CHUN WO CONSTRUCTION & ENGINEERING CO LTD AND ANOTHER t/a CHUN WO-FUJITA-HENRYVICY JOINT VENTURE v. CHINA WIN ENGINEERING LTD

HCCT 37/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION & ARBITRATION PROCEEDINGS

NO 37 OF 2006

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J U D G M E N T

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1.  The matter first came before me pursuant to the direction of the Registrar for two preliminary questions to be determined in the context of a taxation of the costs of the Defendant.  As arguments proceeded, it emerged that there are some more fundamental issues between the parties.  As a result, the Defendant issued a summons on 9 May 2008 seeking more wide-ranging relief.  To understand that, one must refer back to the history of the action.

The disputes

2.  The action was started in December 2000 as HCA 10489 of 2000.  At that stage, the focus was on the smooth and orderly termination of the construction sub-contract between the Plaintiff as the main contractor and the Defendant as the sub-contractor.  The Plaintiff claimed injunctive relief to prevent the Defendant from entering, remaining on or obstructing or interfering with the Plaintiff’s or its new sub-contractor’s use and occupation of the site.

3.  It was the Plaintiff’s case that the Defendant had wrongfully entered the site and caused disruption to the works at the site despite the termination of the sub-contract by a notice of termination on 13 December 2000.

4.  On the other hand, the Defendant alleged that the Plaintiff’s termination was wrongful and constituted a unilateral breach of the sub-contract.  The Defendant insisted on the continued performance of the sub-contract.

The interlocutory injunctions

5.  There were cross-interlocutory injunction proceedings.  The question of physical occupation of the site was practically resolved by the order of Suffiad J on 22 December 2000.  Although it was only an interlocutory injunction in favour of the Plaintiff, its effect was that the Defendant had to vacate the site subject to the permission to attend the same between 23 and 25 December to inspect and measure the works done by the Defendant.

6.  The works at the site was completed in or about 2001.  There was no question of the Defendant continuing to perform the sub-contract.

7.  The order of Suffiad J also dealt with the question of costs stemming from the cross-interlocutory injunction proceedings.  The Defendant was ordered to pay half of the Plaintiff’s costs regarding the Defendant’s application for interlocutory injunction in any event.  Regarding the Plaintiff’s application for interlocutory injunction, the Plaintiff’s costs were to be costs in the cause.

8.  There were still cross claims for damages stemming from the termination of the sub-contract.  However, on the materials before me, the action became dormant after the close of pleadings in March 2001.

The action resumed impetus in 2006

9.  After a long hiatus, the action resumed its impetus in 2006.  It was transferred to the Construction and Arbitration List, hence a new action number was assigned.  It became HCCT 37 of 2006.  Substantial amendments were made to the Statement of Claim and the Defence and Counterclaim. 

10.  By the Amended Statement of Claim of 4 August 2006, the Plaintiff added a substantial claim for breach of the sub-contract alleging that the Defendant had failed to carry out the works in a satisfactory manner.  It was further alleged that the Defendant’s works were seriously behind the programme and delayed the progress of the works at site as a whole.

11.  By the Amended Defence and Counterclaim of 29 November 2006, the Defendant gave further particulars of its claim for damages.

The mediation

12.  Pursuant to Practice Direction 6.3, the pilot scheme for voluntary mediation for cases in the Construction and Arbitration List came into operation on 1 September 2006.

13.  On 8 January 2007, the Defendant issued a Mediation Notice in accordance with Practice Direction 6.3.  In the Notice, the Defendant proposed to adopt the Hong Kong International Arbitration Centre [“HKIAC”] Mediation Rules as the rules of the intended mediation.

14.  On 19 January 2007, the Plaintiff responded through solicitors indicating that it agreed to mediate in accordance with the HKIAC Mediation Rules.

15.  Clause 13(i) of the HKIAC Mediation Rules dealt with the costs of mediation as follows:

“Unless otherwise agreed, each party shall bear its own costs regardless of the outcome of the mediation or of any subsequent arbitral or judicial proceedings.  All other costs and expenses shall be borne equally by the parties and the parties shall be jointly and severally liable to pay to the mediator such costs, including:-

(a) the mediator’s fees and expenses;

(b) expenses for any witness or expert advice or opinion requested by the mediator with the consent of the parties; and

(c) any administrative costs in support of the mediation including HKIAC’s costs.”

16.  There was however no agreement on the appointment of mediator.  The parties applied on 6 February 2007 to HKIAC for a mediator to be appointed.  On 8 March 2007, HKIAC appointed a quantity surveyor as the mediator. 

