appeal held at para.17 of its judgment on costs:

“In these and other cases, courts have emphasised the undesirability of attempting to define the circumstances in which orders for indemnity costs are to be made. It has been said that:

… the discretion is not to be fettered or circumscribed beyond the requirement that taxation on an indemnity basis must be “appropriate”.”

11. Accordingly, the Court’s discretion to order costs on an indemnity basis is not fettered beyond the requirement of appropriateness. The epithet of “appropriate” connotes fairness.  It is difficult to imagine how a costs order (on whatever basis) can be appropriate if it not fair having regard to the circumstances.  Subject to this, the Court’s discretion is unfettered.  

12. In particular, the Court’s discretion to order costs on an indemnity basis is not confined only to cases where the Court finds the losing party to be guilty of some deception or underhand conduct, or that the case or application has been brought with some ulterior motive or for an improper purpose (see para 16 of the Society for Protection of the Harbour case (supra)).  The Court’s discretion to order indemnity costs is not confined to cases where the Court finds “special circumstances”, such as those mentioned above.  If fairness in the circumstances of the case requires the making of such an order, then in my judgment, it is “appropriate” for the Court to make it. 

13. What is appropriate or fair must depend on the circumstances of each case.  Relevant circumstances include “all matters relating to the litigation and the parties’ conduct in it, and also to the circumstances leading to the litigation, but no further”: see para. 18 of the Court of Final Appeal judgment in the Society for Protection of the Harbour case (supra).

14. As pointed out above, it is usually fair to make costs orders on the party and party basis.  But the circumstances of the case, which may include consideration of the attributes of the parties (see para. 18 of the Society for Protection of the Harbour case (supra)), their conduct, and the nature of the proceedings itself, may make it fair or appropriate to order costs on some other basis.  For example, in proceedings involving arbitration awards, a losing party who has failed in his application to set aside or resist enforcement of an arbitration award would generally be ordered to pay costs on an indemnity basis unless he can show special circumstances why such an order should not be made:  Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) No.2 [2012] 4 HKLRD 569, at 573-574 (paras. 14-17, per Tang V-P, as he then was).  The reason given for this is that the nature of such proceedings is such that it is generally fair to order the losing party to pay costs on an indemnity basis: see para 15 of the judgment, where Tang V-P expressed agreement with the observations of Reyes J (as he then was) in A v R (Arbitration: Enforcement) [2009] 3 HKLRD 389, whereby the learned judge remarked that “[a]pplications by a party to appeal against or set aside an award or for an Order refusing enforcement should be exceptional events.  Where a party unsuccessfully makes such application, he should in principle expect to have to pay costs on a higher basis.  This is because a party seeking to enforce an award should not have had to contend with such type of challenge.”

15. In 2008, O.62 r.5 of the Rules of High Court was amended.  By r.5(1), the Court is required, in exercising its discretion as to costs, to take into account, to such extent (if any) as may be appropriate in the circumstances, inter alia, the underlying objectives set out in O.1A, rule 1 (para (aa)), the conduct of all the parties (para. (e)), and also “whether a party has succeeded on part of his case, even if he has not been wholly successful” (para.(f)).  O.62 r.5(2), also introduced by the 2008 amendments, further provides that for the purpose of paragraph (1)(e), the conduct of the parties “includes” various matters set out therein.

16. The Society for Protection of the Harbour case was decided before the 2008 amendments, while the Pacific China Holdings case was decided after the 2008 amendments.

17. The amended O.62 r.5 now requires the Court to take into account various matters set out therein, including, inter alia, the underlying objectives set out in O.1A, r.1.  However, the rule does not take away the Court’s otherwise unfettered discretion as to costs, as the Court is only required to take into account the matters “to such extent, if any, as may be appropriate in the circumstances”.    The Court has full discretion to attach any weight – and indeed no weight at all – to any of those matters as it may consider appropriate.  The matters set out in O.62 r.5(1) may be relevant to different extent in different cases, and it is for the Court to take account of them to any such extent as it considers appropriate in the circumstances.  Moreover, O.62 r.5(2) is inclusive in nature: they are not purported to be exhaustive.  Even without the 2008 amendments, the matters set out in r.5(2) would have been taken into account by the Court, to the extent as they may be relevant, in considering the conduct of the parties. This would have been the case even before the 2008 amendments.

18. The Court has an unfettered discretion as to costs.  That was the position before the 2008 amendments, and continues to be the position now.  The overriding requirement is simply to make an appropriate order that is fair in all the circumstances of the case.   In this connection, I note that one of the express underlying objectives set out in O1A, r.1, for which the Court is required to take into account under O.62 r.5 (1)(aa), is to “ensure the fairness between the parties”: see, O.1A, r.1(d).

