PREAMBLE PROPERTIES FINANCE LTD v. YAU CHI YUK and TSO TUNG HA, the Personal Representatives of the estate of YAU SZE MING, deceased

DCMP 899/2017

[2020] HKDC 404

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO 899 OF 2017

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REASONS FOR DECISION

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INTRODUCTION

1.  This is an appeal by the plaintiff against the costs order made by a master (“the Master”) on 23 December 2019 whereby the Master inter alia ordered “costs of this action be to the plaintiff to be taxed if not agreed.” (“the Master’s Order”). 

2.  The plaintiff appealed against the Master’s Order.  However, due to the general adjournment period (“the GAP”) caused by the coronavirus pandemic, the appeal was not heard until 20 May 2020 before me.  

3.  After hearing submissions from counsel on both sides, I made the following order at the end of the hearing:-

(1)     Allow the appeal and set aside §3 of the Order made by the Master on 23 December 2019 where she had made an order that the “costs of this action be to the plaintiff to be taxed if not agreed.” Instead, §3 will be substituted with the following:-

“3. Costs of this action (including all previous orders for costs either reserved or be in the cause of the action) be to the plaintiff to be taxed if not agreed on a full indemnity basis.”

(2)     Costs of the appeal be to the plaintiff to be taxed if not agreed, on an indemnity basis, with certificate for counsel.”

4.  I said I would give the reasons for my decision in due course.  Here are the reasons.

BACKGROUND

5.  On 30 July 2017, a mortgage agreement known as a first legal charge had been entered between the plaintiff as lender and Mr Yau Sze Ming (“Yau”) as borrower (“the First Legal Charge”). It provides inter alia that Yau, shall pay all sums of moneys obligations and liabilities owing to the plaintiff including “all costs, charges and expenses (including all legal expenses calculated on full indemnity basis) which may be incurred under or in connection with any other matter arising under or in consequence of or in connection with this Legal Charge ….” (“the Indemnity Costs Clause”)[1].

6.  On 21 March 2017, the plaintiff brought an O 88 mortgage action against Yau by originating summons, claiming (i) payment of all money due under the First Legal Charge; (ii) vacant possession of the mortgaged property; and (iii) costs on full indemnity basis.

7.  On 1 August 2017, by the order of Master Chan, the matter was adjourned, with a direction to Yau to file his acknowledge of service and affirmation in opposition within 14 days. Costs was reserved on that occasion.

8.  On 11 August 2017, Yau filed an affirmation in opposition of the application, alleging (i) his ignorance to the interest rate charged; and (ii) inability to repay the debt.  He asked for more time to repay the debt.  However, that affirmation was not served on the plaintiff.

9.  On 26 September 2017, by the order of Master Chan, Yau was allowed to file his affirmation in opposition, with leave to the plaintiff to file an affirmation in reply.  Costs was ordered to be in the cause on that occasion.

10.  On 7 December 2017, the matter was adjourned to be heard on 27 February 2018 by Master Chan.  Costs was reserved on that occasion.

11.  On 27 February 2018, Master Chan ordered the matter to be turned into an action by writ and the plaintiff was ordered to file and serve its statement of claim.  Costs was ordered to be in the cause.

12.  Sometime between February and March 2018, Yau had passed away on an unknown date.  This was a matter unbeknown to the plaintiff at the time. 

13.  On 12 March 2018, the plaintiff filed its statement of claim, specifically referred to (i) the Indemnity Costs Clause; and (ii) claiming inter alia “costs of these proceedings on full indemnity basis.”

14.  On 7 June 2018, the plaintiff applied, inter alia, for summary judgment under O 14 of the Rules of the District Court (“RDC”), again claiming costs on a full indemnity basis. 

15.  On 29 June 2018, the plaintiff learned of the passing of Yau, causing a standstill in the action from that date onwards. 

16.  By the order of Registrar Ho, the matter was adjourned by consent for the personal representatives of Yau to obtain the letters of administration.  Costs for that hearing was reserved again.