17.  The parties and the mediator signed a Mediation Agreement on 19 March 2007.  Clause 14 of the Mediation Agreement dealt with the mediator’s fees and disbursement:

“The Parties together and separately will be liable to the Mediator for the Mediator’s fees and disbursements … and shall pay to the Mediator any such fees and disbursements in advance as may be requested by the Mediator.  The Parties shall share equally such fees and disbursements.”

18.  A preliminary meeting for the mediation was held on 19 March 2007.  At that meeting, apart from the signing of the Mediation Agreement, the mediator cleared with the parties his social relationship and professional relationship with some the persons involved in the dispute.  He also explained to the parties the mediation objectives, the mediation process, the role of the mediator and the role of the parties.  The persons who would attend the mediation were identified and a deadline was agreed regarding the submission and exchange of position papers.

19.  The mediation was held on 26 March 2007 at the office of the solicitors for the Defendant.  It lasted for about 8½ hours.  It did not result in a settlement right away.  However, it is quite clear to me that the mediation was useful in substantially narrowing down the differences between the parties.  In a letter of 20 April 2007 from the Defendant’s solicitors to the Plaintiff’s solicitors shown to me by the Defendant without any objection from the Plaintiff, it was recorded as follows:

“We are instructed that during the mediation meeting, Mr Ricky Law of [the Plaintiff] indicated to Mr Tsang of [the Defendant] that the Plaintiff would be prepared to offer to pay $5,400,000 in full and final settlement of our respective clients’ claims and interest, with each party bearing its own legal costs.  In response, Mr Tsang stated that the Defendant would accept $6,000,000 in full and final settlement of the above action, including interest and costs.  The extra $600,000 (the difference of 10%) represented only a nominal value and fraction of the Defendant’s legal costs and disbursements incurred since 2000 …”

20.  This should be viewed against the background that at the beginning of the mediation, the respective position adopted by the parties was as follows:

(a) The Plaintiff said the Defendant should pay damages in the sum of $13 million odd;

(b)    The Defendant said the Plaintiff should pay damages in the sum of $8 million odd.

21.  Before the mediation, the Plaintiff had made a payment into court in the sum of $400,000 on 1 September 2006.  It was said to be “in satisfaction of all the causes of action in respect of which the Defendant counterclaims including interest and the costs of the counterclaim and costs of the action and after taking into account and satisfying all the … Plaintiff’s causes of action including for interest and costs in respect of which it claims.”.

Post mediation developments and settlement of the substantive claims

22.  After the mediation, the Plaintiff increased the payment into court several times:

(a) On 30 March 2007, the Plaintiff paid a further sum of $2.1 million “in satisfaction of all the causes of action in respect of which the Defendant counterclaims including interest and after taking into account and satisfying all the …Plaintiff’s causes of action in respect of which it claims”;

(b)    On 18 April 2007, the Plaintiff paid another further sum of $1.1 million on the same terms;

(c) On 20 April 2007, the Plaintiff paid another further sum of $220,000 on the same terms.

23.  The total amount paid into court was therefore $3,820,000.  In a letter dated 20 April 2007, the Plaintiff’s solicitors wrote to the Defendant’s solicitors indicating that the aggregate amount of $3,820,000 was “in satisfaction of all the causes of action in respect of which the Defendant counterclaims including interest and after taking into account and satisfying the Plaintiff’s causes of action of the Plaintiff’s action.”.

24.  Thus, despite the reference to costs of the action in the first notice of payment into court, the Plaintiff clearly represented to the Defendant by its subsequent notices of payment in and its correspondence that costs were not taken into account in the figure of $3,820,000.  Mr Houghton SC appearing for the Plaintiff did not argue otherwise.

25.  It is quite plain that the mediation had led to these increases in payment into court by the Plaintiff.  The Defendant accepted the payment into court by a notice of 3 May 2007.

26.  The parties regarded the acceptance of payment into court as a settlement of claims and the counterclaims.  On 4 May 2007, they wrote jointly to the court to ask for the proceedings to be stayed and an impending hearing on 7 May 2007 be vacated.

27.  On 4 May 2007, Burrell J vacated the hearing of 7 May 2007 and directed the parties to file a consent summons to stay the proceedings on terms.

28.  On 9 May 2007, the parties filed a consent summons seeking an order that all further proceedings be stayed and no order as to costs of the application.  On 11 May 2007, Burrell J made an order in terms and vacated the trial dates.

29.  The parties acknowledged the usefulness of the mediation in a report submitted to the court pursuant to paragraph 24 of Practice Direction 6.3 on 11 June 2007.  In response to the query whether mediation has led to settlement of the dispute or some part of it, the parties stated:

“The parties have failed to reach any agreement to settle during the mediation meetings.  After several mediation meetings, the Defendant accepted $3,820,000 exclusive of costs being the sum for full and final settlement of the action.  Mediation was of assistance to the settlement of the dispute.”

