RBA FAR EAST LTD v. YUEN CHAK HANG EDWARD AND OTHERS

HCCL 3/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 3 OF 2011

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D E C I S I O N

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1.  These applications before me come at the tail end of very substantial proceedings, in which large sums of money were claimed, and which were brought to an end by the acceptance of a sanctioned offer made by the plaintiff to receive a very substantially smaller sum in order to bring the proceedings to a close.

2.  The two summonses before me are :

(1)   The defendants’[1] summons dated 26 November 2012 under O 22 r 21, O 62, r 5 of the Rules of the High Court (“RHC”), and the inherent jurisdiction of the court for orders that :

(a)  defendants’ costs upon plaintiff’s withdrawal of the bribery and secret commission claims be paid by the plaintiff on an indemnity basis;

(b)  defendants’ costs thrown away by variation of the injunction be paid by the plaintiff on an indemnity basis; and

(c)  there be no order as to such part of the plaintiff’s costs of and incidental to the bribery and secret commission claims.

(2)   The plaintiff’s summons dated 4 December 2012 under O 22 r 21, O 62 r 5 of the RHC, and the inherent jurisdiction of the court for orders that :

(a)  the costs of the action up to 14 November 2012 be to the plaintiff, save as provided by the order of Reyes J dated 20 July 2012;

(b)  defendants’ costs upon the plaintiff’s withdrawal of the bribery and secret commissions claims be paid by the plaintiff, be taxed if not agreed; and

(c)  defendants’ costs thrown away by variation of injunction,  be paid by the plaintiff, be taxed if not agreed.

The brief history of the proceedings

3.  These proceedings were brought by the plaintiff, the buying agent of the RBA Inc., the well-known garment company retailing clothes under the brand “Brooks Brothers”.  The 1^st defendant worked for the plaintiff for more than 18 years in the course of which he became an executive director and chief financial officer of the plaintiff with control over its financial matters.  On 9 March 2010, a senior executive of RBA Inc., Mr. Edward Dixon, received an anonymous e-mail making allegations against the 1^st defendant and two other senior executives of the plaintiff alleging that the 1^st defendant received kick-backs and side payments amounting to 3% of the FOB price for each purchase order placed by the plaintiff.  A request for identification by Mr. Dixon prompted an e-mail from the whistle blower refusing to reveal the name of his factory out of fear that the plaintiff might take action that would jeopardize his relationship with other clients and ruin his business.  These allegations prompted RBA Inc. to commence extensive investigations in Hong Kong and in the Mainland for which purpose they engaged Deloitte Financial Advisory Services LLP (“Deloitte”) to provide forensic accounting support.  These investigations revealed that:

(a)   the defendants had a control of 68 bank accounts in Hong Kong, Singapore and the UK and several safe deposit boxes.  These accounts had seen enormous fund flows to the tune of HK$ 80 million and carried substantial balances to the tune of HK$ 32 million.  The 1^st defendant also has 16 insurance policies with insured amounts in excess of US$ 16 million.  These amounts were substantially more than his earnings over the past 18 years with the plaintiff during which the 1^st defendant earned no more than HK$ 35 million.

(b)   The 1^st defendant had also set up the 3^rd and 4^th defendants, two BVI companies whose names were either deceivingly similar or outright identical to names and marks previously used by RBA Inc..

(c)   The investigation also reviewed that the 1^st defendant had misappropriated money from the plaintiff under the pretence of expenses reimbursement in a total amount of USD567,867.  The 1^st defendant had confessed to this wrong doing and had signed, and paid up on, a promissory note in the sum of USD150,000.

4.  Following upon those investigations, the present action was commenced on 2 March 2011 against the 1^st defendant claiming repayment of bribes, secret commissions, and expense frauds, and against his family and children, and 3 nominee companies, as constructive trustees receiving funds from the bribes, secret commissions and expense frauds. At the same time, the plaintiff obtained ex parte mareva injunctions against the defendants.  The defendants had initially sought to discharge the mareva injunctions, the 1^st defendant asserting, in his 4^th affirmation dated 29 April 2011, that the wealth discovered by the plaintiff to be under his control largely came from his wealthy sister.  However, the defendants did not pursue their applications to discharge the mareva injunctions, and consented to the continuation of the mareva injunctions and that all costs in connection therewith be in the cause.

