HOLAKE HONG KONG LIFTS LTD v. THE INCORPORATED OWNERS OF TUNG FAT BUILDING BLOCK D KAM PING STREET

DCCJ 3710/2018

[2023] HKDC 938

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3710 OF 2018

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BETWEEN

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DECISION

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1.  The plaintiff (“Holake”) in August 2018 commenced this action to claim against the defendant (“the IO”) for 14 months’ lift maintenance service fees totalling HK$176,400 (“the Fees”).

2.  A few months later in November 2018, the IO commenced the third-party proceedings against the 1^st Third Party (“TP1”) and the 2^nd Third Party (“TP2”), who were respectively the Chairman and the Secretary of the former management committee of the IO, for an indemnity or contribution based on their alleged breach of duty owed to the IO. TP2 contested the third-party proceedings while TP1 has not filed an Acknowledgement of Service of the Third Party Notice and has not participated in the third-party proceedings.

3.  The third-party action was directed by me at the PTR to be tried immediately after the main action and it was also directed that TP2 might participate in the main action in a limited way.

4.  On day 2 of trial (19 April 2023), Holake applied for and was given leave to discontinue the main action on term that it paid the IO’s costs of the main action. Consequently, the IO also applied for and was given leave to discontinue the third-party proceedings as against TP1 and TP2 with no order as to the costs of the action between the IO and TP1. As agreed by the parties then, the following 2 costs issues were reserved for argument to be disposed of on papers:-

(a) The basis of taxation of IO’s costs of the main action to be paid by Holake; and

(b) The costs as between the IO and TP2.

5.  Having considered the parties’ written submissions, these are my decisions on the above 2 costs issues.

The basis of taxation of the IO’s costs of the main action

6.  The IO asks that its costs in the main action to be paid by the Holake be taxed on an indemnity basis from 20 May 2021.

7.  For the following reasons, I accede to the IO’s application.

8.  First, the fact that Holake’s present claim was evidently untenable could be seen from its own documentary evidence:-

(a) The plaintiff’s claim was based solely on the allegation that the subsisting contract was the one dated 24 August 2016 (“the 2016 Contract”), which allegedly did not contain the Addendum providing for early termination by the IO. While the IO’s case was that the subsisting contract was the one dated 28 August 2014 (“the 2014 Contract”), which contained the Addendum and which was extended automatically per a clause contained therein.

(b) In Holake’s own letter dated 1 November 2016 (“the Extension Letter”)[1], Holake expressly made reference to the 2014 Contract and stated in no unclear terms that the 2014 Contract had been automatically extended earlier and the period of service therefore was extended up to 30 November 2016.

(c) If the 2016 Contract was indeed signed on 24 August 2016 which thereby superseded the 2014 Contract, it would be totally inexplicable why Holake would issue the Extension Letter.

9.  Second, the IO has since July 2019 initiated to mediate with Holake which was refused by Holake. As I commented at the PTR, the amount of costs the parties had spent and would be spending was disturbingly disproportionate to the minor amount at stake. The parties were therefore expected all the more to make reasonable effort to attempt to resolve the matter amicably. The relevant letters exchanged clearly showed that the IO was eager and sincere in trying to resolve the matter by mediation. However and unfortunately, no mediation took place because Holake all along insisted that both TP1and TP2 need to join the mediation and Holake eventually refused to mediate for the sole reason that the IO could not secure the attendance of TP1 (TP2 having indicated it would join).

10.  In my view, the absence of TP1 was not a reasonable justification for Holake not to mediate. Quite clearly, Holake was claiming the Fees from the IO, and not from TP1 and/or TP2. The matter of contribution or indemnity was a matter between the IO and TP1 and TP2, that did not concern Holake. Therefore, after the initial effort to involve TP1 failed, Holake should have mediated with the IO nevertheless, as the IO had so expressly asked.

11.  I accept the IO’s submission that in the circumstances just on Holake’s unreasonable refusal to mediate alone, this court should follow Golden Eagle International (Group) Ltd v GR Investment Holdings Ltd [2010] 3 HKLRD 273 and order costs to be taxed on a common fund basis.

12.  Third, it is indisputable that Holake clearly failed to beat the IO’s Calderbank offer by letter dated 12 May 2021. The offer was that the IO would pay Holake HK$50,400 with each party bearing its own costs. Holake rejected the offer by essentially insisting that it had a good claim under the 2016 Contract. With respect, it is idle for Holake now to submit that such was a “constructive” reply, and I must reject such submission. I also reject its submission that I should temper the effect of the Calderbank offer by considering what evidence was available at the time and that Holake “did not have a comprehensive picture of the respective merits of the parties’ case”. As said in paragraph 8 above, the lack of merits in Holake’s claim was evident by its own documents.

13.  Fourth, as Holake’s witness Chan So Ying confirmed in cross-examination, Holake in fact only had in its possession the front page of the 2016 Contract but not the other pages of the 2016 Contract. However, Holake put in the Trial Bundles “replacement” pages as if they were part of the 2016 Contract without expressly making that clear. This is clearly unacceptable litigation conduct.