The question of costs

30.  Despite the sensible stance adopted by the parties in having the substantive claims and counterclaims settled, unfortunately the question of costs continues to involve them in costly legal proceedings.

31.  Soon after the settlement, the solicitors for the Defendant wrote to the solicitors for the Plaintiff on 9 June 2007 seeking costs.  After some initial correspondence on figures and breakdowns, solicitors for the Plaintiff wrote on 21 June 2007 taking objection on costs of the mediation being included.  The Plaintiff also took objection on the overall figure as being unreasonably high and unjustified.  The Plaintiff offered $670,000 in full and final settlement of the costs of the action including all previous costs orders made.

32.  The offer was rejected by the Defendant as unreasonably low in a letter of 25 June 2007.  The Defendant also threatened to proceed to taxation.

33.  The Plaintiff issued a summons on 11 July 2007 seeking an order that the Defendant to proceed with taxation within 28 days.  The summons was heard by Registrar Chan on 23 July 2007.  The Registrar ordered the Defendant to proceed with taxation within 63 days.

34.  On 24 July 2007, the Plaintiff sent to the Defendant’s solicitors a cheque of $670,000 under the cover of a letter from its solicitors.  It was stated that the cheque represented “an advance payment of costs prior to the taxation which is made now in order to reduce potential interest payable by [the Plaintiff] in respect of taxed costs, and this amount is to be set-off against the eventual taxed costs.” It was further stated that “such payment is made without prejudice to our client’s right to claim … for any amount which may be found to have been overpaid upon conclusion or termination of taxation process.”.

35.  The Defendant deposited the cheque into its account.

36.  There was some delay on the part of the Defendant in the taxation process and the Plaintiff issued a summons on 22 October 2007 seeking an unless order.  By a consent order, the Defendant was given up to 23 November 2007 to proceed with taxation.

37.  The Defendant filed its bill of costs and issued an appointment to tax on 23 November 2007.  The Plaintiff filed its List of Objections to the Defendant’s Bill on 7 January 2008.

38.  At the call-over hearing on 8 January 2008, having studied the Plaintiff’s List of Objections, Registrar Au-yeung directed two issues be determined before a judge.  In the order as drawn up, the two preliminary issues are identified as:

“The Defendant’s entitlement to its costs of defence of the Plaintiff’s claim and of the mediation.”

39.  Parties have spelt out more precisely what those two issues are in their submissions.  Having read the List of Objections, I am happy to adopt Mr Houghton’s formulation of such issues as accurate:

“(1)   Costs of the claim not to be included in the bill

The Defendant, having accepted the Plaintiff’s payment into court in satisfaction of the counterclaim after taking into account and satisfying all the Plaintiff’s causes of action in respect of which it claims: is only entitled to claim its cost of counterclaim.  In Medway Oil Storage Co Ltd v Continental Contractors Ltd [1929] AC 88 … it was held that party who is to receive the costs of the action so far as they have been increased by the counterclaim and would not have been incurred but for the counterclaim.  The Defendant has obviously claimed in this bill all costs irrespective of whether they are costs of the claim or costs of the counterclaim.  The bill ought to have been apportioned so that only costs of the counterclaim as defined in Medway Oil are charged.

(2) Costs in mediation

The Defendant has included in the bill costs in the mediation.  The Plaintiff maintains that costs in the mediation are not costs recoverable in this action as they are separate proceedings, without prejudice in nature and is voluntary.  There is no provision in the agreement to mediate for costs in the mediation to be treated as costs of the counterclaim taxable in the instant action; nor has there been an order for costs in the action providing for the costs in the mediation.”

40.  It is therefore clear from the history of the dealings between the parties as to costs up to this stage that the Plaintiff did not take the point that the Defendant was not entitled to any costs.  It had never been suggested that since there was no order for costs made in favour of the Defendant whether in respect of the claim or the counterclaim the Defendant is not entitled to have its costs taxed.  As a matter of common sense, it is difficult to see why the Plaintiff would have paid $670,000 in advance, albeit on terms, and pushed the Defendant to proceed with the taxation promptly if it considered the Defendant had no entitlement to costs whatsoever.

41.  Thus, it came with a bit of surprise that counsel for the Defendant (Mr Houghton had yet to be involved at that stage) advanced the argument that the Defendant had no entitlement to costs at all in his skeleton submissions filed on 30 April 2008 for the purpose of the hearing on 5 May 2008.