5.  On 23 April 2012, ICAC informed the 1^st defendant that their investigations were complete and that, on the basis of the facts then known, no further investigative action of the complaint against him alleging corrupt practices would be pursued.  Given the decision of the ICAC to close their file and absent evidence from suppliers of actual bribes being paid which, understandably, was unlikely to be readily forthcoming, the plaintiff decided to withdraw the bribery and kick‑back claims.  The plaintiff applied to do so by summons dated 3 July 2012, which was heard by Reyes J, the judge then in charge of the commercial list, who granted leave to the plaintiff to withdraw the bribery and secret commission claims and to amend the statement of claim accordingly.  He also varied the injunction orders, adjusting the scope of those orders.  He ordered that the costs of and occasioned by the applications to withdraw and to amend the statement of claim be to the defendants, in any event, to be taxed if not agreed, on a basis to be determined by the trial judge; and he ordered the costs of and thrown away by the plaintiff’s variation to the injunctions be to the defendants, in any event, to be taxed if not agreed, again, on a basis to be determined by the trial judge.  It appears from the transcript of that  hearing that he was not prepared to make an order that the costs to the defendants be taxed forthwith and on an indemnity basis.  He said:

“I think … the actual basis of the order, whether party and party or indemnity basis, should really be a decision of the trial judge, once [he has] seen the entire picture.”

6.  Negotiations taking place between the parties eventually resulted in the entire proceedings coming to an end when the defendants, on 14 November 2012, accepted the plaintiff’s sanctioned offer of 18 October 2012 to be paid USD450,000 (inclusive of USD150,000 previously paid).

7.  However, costs remained in dispute and resulted in the two summonses before me, the defendants, by their summons, claiming that the cost awarded by Reyes J should be taxed an indemnity basis, and the plaintiff by its cross-summons seeking a taxation of those costs on the usual party and party basis. 

8.  As regards the costs of this action, the defendants seek an order that there be no order as to such part of the plaintiff’s costs of and incidental to the bribery and secret commission claims; and that the costs of the action be provided for; whilst, by its cross‑summons, the plaintiff asks for the usual order of costs, up to acceptance of the sanctioned offer, save for those orders as to costs made by Reyes J in favour of the defendants.

The costs awarded by Reyes J: to be taxed on party and party or indemnity basis?

9.  Consequent upon the retirement of Reyes J, I was appointed the judge in charge of the commercial list and the determination of the basis of taxation of the costs awarded rightly falls upon me.  Reyes J deferred making any determination of the basis of taxation, for the reason, with which I agree, that the determination should be made by the trial judge after trial when he would have seen the entire picture and, I would act, when he has made his findings of fact after hearing the witnesses giving evidence before him.  However, there has been no trial, and there are no findings of fact in this case, and I have to do the best I can, upon my review of the affidavit evidence filed in this case and the submissions made on behalf of the parties.  Having regard to the objectives of the civil justice reform, I refrain from conducting a mini trial of the matters in contention.  I also refrain from conducting a prolonged investigation into the allegations and cross-allegations made by the parties.  Instead, I shall attempt to look at the entire case in the round in order to decide whether or not the defendants have discharged the burden, which they acknowledge rest on them, to show that special or unusual features exist in the present case to warrant the imposition of indemnity costs.

10.  The parties are agreed that the principles to be applied in the exercise of the court’s discretion, whether or not to make an order for indemnity costs, appear in §§13-20 of the decision of the Court of Final Appeal in Town Planning Board v Society for Protection of the Harbour Ltd (No 2) (2004) 7 HKCFAR 114.  The discretion to order indemnity cost is not to be fettered, or circumscribed, beyond the requirement that taxation on an indemnity basis must be “appropriate”.  The power to order taxation on an indemnity basis is not confined to cases which have been brought with an ulterior motive or for an improper purpose, or where there was some deception or underhand conduct on the part of the losing party.  Litigants who conduct their cases in bad faith, or as a personal vendetta, or in an improper or oppressive manner, or whose conduct results in costs being incurred irrationally, or out of all proportion, to what is at stake, may also expect to be ordered to pay costs on an indemnity basis if they lose, and have their costs, or part of their costs, disallowed if they win.  However, the grounds upon which costs are awarded must be connected with the case.  This may extend to any matter relating to the litigation and the parties’ conduct in it, and also to the circumstances leading to the litigation, but no further.

11.  The main ground relied upon by the defendants for their contention that costs should be awarded on an indemnity basis is that the plaintiff brought these very serious charges, which impinge the moral character of the 1^st defendant, solely based on a complaint of an unidentifiable whistle blower who asserted that he had been a supplier of the plaintiff.  Instead of making an investigation with suppliers and adducing evidence of actual bribes and kick-backs, the plaintiff had chosen to take issue with the 1^st defendant’s wealth and to suggest that this was disproportionate to his income.