17.  In November 2018, Yau Chi Yuk and Tso Tung Ha were appointed as personal representatives of the estate of Yau.  

18.  On 16 August 2019, an agreement for the sale and purchase of the mortgaged property was signed.  On 15 November 2019, the sale of the mortgaged property was completed.  On 18 November 2019, the solicitors for the estate sent to the solicitors for the plaintiff, a cheque in the sum of HK$985,919.46, representing the principal and interests owed by Yau to the plaintiff under the First Legal Charge. 

19.  On 5 December 2019, the plaintiff issued a discontinuance summons (“the Summons”) applied for the following:-

(i)     the defendant in this action, ie Yau be substituted by the estate;

(ii)    upon the plaintiff receiving full and final settlement of all principal and interest due by the defendant, discontinuance of the action with leave; and

(iii)    costs of this action (including costs of this application and all previous orders for costs either reserved or be in the cause of this action) be to the plaintiff to be taxed if not agreed on full indemnity basis. (emphasis added)

20.  On 23 December 2019, the matter was heard by the Master who made an order in terms of §§ (i) & (ii) of the Summons.  They were not matters in dispute.  However, on § (iii), the Master only ordered “costs of this action be to the plaintiff to be taxed if not agreed”.  She did not decide on what basis such costs should be taxed and what would happen to those costs which had been reserved or ordered to be in the cause on previous occasions in her order. 

DISCUSSION

Legal principles involved

21.  The principles in relation to an appeal from a master to a judge in chambers is trite but worth reminding ourselves of.  It is by way of an actual rehearing of the application which led to the order under appeal, and the judge treats the matter as though it came before him for the first time.  The judge in chambers is in no way fettered by the previous exercise of the master’s discretion: See Hong Kong Civil Procedure 2020 (“HKCP 2020”), Vol 1, §58/1/2.

22.  As this appeal only involves the Master’s decision on the issue of costs, the appellant/plaintiff has to show that “the order made by the master was unreasonable or erred in law, ie if he either failed to take into account proper matters or took into account matters that should not have been taken into account.”: See HKCP 2020 Vol 1, §58/1/6.

The Master’s Order

23.  Mr Donald Chan, the plaintiff’s solicitor who attended the hearing before the Master on 23 December 2019, has filed an affirmation to record the exchange between the Master and the solicitors representing the parties at the hearing.  Originally the plaintiff’s solicitors intended to apply to the court for the Digital Audio Recording Transcription and Storage (“DARTS”) recording and/or transcripts. However, due to the GAP, they reckoned that it was unlikely that such transcripts would become available before the appeal hearing.  Hence, he filed the affirmation instead.  I have had the opportunity to listen to the audio recording through the DARTS system before the hearing.  I can confirm that Mr Chan’s affirmation has correctly recorded what took place at the hearing save for one minor mistake in relation to the “note” made by the Master in her record which I shall deal with below.   

Issues to be decided  

24.  In my judgment, the issues in this appeal involved: (i) what was the issue that the Master was asked to decide at the hearing below; (ii) what did she decide; (iii) by doing so, whether the Master had acted unreasonably or erred in law, ie by failing to take into account proper matters and took into account matters that should not have been taken into account; and (iv) if the Master was wrong, then what should be the correct costs order.

(i) What was the Master asked to decide at the hearing below?

25.  In the Summons, the plaintiff asked for, inter alia, costs of the action on an indemnity basis.  Specifically, the plaintiff asked that “costs of this action (including costs of this application and all previous orders for costs either reserved or be in the cause of this action) be to the plaintiff to be taxed if not agreed on full indemnity basis”. 

26.  At the hearing, the Master first granted an order in terms of the first 2 paragraphs of the Summons which were not in dispute.  The Master then proceeded to deal with the third paragraph of the Summons which involved the issue of costs.  In the affirmation filed in support of the Summons as well as at the hearing, the plaintiff’s solicitor had specifically asked the Master to deal with those costs which had been reserved or ordered to be in the cause by Master Chan and Registrar Ho on previous occasions. 