42.  This clearly goes beyond the scope of the two preliminary points identified by the Registrar.

43.  At the hearing on 5 May 2008, the Defendant applied for an adjournment to enable it to make an application to lift the stay and for costs being awarded in its favour.  Having heard submissions from the parties, I considered it fair and right to give an opportunity to the Defendant to file whatever application it deems fit to respond to the new stance taken by the Plaintiff.  The matter was therefore adjourned to 30 May 2008.

44.  The Defendant issued a summons on 9 May 2008 seeking to lift the stay granted by Burrell J for the purpose of entertaining an application by the Defendant for an order for costs against the Plaintiff in respect of the claim and the counterclaim, including costs previously reserved and taxation of the Defendant’s costs.

45.  In the light of the arguments canvassed before this court, the following issues have to be resolved:

(a)    Whether the Defendant has any entitlement to costs in the absence of any specific order;

(b)    If so, the extent of the Defendant’s entitlement;

(c) Whether this court has jurisdiction to make an order for costs without lifting the stay;

(d)    If so, whether the jurisdiction should be exercised in the present circumstances and in the exercise what order as to costs should be made;

(e) If the answer to (c) is negative, whether this court has jurisdiction to lift the stay and if yes, whether such jurisdiction should be exercised in this instance;

(f) If the stay is lifted, what order as to costs should be made;

(g) Depending on the answers to the above, in so far as necessary, the two preliminary issues identified by the Registrar.

General observations

46.  Before I embark on a discussion on these issues, it is to be noted that Section 52A of the High Court Ordinance provides that the costs of and incidental to all proceedings shall be in the discretion of the court.  As noted in para. F1/52A/4 of the Hong Kong Civil Procedure 2008 the discretion must be exercised judicially in accordance with rules of reason and justice.

47.  In the present case, the substantive claims between the parties were settled through the payment into court machinery and the order for stay.  The stay was granted pursuant to a consent summons.  The stay is therefore part of the contract between the parties and it is well established that short of cogent grounds supporting the setting aside of the contract of settlement, the court will not vary the terms of the stay.

48.  It is plain to me that the parties and their legal advisers had not addressed their minds adequately to the question of costs in concluding the settlement.  On the face of the consent order of 11 May 2007, the court did not deal with the question of costs other than the costs of the application.  It said nothing about the other costs of the action, whether costs of the Plaintiff’s claim or costs of the Defendant’s counterclaim.

Whether the Defendant has any entitlement to costs in the absence of further order

49.  Mr Houghton submitted that because of Order 62 rule 3(1) the Defendant is not entitled to any costs in the absence of any court order.  But rule 3(1) is subject to the other provisions of Order 62.

50.  In a case where a claim is settled by the acceptance of a payment into court, Order 62 rule 10(2) gives the plaintiff who accepted the payment an entitlement to costs up to the time of giving notice of acceptance.  It is unnecessary to have a further order.

51.  Mr Houghton submitted that rule 10(2) is not applicable to a defendant accepting a payment into court by a plaintiff satisfying his counterclaim.  He cited an unreported English case to support him: Iberotravel Ltd v Pallas Leasing (No. 32) Ltd [1997] EWCA Civ 1902.

52.  The point appears to have been conceded by counsel in the Iberotravel case and the judgment of the English Court of Appeal focused on the other issues.  I do not derive any assistance from that case in the present context.

53.  As a matter of principle, one should bear in mind that a counterclaim is in substance a claim by the defendant against the plaintiff (see Hong Kong Civil Procedure 2008 Para. 15/2/4).  In the counterclaim, a defendant in the action is in substance a plaintiff to the counterclaim whilst a plaintiff in the action is in substance a defendant to the counterclaim.  Order 22 rule 6 clearly envisages the use of payment in mechanism by a plaintiff facing a counterclaim.  That rule expressly provides that rule 3(4) is applicable with modification to the acceptance by a defendant of a plaintiff’s payment into court as regards the disposal of the counterclaim.  The effect is that on such acceptance, the counterclaim will be stayed.

54.  Even though there is no equivalent of Order 22 rule 6 in Order 62 rule 10, in my judgment rule 10(2) should be construed to cover the situation where a plaintiff makes a payment into court to satisfy the counterclaim of a defendant and the defendant accepts such payment to dispose of the counterclaim.

55.  This stems from the underlying tenet of the payment into court mechanism.  It is well established that payment into court should not be taken as an admission of liability.  Thus, it would usually be difficult for the court to make an order for costs in favour of a party accepting the payment in without going into the merits.  Yet to require that to be done will defeat the very purpose of the payment into court mechanism in terms of saving the costs and efforts in going through the merits.  Therefore, Order 62 rule 10(2) is essential for the operation of whole payment into court procedure.  Without the automatic entitlement to costs, a payment into court mechanism is incomplete.