12.  In answer to these contentions, the plaintiff asserted that the 1^st defendant, a high ranking and trusted employee of 18 years, was caught, and admitted to, defrauding the plaintiff under the pretence of expenses reimbursement.  The plaintiff pointed to the huge, and disproportionate, amounts of money flowing from and standing in an alarmingly large number of bank accounts of the 1^st defendant, and of his nominees, and relied upon the fact that the evidence it had presented satisfied the judge that he ought to grant ex parte mareva injunctions against the defendants.

13.  In this connection, there is a clear conflict of fact, which I am unable to resolve on the affidavit evidence.  The plaintiff has asserted that the 1^st defendant’s explanation, that his seemingly disproportionate wealth was in fact mostly his sister’s hard-earned money, was not put forward until some 9 months later.  As against that, the 1^st defendant asserted that he did disclose the sources of wealth before the action, during his meetings with personnel of RBA Inc. and Deloitte.  However, whether or not the explanation was provided earlier, or later, the plaintiff pointed to the fact that, the explanation notwithstanding, the defendant chose to consent to a continuation of the mareva injunctions to their full extent and, further, that the defendants did not seek any variation of the terms of mareva injunctions during the 16 months’ period of their subsistence in full force, during which time the defendants were legally represented and, presumably, properly advised.

14.  The point was also taken that the plaintiff was merely a buying office and the 1^st defendant’s role, as chief financial officer, would not enable him to choose suppliers and to extort bribes.  To counter this, the plaintiff pointed to the fact that the 1^st defendant, as chief financial officer, controlled payments to suppliers and, as such, was in a position to extort bribes.

15.  The defendants complained about the delay in the withdrawal of the bribery and secret commission claims, which, they asserted, amounted to over 99% of the plaintiff’s claim against the defendants.  Notwithstanding the defendants’ request for the plaintiff to clarify its case in January 2012, the withdrawal was only made apparent from the plaintiff’s further answer to the request that was only filed on 26 April 2012.  In answer, the plaintiff asserted that it withdrew the bribery and kick-back claims, and applied to vary the mareva injunctions, soon after the plaintiff’s internal investigations were completed and after the ICAC had indicated, on 23 April 2012, that they would take no further action in the matter.  The decision to withdraw was made on the plaintiff’s realisation that there was little or no prospect that any of the suppliers would openly, and voluntarily, admit to bribing the 1^st defendant.

16.  The defendants complained of the oppressive nature of the proceedings brought against them which caused to havoc to them.  They did not attempt to vary the injunction orders because they were in financial difficulties and were not be able to incur the legal costs involved in such an exercise.  Their hardships were well known to the plaintiff who refused their requests to increase the limit for legal costs contained in the mareva injunctions.  To counter these assertions, the plaintiff pointed to the fact that the defendants enjoyed full legal representation and had exchanged two rounds of affirmations, involving a total of 12 affirmations, and that they could have sought to discharge, or vary the injunction orders, rather than consenting to their continuance.  The evidence of the 1^st defendant’s wealth, and of his sister’s financial status and support, contradicted the assertion by the defendants of financial difficulties on their part.

17.  The defendants also complained that a personal vendetta was being conducted against the 1^st defendant, driven by Mr. Joe Dixon who had animosity against him, and which was made all the more clear by the fact that other implicated staff had not been sued.  The proceedings were oppressive and caused hardship by tarnishing the 1^st defendant’s representation and by rendering him unemployable.  In answer, the plaintiff asserted that it was a part of a large global operation and that there was no basis to suggest that such an extensive investigation and litigation was the result of one staff member’s personal animosity against the other.  The plaintiff’s reaction to and the pursuit of this matter by litigation was entirely reasonable and justified, given the fact that a long time top executive had been found to be stealing from it, and appeared to be inexplicably rich.  Complaints of damaged reputations did not hold water and, to the extent that the 1^st defendant had confessed to his own wrongdoing, he certainly did not do his reputation any good. 