27.  The Master asked the solicitor representing the defendant if he had any disagreement on the issue of costs.  The defendant’s solicitor stated that he was not in the position to agree on whether or not those costs which had been reserved should be paid by the defendant as his firm did not represent Yau.  He said that his firm only represented the personal representatives of the estate, namely, the present defendant in the case. 

28.  The Master then stated the following during the hearing:-

(1)     these are very minor issues and she does not understand why the parties were not able to reach a compromise in relation to those costs;

(2)     as she is also the master handling O 88 mortgage action cases, she presumes that many of these reserved orders on costs were made because the cases had to be adjourned so that negotiations can be done or time be given to the defendant to sell the property; and

(3)     as she is also a taxing master, she says that if she were to handle the case, she would only give a sum of HK$700 for each of the costs “reserved orders” given in the case as it is an O 88 mortgage action and hence a relatively simple matter.

29.  After some further exchange between the Master and the solicitors on both sides, the Master proceeded to say that if the parties cannot agree on the issue of costs, she would let the taxing master decide on how to deal with the assessment of costs and she would only give an order that “costs of this action be to the plaintiff”.  She said she would leave it to the taxing master to decide if the costs should be assessed on a “full indemnity basis”.  She did however ask the defendant’s solicitor if the defendant was willing to pay the “costs in the cause” orders on a full indemnity basis for which the defendant’s solicitor answered in the positive.  The Master then said that she would mark that down in the court record, which she did in her handwritten notes as follows: “there are only 3 reserved orders needed to be made.  D agreed to pay on indemnity basis on those “costs orders be in the cause””[2].

30.  In my judgment, it is clear that the Master was asked to decide specifically on which basis the costs of the action should be taxed, in particular for those outstanding costs orders mentioned in §3 of the Summons.

31.  Unfortunately, in my view, the Master has failed to do so.  At least the Master’s Order in my view does not reflect the decision she was asked by the parties to make at the hearing.

(ii) What the Master did not decide at the hearing?

32.  Order 21 rule 3(1) of the RDC provides as follows:-

“… a party may not discontinue an action … without the leave of the Court, and the Court hearing an application for the grant of such leave may order the action … to be struck out, as against any or all of the parties against whom it is brought or made on such terms as to costs … as it thinks just.” (emphasis added)

33.  As it apparent from the above passage, it is for “the Court hearing an application” for the grant of the leave to discontinue the action to make “such term as to costs as it thinks just”.  Therefore, in my judgment, it is not for another court or tribunal, which has not had the advantage to hear the leave application to discontinue the action, to make such costs order:  See HKCP 2020 Vol 1, §21/5/12A and §62/10/3.

(iii) whether the Master has acted unreasonably or erred in law

34.  Seen in such light, I am of the view that the Master being “the Court hearing (the) application”, has to decide on the issue of costs and in particular on which basis they should be taxed.  She cannot delegate this task to the taxing master: See HKCP 2020, Vol 1, §62/2/8.

35.  With respect to the Master, by simply ordering that “costs of this action be to the plaintiff to be taxed if not agreed”, she has not decided the real outstanding issue in the case, namely, whether the costs, including those previously reserved and/or ordered to be in the cause, should be taxed on a (i) party and party or (ii) full indemnity basis. I think she was wrong when she said that, with the court order she had given, the taxing master will still able to order costs “on an indemnity basis” at the taxation hearing. 