56.  Hence, to hold that Order 62 rule 10(2) as not applicable to a payment into court by a plaintiff to satisfy a counterclaim is to devise an incomplete mechanism under Order 22 rule 6.  Given that a counterclaim is in substance a separate action by a defendant against a plaintiff, in the absence of clear wordings in Order 62 rule 10(2) to exclude its operation to a payment in to satisfy a counterclaim, I am of the view that it should be applicable.

57.  Another reason advanced by Mr Houghton for suggesting that rule 10(2) is not applicable in this instance is due to a defect in the Notices of Payment Into Court.

58.  As mentioned, the claim of the Plaintiff includes a claim for injunction.  Although the interlocutory injunction proceedings had practically resolved this part of the claim, there was still a claim for permanent injunction that had to be disposed of when the case was settled.  The payment into court mechanism can only dispose of claims for a debt or damages and it cannot dispose of other claims (see Hong Kong Civil Procedure 2008 Para. 22/1/2).  Thus, notwithstanding the Plaintiff purported that the payment into court was “after taking into account and satisfying the Plaintiff’s causes of action of the Plaintiff’s action” its acceptance would not have the effect of disposing of the injunction claim.  Up to this point, I have no quarrel with the analysis with Mr Houghton.

59.  But counsel goes further.  He submits that because of this defect, Order 62 rule 10(2) is not applicable and he relied on the Court of Appeal’s decision in Associated Engineers Ltd v Lo Chee Pui  CACV 398 of 2002, 27 Feb 2003.

60.  With respect, the Court of Appeal in Associated Engineers dealt with a different situation.  In that case, the plaintiff’s claim included a claim for declaration.  The defendant made a payment into court “in satisfaction of all the causes of action in respect of which the plaintiff claims”.  The plaintiff accepted the payment and proceeded to taxation.  It was held that the acceptance of the payment into court in the circumstances did not trigger Order 62 rule 10(2) because the payment in did not satisfy the declaration claim.  Further, the plaintiff did not file a notice of abandonment of the claim for declaration before it went ahead with the taxation.

61.  In other words, there was still an outstanding claim by the party seeking taxation.  It is clearly spelt out in rule 10(2) that in such circumstances he should finally dispose of his outstanding claim by a notice of abandonment before he is entitled to seek taxation.  Had the plaintiff done so, the Court of Appeal was of the view that he would be entitled to taxation (see Para. 33 of the judgment).

62.  Thus, it is clear that the formal defect in the notice of payment into court was not regarded as the obstacle.  Rather, it was the fact that there was an outstanding claim by the party seeking taxation which renders rule 10(2) inapplicable.

63.  It is noteworthy that the automatic right to taxation under rule 10(2) does not depend upon the disposal of all the claims advancing by party or parties other than the party seeking taxation.  In other words, take a simple situation where a defendant makes a payment into court to satisfy some causes of action in the claims of a plaintiff after taking into account of some but not all causes of action in the counterclaims, that plaintiff can seek taxation under rule 10(2) if he gives notice of abandonment regarding the rest of his own claims.  The fact that the defendant is still pursuing the rest of his counterclaims does not matter.  Rule 10(2) would still be applicable.

64.  Applying the analysis to the present case, the only claims of the Defendant in the Counterclaim are for debts or damages.  On acceptance of the payment into court, the whole of the Counterclaim was stayed.  There was no need for the Defendant to give any notice of abandonment in respect of any outstanding causes of action in the Counterclaim.

65.  The fact that there was still an outstanding cause of action for injunction by the Plaintiff cannot affect the operation of rule 10(2).

66.  Therefore, the arguments of Mr Houghton on the inapplicability of Order 62 rule 10(2) fail.  I hold that the Defendant is entitled to tax its costs of the Counterclaim pursuant to that rule.

The extent of the Defendant’s entitlement

67.  It follows from the above analysis that the Defendant’s entitlement under rule 10(2) is confined to the costs of the Counterclaim.  It does not extend to the costs of the Claim.

68.  By reason of Order 62 rule 3(1), the Defendant must obtain an order for costs from the court before it can have the costs of the Claim.  The same applies to the Plaintiff.

Whether the court can make an order for costs without lifting the stay?

69.  Mr Francis submits that the court can make an order for costs now without lifting the stay.  He seeks an order for costs in the Defendant’s favour both in respect of the Claim and the Counterclaim.  He relies on Rookes v Barnard (No. 2) [1966] 1 QB 176.