18.  To pursue the defendants to the extent and in the manner that the plaintiff did, simply on the unsupported assertions of an anonymous whistle blower, would constitute strong grounds, in my judgment, to order cost to be taxed on an indemnity basis upon the withdrawal of the unfounded bribery and secret commission claims which must, of necessity, have caused substantial hardship to the defendants and, in particular, to the 1^st defendant, and must have severely tarnished his reputation.  But there is much more to this case than just that.  Balancing the evidence filed by the parties in support of their rival contentions, and having closely reviewed and weighed those contentions, I conclude that I am not persuaded that I should depart from the usual order for costs to be taxed on a party and party basis.  However, my decision is not to be construed as containing adverse findings against the defendants.  There has been no trial and just as Reyes J did not see, neither have I seen the entire picture.  What I have done is to weigh the various matters advanced before me and determine that they do not lead me to depart from the normal order and make orders for costs to be taxed on an indemnity basis. 

The proviso to O 22, r 21 of the RHC

19.  I agree with the recent of observations of Poon J on the proper approach to follow when faced with an application to apply the “Otherwise Proviso” contained in O 22, r 20(1) and O 22, r 21(1) of the RHC.  Under r 20(1), where a defendant’s sanctioned offer or sanctioned payment to settle the whole claim is accepted without requiring the leave of the Court, the plaintiff is entitled to his costs of the proceedings up to the date of service notice of acceptance.  Under r 21(1), where a plaintiff’s sanctioned offer to settle the whole claim as accepted without requiring the leave of the Court, the plaintiff is entitled to his costs of the proceedings up to the date on which the defendant served notice of acceptance.   These prima facie costs consequences follow upon the stated event “unless the court otherwise orders” (“the Otherwise Proviso”).  In his judgment in Etratech Asia-Pacific Ltd v Leader Printed Circuit Boards Ltd, Poon J analysed the legal position and concluded that the prima facie rule in O 22 r 20(1) should apply unless (1) the defendant discharges the burden of showing exceptional circumstances that justify a departure; and (2) he has given a prior warning to the plaintiff that he will apply to invoke the Otherwise Proviso upon acceptance of the sanctioned payment or sanctioned offer[2]. In my judgment, the same applies with regard to r 21(1) under which the defendant has to give a prior warning to the plaintiff that he would apply to invoke the Otherwise Proviso when he serves his notice of acceptance of the plaintiff’s sanctioned offer.

20.  It is common ground that prior notice has been given in this case.  If allowed, the effect of defendants’ applications before me to apply the Otherwise Proviso, would be to deny the plaintiff its cost of the action which were not already denied by the orders of Reyes J who ordered that  the costs of and occasioned by the applications to withdraw the bribery and secret commission claims and to amend the statement of claim accordingly be to the defendants, in any event, and who also ordered that the costs of and thrown away by the plaintiff’s variation to the injunctions be to the defendants in any event.  The effect of these cost orders is that the costs incurred by the defendants in defending the bribery and secret commission claims, and in resisting the mareva injunctions, is so far as those orders sought to preserve assets to satisfy the bribery and secret commission claims, are to be paid by the plaintiff to the defendant.  As was conceded by the plaintiff, the effect of these costs orders is to deny the plaintiff any right to claim its costs incurred in the pursuit of bribery and secret commission claims in this action which, and I quote from the submission of counsel for the plaintiff, constitute “the lion’s share” of the plaintiff’s costs of the action. 

21.  Viewed in this context, the application before me must fail as the defendants have not demonstrated any exceptional circumstances to deny the plaintiff its costs of recovering the sum of US$567,867, being sums that were wrongly claimed, and paid, as expenses reimbursements, and in respect of which claim the defendant accepted the plaintiff’s sanctioned offer of 18 October 2012 to be paid US$450,000.  I do not see any basis for depriving the plaintiff its costs of recovering these sums, a substantial amount of which was successfully recovered by the defendant’s acceptance of the plaintiff’s sanctioned offer.  No exceptional circumstances have been shown to me to exist as would enable me to deny the plaintiff its rightful costs in this matter.

22.  However, if I am wrong in my construction of the effect of the costs orders made by Reyes J., and if the plaintiff was wrong to make the concession that it did, then I would conclude that exceptional circumstances existed in the present such as would enable me to order that the plaintiff is entitled to recover its costs of the proceedings up to the date of service of notice of acceptance, save for the plaintiff’s costs incurred in the pursuit of the bribery and secret commission claims in this action and save for the plaintiff’s costs incurred in obtaining the mareva injunctions, in so far as those orders sought to preserve assets to satisfy the bribery and secret commission claims. 

Costs

23.  I make a costs order nisi that the defendants pay the cost of the applications to the plaintiffs, to be taxed on a party and party basis, if not agreed.