19. As pointed out above, the unfettered discretion of the Court is such that its discretion to order costs on an indemnity basis is not confined to cases of “special circumstances” (in the sense of circumstances that indicate bad faith, improper or oppressive conduct, underhandedness, or ulterior motive on the part of the losing party).   An order for indemnity costs requires some “special or unusual feature” (see para. 16 of the Society for Protection of the Habour case) only in the sense that it is usually fair to order costs on a party and party basis in the absence of anything that makes it appropriate or fair to require the losing party to effectively “indemnify” the costs of the winning party except those which are of unreasonable amount or have been incurred unreasonably (c.f. O.62 r.28(4A)): see, paras. 13-15 of the Society for Protection of the Habour case.

20. That “special circumstances” are not required to be established before an order for indemnity costs may be made is best illustrated by the Pacific China Holdings case referred to above.  There the Court of Appeal recognised that there were no “special circumstances” (in the sense mentioned above) to require the making of an order for indemnity costs, but justified the making of the same in that case on the basis that fairness required that a party who unsuccessfully sought to set aside or resist enforcement of an arbitration award should pay the costs of the other party on an indemnity basis.  As Tang V-P remarked in para. 16 of his judgment:

“… It might be regarded as wrong in principle, if notwithstanding Civil Justice Reform and its implications, indemnity costs could only be awarded when special circumstances are established.  However, I believe indemnity costs may be awarded under O.62 r.5(1) in an unsuccessful application to set aside an arbitral award or to resist enforcement to “ensure fairness between the parties”.  Unless such practice is wrong in principle, we cannot interfere.”

21. Perhaps I may add this.  The underlying objectives set out in Order 1A. r.1 embody, in express terms, the spirit of the Civil Justice Reform.  It is to be noted that by virtue of Order 1A r.3, “the parties to any proceedings and their legal representatives shall assist the court to further the underlying objectives of these rules”.  Hence it is not just the case that the Court is required to take into account the underlying objectives when exercising its discretion on costs, there is a positive duty imposed on the parties to assist the Court in the furtherance of the said underlying objectives. 

Exercise of discretion

22. Mr Bartlett on behalf of the Plaintiff accused the Defendant for acting in bad faith and in an underhanded manner in making the Amendment Application.  He argued that by making the application at such a late stage when all the grounds relied upon by the Defendant were known to the Defendant “from the outset of the dispute”, the Defendant had deliberately “kept the new point in hiding, despite its magnitude and potentially dire consequences, keeping its options open”.  He accused the Defendant of “cynicism and opportunism”, and that the Amendment Application was “designed to derail the trial”.

23. I am not prepared to go as far as Mr Bartlett, despite my taking a dim view of the Amendment Application.  I do not think that despite the extraordinary lateness of the application, and the absence of any satisfactory explanation for the delay, there is evidence or sufficient evidence to show bad faith, oppression, or some deliberate design to derail the trial on the part of the Defendant.  The decision to make the Amendment Application might have been wrongly made by the Defendant or its legal representatives, but it is quite a different thing to say that the decision was made in bad faith.  I reject Mr Bartlett’s submissions in this regard.

24. However, as I held above, it is not necessary, in order for this Court to make an order for indemnity costs, to hold that the Defendant was guilty of any bad faith or other deliberately oppressive or improper conduct.  The overriding requirement is what is appropriate or fair in the circumstances.

25. One important consideration of fairness is that a party such as the Plaintiff in this case has a legitimate expectation that when the action is set down for trial, it would be tried on the issues as crystallised and pleaded by the parties, and that all interlocutory applications required to be made have already been completed.  It is of course a common experience of lawyers that we do not live in a perfect world, that sometimes late applications may have to be made, and indeed may be justified even if made at a late stage.  Litigation is not a business that can be entirely freed from surprises, despite all the safeguards by the rules and even the good intention of the parties.  But the Amendment Application in the present case, made at such time and of such nature, is extraordinary by any measure.  The Amendment Application was made only after all factual evidence had already finished; and by the Illegality Amendments the Defendant sought to allege that the very contract (namely the HOA) upon which the Plaintiff sued - the validity of which the Defendant had all along affirmed (indeed the Defendant found its original Counterclaim upon the same contract) – was illegal and unenforceable. The Illegality Amendment, if allowed, would have wholly changed the colours of the Defence, and would have entailed the re-pleading by the parties of their respective case, the introduction of new evidence, the filing of new witness statements etc. in order that the new issue of illegality may be properly investigated at trial.  Of all the “legitimate” surprises that even an experienced litigant may come to expect in litigations, an application of such nature made at such late stage may still properly be described as a “bolt from the blue”.  Such bolts from the blue are not only contrary to the letter and spirit of the Civil Justice Rules, they (adopting the submission of Mr Bartlett) “make a mockery of the processes such as information checklist, case management conferences and pre-trial review which are designed to identify and resolve last-minute procedural matters so that the trial can proceed efficiently”.  In my judgment the Plaintiff was entitled to a legitimate expectation that there would not be such bolts from the blue at trial, and if he was successful in deflecting the bolt it is only fair that he should be able to recover his costs on a higher basis.