70.  Rookes v Barnard (No. 2) [1966] 1 QB 176 is authority for the proposition that a stay pursuant to Order 22 rule 3(4) is only a stay of further proceedings to determine the substantive rights of the parties and it does not extend to proceedings on question of costs.  But as regards costs of the Plaintiff’s claim, we are not dealing with a stay pursuant to Order 22 rule 3(4).  Order 22 rule 3(4) does not impose any stay on the plaintiff’s causes of action under the claim.

71.  Is the proposition in Rookes v Barnard (No. 2) applicable to the stay ordered by consent in the present case? To answer that, I find guidance from the judgment of the English Court of Appeal in Wagstaff v Colls  [2003] EWCA Civ 469, 2 April 2003.  The following principles can be taken from that case:

(a) A stay does not operate as a discontinuance or a judgment for the plaintiff or the defendant.  Thus, the proceedings remain extant and the stay can be lifted or removed if proper grounds are shown;

(b)    The extent of a stay depends on the context in which the stay was granted.  In the context of a stay by consent for settlement of disputes, one should look at the agreement reached between the parties.  The court will not hold a party barred by a stay from taking ancillary proceedings in the same action which has nothing to do with the bargain leading to the stay.  In that case, it was held that it was not necessary to lift a stay under a Tomlin order to enable a party to take wasted costs order proceedings against a solicitor;

(c) As between parties to the agreement leading to the stay, the court will be slow to allow litigation between them to be re-opened.  This is particularly so when the stay is an integral part of the compromise.

72.  Given the analysis in the earlier part of this judgment, it is not necessary for the court to make any order for the costs of the Counterclaim.  Even if I were wrong on that, I would hold that the stay by consent had nothing to do with the Counterclaim.  By the time of the joint application for stay by consent, the Counterclaim had already been stayed pursuant to Order 22 rule 3(4).  The joint application was to deal with the disposal of the Plaintiff’s claims.  It is precisely the situation in Rookes v Barnard (No. 2).  Hence, if a court order is necessary for the costs of the Counterclaim, I would hold that the court can make a costs order in respect of the Counterclaim without lifting the stay.

73.  As regards costs of the Plaintiff’s claim, one should proceed on the basis that if any party wishes to recover costs (including costs reserved or costs in the cause) he should ask for an order for costs specifically before the proceedings are stayed by consent.  I have referred to the history leading to the making of the consent order.  I do not think there is anything to suggest that either the Plaintiff or the Defendant wished to reserve the question of costs of the Plaintiff’s claim for future determination by the court.  As such, I cannot see any ground for suggesting that the stay does not extend to application for costs of the claims by the Plaintiff. 

74.  Therefore, I hold that it is necessary to lift the stay if either party wishes to obtain a court order for the costs of the Plaintiff’s claims.

An order for costs of the Counterclaim?

75.  I have already held that it is not necessary to have an order for costs of the Counterclaim by reason of Order 62 rule 10(2).  However, in case I were wrong in that, I would make an order that the Plaintiff shall pay the Defendant’s costs in the Counterclaim.  That would be in line with the spirit of the payment in mechanism as a whole.  Having utilized the mechanism, I do not see any justification to allow the Plaintiff to escape from its natural consequences.

Should the stay be lifted?

76.  This is only relevant in respect of the costs of the Plaintiff’s claims.  Having heard the submissions from the parties, I do not consider that this is a proper case for re-opening the question of costs regarding the Plaintiff’s claims.  Whilst it is correct that in the pre-stay correspondence there was no discussion as to costs, it does not mean that a party can expect the court to entertain a further application for an order for costs after a stay is ordered by consent.

77.  In my judgment, what a party should do if he wants costs despite the action is to be settled by a stay by consent is to apply for such an order for costs before the stay is ordered.  This is consistent with the practice in relation to Tomlin order.  In my experience, I have never heard of a case where parties to a Tomlin order come back to court to ask for costs order after a stay is granted by consent.  If a party wants costs as part of the settlement, he should provide for it in the schedule to the Tomlin order.

78.  By the same token, in the present case, if the Defendant had intended to seek costs of the Plaintiff’s claims (as opposed to costs of the Counterclaim), he should include that in the consent summons or seek the same from Burrell J before the stay was granted.

79.  I therefore dismiss Paragraph 1 of the Defendant’s summons.

80.  I will also dismiss Paragraph 2 in respect of the costs of the Plaintiff’s claim.  But I will make no order (as my primary conclusion is that it is not necessary to do so) as regards the costs of the Counterclaim.  I will remit the matter back to the taxing master for the taxation proceedings to continue for the costs of the Counterclaim in accordance with the following conclusions on the two preliminary points.

What constitutes the costs of the Counterclaim?