36.  In my judgment, this cannot be the case due to O 62 r 28 of the RDC which provides as follows:-

“(1) This rule applies to costs which by or under these Rules or any order or direction of the Court are to be paid to a party to any proceedings … by another party to those proceedings …

(2) Subject to the following provisions of this rule, costs to which this rule applies shall be taxed on the party and party basis, …

(3) The Court in awarding costs to which this rule applies may in any case in which it thinks fit to do so order or direct that the costs shall be taxed on the common fund basis or on the indemnity basis.”[3] (emphasis added)

37.  In other words, according to O 62 r 28, unless the court (in our case the tribunal who gave leave to the plaintiff to discontinue the action, namely, the Master herself) otherwise directs for costs to be taxed on an indemnity basis under r 28(3), the costs, by default, will be taxed on a party and party basis under r 28(2).  Therefore, by not stating that the costs should be taxed on a different basis, the default position will automatically “kick in”.  Thus, the taxing master at a future hearing simply cannot usurp the function of the tribunal which has heard the discontinuance application.  In my view, the fact that the Master herself may well be the master who will hear the taxation for the mortgage action one day is not relevant as there is no guarantee that she will in fact be hearing the case herself.  In any event, the exercise of the discretion under the Summons in relation to costs simply cannot be delegated to another judicial officer or tribunal.

38.  In the aforestated premises, I am of the view that the Master erred in law and in her understanding and interpretation on the above rules. She had taken into account of matters she ought not to have taken into account.  In my judgment, the Master’s Order can only carry the meaning that the costs of the plaintiff be taxed on a party and party basis.  This was not what the parties had agreed or intended at the hearing: See HKCP 2020, Vol 1, §62/App/6 cited with approval in Chan Yin Ha v Union Medical Centre Limited, unreported, HCPI 804/2003 & HCPI 805/2003, Master J Wong, 29 October 2010, at §15. 

39.  Hence, with respect to the Master, I think she was wrong when she said that she could “leave it for the taxing master to decide if the costs should be assessed on a “full indemnity basis”.  As analysed above, I consider the Master’s Order simply is not capable to carry that meaning or effect at all and the taxing master will be bound by the Master’s Order to conduct the taxation on a “party and party” basis only:  See HKCP 2020 Vol 1, §62/3/1.

40.  Nor do I think that the note the Master marked down on the court record to say that the defendant was willing to “pay on an indemnity basis on those costs orders in the cause” could save the day.  As the “court record” is not part of the order she made on that day, the taxing master in my view simply cannot treat that as part of the order.  I agree with Mr Wong who appears for the plaintiff at the appeal hearing that the only remedy available to the plaintiff under such circumstances is to appeal against the Master’s decision. 

41.  Thus, I find myself in the unfortunate position that I have to disagree with the Master’s decision.  I find that the orders she made on costs was unreasonable and/or erred in law. 

(iv) What should be the correct costs order in this case?

42.  As this appeal is by way of a hearing de novo, I have to decide afresh what should be the correct order on the issue of costs under the Summons. 

43.  The plaintiff submits that the correct costs order should be the one they asked for under §3 of the Summons, namely “costs of this action (including costs of this application and all previous orders for costs either reserved or be in the cause of this action) be to the plaintiff to be taxed if not agreed on full indemnity basis.” 

44.  I agree.

45.  It is trite that decision on costs is a matter of discretion for the court.  However, such discretion must be exercised judicially; on fixed principles and according to the rules of reasons and justice: See HKCP 2020, Vol 1, §62/2/6.  

46.  First of all, I think it is important to bear in mind that this case is based on a mortgage agreement where the borrower had agreed to take out a loan from a finance company by using his property as security.  It is not uncommon to find in such agreements that the borrower, who usually does not want to or able to borrow from traditional banks, would agree to pay a much higher interest rate and to pay costs on an indemnity basis. 

47.  It has been held on many previous occasions that the court should be slow to disturb the parties’ agreement in a commercial transaction, unless the circumstances were such as to cause the court in the exercise of its discretion to intervene: See for example Bank of China (Hong Kong) Ltd v Twin Profit Ltd & Ors [2011] 3 HKC 59 §§6-8, applying Gomba Holdings(UK) Ltd v Minories Finance Ltd [1993] Ch 171 at 182 A-B; Chekiang First Bank v Fong Siu Kin [1997] 2 HKC 302 at 309E-H.