14.  Thus, considering all of the above together, I think it appropriate to order Holake to pay the IO its costs in the main action with certificate for counsel, including any costs that were reserved (if any), but as from 20 May 2021 onwards be taxed on an indemnity basis.

The costs between the IO and TP2

15.  It is not disputed by the IO and TP2 that the general position is that the discontinuing party should pay the other party the costs of the discontinued action unless there are good reasons to depart from it, and that this general position applies to a third-party action. It is also trite and not disputed by the parties that the court has a wide discretion on costs. TP2 emphasizes that this court should focus on what justice of this case requires.

16.  The IO asks for its costs to be paid by TP2 because (a) the relevant documentary evidence, particularly the very important 2014 Contract had not previously been given by TP1 and TP2 to the IO and therefore the IO had to commence the third-party proceedings to seek contribution or indemnity, (b) the third-party action was discontinued because Holake’s discontinuance of the main action rendered the third-party action academic, and (c) the IO would have won had the third-party action been fought through.

17.  TP2 did not dispute that the 2014 Contract was produced by him in July 2019 only after the third-party action has been commenced.

18.  However, it was clear that once the third-party action was commenced and since, TP2 had been assisting and cooperating with the IO to contest Holake’s claim and to establish that the 2014 Contract was the subsisting one. TP2 indeed would have been the IO’s main witness, which as mentioned above I expressly gave the direction providing for it (among others) to manage the interplay between the trial of the main action and the trial of the third-party proceedings.

19.  Even at an early stage of the main action and the third-party proceedings, it should have been appreciated that if it be established that the subsisting contract was the 2014 Contract, the only contention between the IO and TP2 was whether the 2014 Contract (as extended) had been validly terminated by the previous IO’s 1^st letter dated 25 June 2017 or by its 2^nd letter dated 27 September 2017. If terminated by the former, the IO would not be liable to Holake at all under the 2014 Contract. If terminated by the latter, the IO would only be liable to Holake for 3 months’ fee at HK$50,400, and on which TP1 and TP2 might be liable. In this scenario, the claim as against TP1 and TP2 ought to have been commenced in the Small Claims Tribunal.

20.  As discussed at trial, since Holake’s only pleaded case was based on the 2016 Contract with no alternative claim based on the 2014 Contract, once it was established that the 2016 Contract was not the subsisting one, Holake’s action would fail altogether.

21.  As aforesaid, after the 2014 Contract was produced by TP2 and together with the Extension Letter, the merits of establishing the 2014 Contract could be seen as very strong.

22.  In other words, once the 2014 Contract was produced by TP2, the above picture should be reasonably clear. In my view, thereafter, there should have been little need on the part of the IO in the meantime to aggressively pursue its third-party proceedings as against TP1 and TP2.

23.  Under O16 r4, the defendant issuing the third-party notice and the third party are to seek third-party directions as to the conduct of the proceedings. This case I think is a very good illustration showing why the parties and their legal advisers should evaluate the third-party proceedings carefully to consider its appropriate conduct.

24.  In my view, this is a clear case in which the IO should have stayed the third-party proceedings pending the outcome of the main action because the chance of the IO prevailing in the main action was strong, and if the IO did, there would be no necessity to further prosecute the third-party action at all. Appropriate directions could and should be sought at the same time for TP2 to be the IO’s witness to contest against Holake’s main claim together.

25.  Unfortunately, the IO has not chosen that course.

26.  However, the picture and considerations as I mentioned above were as clear to TP2 as they were to the IO. Under O1A r3, the parties and their legal representatives have a positive duty to assist the court to further the underlying objectives, and in this case, particularly the objectives of costs effectiveness and a sense of reasonable proportionality and procedural economy. In my view, that duty on the part of TP2 in the context of the present case included a duty to consider the matter and to propose or seek a stay of the third-party proceedings as afore-mentioned.

27.  Thus, I would not hold the IO as entirely at fault but would apportion part of it to TP2.

28.  In the exercise of my discretion based on my analysis and views above, I think the just order is for TP2 to pay the IO the costs of the third-party proceedings up to 14 days after the IO had received from TP2 the 2014 Contract, and thereafter the IO is to pay 70% of TP2’s costs of the third-party proceedings; and in both instances with certificate for counsel and to be taxed if not agreed. As I do not have the exact date on which TP2 produced to the IO the 2014 Contract, I will ask the IO and TP2 to agree on what the date (14 days after production of the 2014 Contract) was and report that date to the court by a short joint letter, and the costs order would be engrossed with that date being specified. As TP2 is legally aided, I would also order his own costs be taxed according to the Legal Aid Regulations.

Disposal

29.  In the premises, I make the costs orders set out in paragraphs 14 and 28 above. I will also order, on a nisi basis, that the costs of the parties’ respective submissions filed for these two costs matters be part of their respective costs in the main action and in the third-party proceedings.

30.  I thank all counsel for their assistance.