81.  The Plaintiff argues in the List of Objections that one should apply the approach of Medway Oil in determining whether an item is recoverable by the Defendant as costs of the Counterclaim.

82.  Medway Oil was a case where both the claim and counterclaim arisen from the same transaction were dismissed with costs.  The plaintiff succeeded in resisting the counterclaim only on the basis that no damage having been shown by the defendant although the court found them to be in breach.  Thus, it is readily understandable why the court regarded it as just that the plaintiff should not recover costs common to the defence of the claim and the prosecution of the counterclaim.

83.  We are not dealing with such a situation.  There is no order for costs of the claim (apart from those made in the interlocutory injunction proceedings).  As explained above, this court is not minded to lift the stay to facilitate a costs order to be made for the claim.

84.  Order 62 rule 3(8) provides for a defendant’s entitlement to costs where a plaintiff accepts money paid into court by a defendant if the latter takes into account of the counterclaim in making the payment.  But that is subject to the power of the court to direct otherwise.

85.  Arguably, by the same token as regards the applicability of Order 62 rule 10(2), rule 3(8) can be applicable to a case where a defendant accepts a payment into court by a plaintiff after taking into the plaintiff’s claim.  However, when this court drawn the attention of the parties to this provision, Mr Houghton argued that it is not applicable in the present case.  Mr Francis argued that it is not applicable, or alternatively he submitted that this court should make a direction to the contrary.

86.  Bearing in mind the stance of Mr Houghton, I do not need to deal with this point.  However, if necessary, I will hold that given the parties’ intention to have the plaintiff’s claim resolved by the consent order for stay and there was no order for costs of the claim in that order, the common intention in the settlement was that neither party shall be entitled to any further costs on the claim apart from those previously ordered.  Thus, to give effect to the settlement, there should be a direction that neither party is entitled to any costs in respect of the Plaintiff’s claim apart from costs order previously made.

87.  This means that the only set of costs which the Plaintiff was entitled to seek taxation is costs already granted in favour of the Plaintiff pursuant to order of Suffiad J on 22 December 2000 in any event.  Regarding the order for Plaintiff’s costs in the cause, since there was no determination of the cause and no order for costs had been made in respect of the claim generally, the Plaintiff is not entitled to taxation.  

88.  In such circumstances, the proper approach is to treat the Counterclaim as an independent action.  It means the Defendant gets the costs incurred on the Counterclaim including costs common to the defence of the claim and the prosecution of the Counterclaim.  But the Defendant cannot have the costs incurred solely for defending the claim.

Do costs include costs of the mediation?

89.  Section 52A of the High Court Ordinance empowers the court to determine the costs of and incidental to all proceedings the Court of First Instance.  The issue is whether costs of the mediation can be regarded as costs incidental to the legal proceedings.

90.  Costs incurred on negotiations with a view to settlement are costs incidental to legal proceedings even though the process of negotiations is not part of the legal proceedings.  See the First Schedule to Order 62, Part I item 5(a)(x).

91.  There is therefore no merit in the Plaintiff’s submission that costs of mediation cannot be costs incidental to legal proceedings since the mediation process is a separate process.

92.  As a matter of principle, for the purpose of deciding whether some costs should be regarded as costs incidental to legal proceedings, I fail to see any valid distinction between costs incurred on negotiations and costs incurred in mediation.  Both are alternative means to settle a civil dispute that would otherwise be litigated.

93.  In Vellacott v Convergence Group plc [2007] EWHC 1774 (Ch) Rimer J (as he then was) held that the costs of a failed post-action mediation were costs incidental to the court proceedings.  The English Court of Appeal made a similar order in Eagleson v Liddell [2001] EWCA Civ 155.

94.  It is a question of fact whether a mediation is so closely connected with a piece of litigation such that the costs of mediation can properly be described as costs incidental to a set of legal proceedings.  If a mediation takes place a long time ago before parties commence legal proceedings, the court may be slow to conclude that the costs of such a mediation should be taxable as costs incidental to the legal proceedings, see Lobster Group Ltd v Heidelberg Graphic Equipment Ltd [2008] EWHC 413 (TCC), 6 March 2008.

95.  In the present case, the mediation was undertaken by the parties pursuant to Practice Direction 6.3 as an attempt to settle an ongoing piece of litigation.  It was acknowledged by the parties that though the mediation did not result in immediate settlement, it contributed indirectly to the settlement of the substantive disputes.

96.  In my judgment, on the facts of the present case, the costs of the mediation are costs incidental to the action and the court has jurisdiction to make order for payment and tax the same.