26. Mr Kat, Counsel for the Defendant, accepted that all the facts on which the Amendment Application was based were not new.  They are matters which were well known to the Defendant from the time it executed the HOA (in 2006) and hence with the Defendant’s knowledge when this action was commenced in 2008.  Mr Kat, however, argued that it was only after the Court had raised (for the first time on Day 1 of the trial) the question with Counsel whether the CSA Agreement was a sham (and was never intended by the parties to take effect on its terms), that the Defendant was alerted to the possible legal consequence of illegality.  He pointed to the remarks by the Court that the point whether the CSA Agreement was a sham “might have some important legal consequences”. In particular, Mr Kat pointed to the following exchange between the Court and Mr Bartlett on Day 1 of the trial:

“Court: So nothing further was done by Dafni in order to provide the services purportedly required to be rendered under this consultancy services agreement?

Mr Bartlett: I believe that is an accurate statement, my lord, yes.

Court: If that is so, that goes a long way to showing that this consultancy agreement is nothing but a sham, it’s just a piece of paper, and if that is a correct view then it might have some impact on some of the other issues, like unjust enrichment, reflective loss – I don’t know. There might well be consequences affecting some of the issues here. I’m just putting this up at this stage for you to think about.” (underline added)

27. Mr Kat argued that notwithstanding that the Defendant has never pleaded any illegality, the Court raised the question whether the CSA agreement may have important legal consequences on the issues. Mr Kat also pointed out that in applying for the amendments, “counsel told the Court that the point was reluctantly taken and with some embarrassment, both to counsel and to [the Defendant], for having been overlooked and being brought so late”.

28. Inasmuch as Mr Kat honestly and gallantly accepted that the Amendment Application was made with some reluctance and embarrassment on his and his client’s part, I think Mr Kat has served his client’s interest well, for I would have been more inclined to accept Mr Barlett’s submissions on bad faith if it had been otherwise.  However, if and insofar as Mr Kat seemed to suggest that it was only because the Court had raised query with Counsel on whether the CSA Agreement was a sham, that the Defendant was triggered into making the Amendment Application on Day 8 of the Trial, I would firmly reject that suggestion.

29. The query that the Court raised related to the CSA Agreement, not the HOA, and no question of illegality was ever raised by the Court.  As I pointed out in the Reasons for Decision, the Plaintiff was not even a party to the CSA Agreement.  The query was raised in the context of the issues as then pleaded by the parties, which included issues of unjust enrichment.  Both the issues of unjust enrichment and reflective loss were in fact canvassed in Mr Kat’s Opening (see para 86 thereof), although both issues were subsequently abandoned by the Defendant when it decided not to pursue its original Counterclaim.  When the Court asked counsel on Day 1 to consider the legal consequences that the CSA Agreement (being possibly a sham) might have on the issues of unjust enrichment and reflective loss, it was plainly in the context of the pleaded issues, which were still alive at that time.  The query can hardly be taken as an invitation to Mr Kat or his client to raise an issue of illegality on the HOA, nor is it an acceptable explanation for the making of the Amendment Application after all the factual evidence had finished on Day 8.

30. In the Reasons for Decision, I have held that the factors that weigh against the exercise of my discretion in favour of the Amendment Application are overwhelming.  I have set out those factors in para. 55 of the Reasons for Decision.  In my judgment, these factors, when considered against the legitimate expectation that I mentioned above, clearly demonstrate how extraordinary and unwarranted this Amended Application was.  An indemnity costs order should not be made merely because a party has lost his application. However, in the particular circumstances of the present case, I have no hesitation in holding that it is appropriate and fair to order costs of and occasioned by the Amendment Application be paid by the Defendant to the Plaintiff on an indemnity basis.  And I so order.

COSTS OF THE DISMISSSAL OF THE COUNTERCLAIM

31. I formally order the dismissal of the Counterclaim (as previously amended).

32. As to the costs of the Counterclaim (including the costs of its dismissal), I accept the submission of Mr Bartlett that the present situation “is little different from a plaintiff forcing a defendant to endure a claim for several years of litigation only to throw its hands up at trial and abandon the claim with consequent waste of money, time and resources of the parties and of the Court.”  Although, as a result of the abandonment of the Counterclaim, there is no final determination by the Court of its merits, the fact of its abandonment would justify the inference that the Defendant must have recognized that the Counterclaim was either bound to fail, or was not worth its while to pursue.  In either case, the question arises as to why the Counterclaim was made in the first place and maintained until almost the end of the trial.  No explanation has been proferred by the Defendant in this regard.

33. In these circumstances, I consider that it is appropriate and fair for the Defendant to pay for the costs of the Counterclaim (including the costs of its dismissal) on an indemnity basis, and I so order.

34. I make an order nisi that the costs of the present application (i.e. for costs of the Amendment Application and the Counterclaim be paid by the Defendant to the Plaintiff on an indemnity basis) be paid by the Defendant to the Plaintiff, to be taxed on the party and party basis, if not agreed.