97.  As with other items of costs, the court should take into account of the agreement between the parties in deciding the incidence and the quantum of costs.  In Lobster Group Ltd v Heidelberg Graphic Equipment Ltd [2008] EWHC 413 (TCC), 6 March 2008, Coulson J held where parties agreed to bear their own costs of the mediation, the court would not re-open the liability as to such costs.

98.  In coming to that conclusion, Coulson J adopted the rationale of the decision of Master Campbell in National Westminster Bank v Feeney [2006] EWHC 90066 (Costs). In that case, the parties settled their dispute by a Tomlin order following mediation.  Under the Tomlin order, the claimant had to pay the costs of the defendants in respect of the counterclaim.  The mediation agreement adopted the CEDR (Center for Effective Dispute Resolution) Model Mediation Procedure which contained the following provisions:

“21.   CEDR Solve’s fees (which include the mediator’s fees) and the other expenses of the mediation will be born equally by the parties …

22.    Each party will bear its own costs and expenses of its participation in the mediation.”

99.  The Guidance Notes attached to the mediation agreement said the following on costs of the mediation:

“The usual arrangement is for the parties to share equally the fees and expenses of the procedure, but other arrangements are possible.  A party to a dispute, which is reluctant to participate in mediation, may be persuaded to participate of the other party agree to bear that party’s expenses.  Parties may also amend the agreement to identify that the costs of mediation may be taken into account in any court orders if there is no settlement at the mediation.”

100.  Before Master Campbell, the defendant argued that the Tomlin order overrode the agreement between the parties on the costs of mediation.  That argument was rejected by the Master and on appeal, rejected by Eady J on 14 May 2007 (a summary of the decision on appeal can be found at the CEDR website).

101.  The Master also held that effect should be given to the agreement under Clause 22 of the Model Procedure and that means a party’s own costs and expenses of participation in the mediation is not recoverable.  However, regarding the mediator’s fees and expenses, the Master was of the view that the position under Clause 21 was analogous to the situation where parties instructed joint experts.  That means initially such fees would be shared between the parties.  The half share of a party would become costs of the proceedings and recoverable as such.

102.  According to the summary at the CEDR website, Eady J was of the view that even the half share of the mediator’s fee was not recoverable.

103.  I have already set out the relevant HKIAC Mediation Rules and the terms of the Mediation Agreement on the costs of mediation.  The booklet published in conjunction with the launching of the pilot scheme for voluntary mediation for cases in the Construction and Arbitration List contained the following information on the topic:

“Whilst you will be required to pay for the mediation service which, principally, will include the mediator’s charge for his or her time together with any room hire costs, it is usual for the parties to agree before the start of the mediation that they will be responsible in equal shares for them.  Of course, if you should decide to instruct lawyers, or other professional persons, to assist you during the mediation, you will be responsible for the entirety of their particular charges.”

104.  I do not think the information in the booklet alters the position between the parties.  Ultimately, it depends on the terms of the agreement between the parties.  In this connection, the terms of the HKIAC Mediation Rules are clear, viz. each party shall bear its own costs regardless of the outcome of the mediation or of any subsequent arbitral or judicial proceedings.  That was adopted by the parties as their agreement.

105.  On those terms, I do not think one should draw any distinction between the costs of participation and the fees and expenses charged by the Mediator.  Even if one were to follow the analogy with joint expert, a party’s share of the fees and expenses of the Mediator will become his own costs incurred in the mediation.  In my view, that would equally be caught by the agreement to bear one’s own costs under the HKIAC Mediation Rules.

106.  I do not see any justification for departing from the agreement between the parties.  Therefore, on the facts of the present case, the Defendant cannot recover any costs of mediation as costs incidental to the counterclaim.

Observations on the procedures

107.  As I said at the outset, the matter was first referred to this court as part of the taxation proceedings.  There is no specific provision under Order 62 for a taxing master to refer a preliminary point for the decision of a judge.

108.  However, it is a matter of case management for a taxing master to decide whether some preliminary points should be resolved first before proceeding with the substantive taxation.  If a taxing master considers that there should be a resolution of preliminary points, it is open to him or her to consider exercising the power under Order 32 rule 12 to refer the preliminary points to a judge.

109.  Having said that, it must also be borne in mind that taxing masters generally have more experience in dealing with taxation of costs and only in rare occasions would a master consider it appropriate to refer a point to a judge.

110.  In the present instance, I understand the preliminary point about the costs of mediation is a novel one as far as Hong Kong is concerned and it could be of general public importance.  It is therefore appropriate for the Registrar to refer the matter to this court, particularly when the parties did not advance any submissions to the contrary.

111.  I will answer the two preliminary points in accordance with my discussion above.

112.  I will also make a costs order nisi that there be no order as to costs for the hearings on 5 and 30 May 2008 and the summons of 9 May 2008.