48.  In my judgment, since the plaintiff in this case has achieved everything it had sought in the discontinuance application, costs should follow the event and to be awarded in its favour: See HKCP 2020 Vol 1, §21/5/12A; Re Lucky Ford Industrial Ltd [2013] 3 HKLRD 550 at §14-15; and Re Chinese United Establishment Ltd & Anr v Nice Gain Enterprises Ltd & Anr, CACV 214/1995, unreported (Hon Litton VP, Mayo and Ching JJA; 24 April 1996).

49.  Further, based on the following, I think the costs should be awarded to the plaintiff on a full indemnity basis.

50.  First, clause 2.01(x) of the First Legal Charge between the plaintiff and Yau expressly provided that Yau should bear “all costs, charges and expenses (including all legal expenses calculated on full indemnity basis) which may be incurred under or in connection with any other matter arising under or in consequence of or in connection with this Legal Charge …”. (emphasis added)

51.  While Yau was still alive and representing himself in the proceedings, there was no suggestion that he had signed the agreement under any duress or misrepresentation.  Being a loan from a finance company, Yau must had been fully aware that the terms under such agreement would be usually “harsher” than those he would find with a traditional bank.  I do not see any good reason why Yau (and hence his estate) should not be bound by the terms he had agreed to under the First Legal Charge.

52.  Second, judging from the handwritten affirmation filed by Yau in the present proceedings, it is quite clear that he has no defence to speak of at all.  By eventually agreed to pay both the principal and interests of the debts owned by Yau in full, it is clear that the defendant must have been aware that the action was properly brought in the first place and Yau had no arguable defence at all. 

53.  Third, looking at the procedural history of the case itself, I do not find the plaintiff had conducted this case in any improper or unfair manner, nor do I find that the plaintiff had wasted any time or costs unnecessary.  On the contrary, by indicating during the hearing below that they were willing to pay the costs on indemnity basis “on those costs orders be in the cause”, I find the defendant must have agreed that they should pay the costs according to what had been agreed by Yau in the agreement.  This is at least insofar as the costs orders which had been previously held as “in the cause” is concerned. 

54.  Hence, it seems that the defendant’s only objections are those costs which had been reserved by the court on previous occasions, namely, that of Master Chan’s order dated 1 August 2017 and 7 December 2017 and Registrar Ho’s order dated 29 June 2018 and the costs of the proceedings itself. 

55.  In my judgment, Master Chan’s order dated 1 August 2017 was necessary to allow the defendant to file his acknowledgment of service and affirmation in opposition.  I find this was solely caused by the delay of Yau in filing his acknowledgment of service and in opposition.  The costs should be borne by the defendant on an indemnity basis.

56.  Master Chan’s order dated 7 December 2017 allowed the matter to be adjourned to be heard on 27 February 2018.  In my view, the costs of this hearing should come under the terms of the agreement between the plaintiff and Yau and should follow the event and to be taxed on a full indemnity basis. 

57.  Registrar Ho’s order dated 29 June 2018 was made when the plaintiff first came to know of the passing of Yau.  The matter was adjourned by consent in order to allow the personal representatives of Yau to obtain the letters of administration in order to carry on the proceedings.  The costs of this again should follow the event and be taxed on a full indemnity basis.    

58.  Last but not the least, at the hearing before me, Mr Yiu for the defendant submitted that it had not been agreed between the parties that the defendant would pay indemnity costs of the proceedings and the costs reserved.  The defendant’s position, according to him, is that they had only agreed to pay “all costs on indemnity basis, except those costs which been reserved and costs of the proceedings”.  In other words, they are only prepared to pay on an indemnity basis of those costs which had been previously held as “in the cause”. 

59.  Mr Yiu’s submission is that the starting point is that the defendant would pay for the costs of proceedings according to what Yau had agreed under the agreement, ie on indemnity basis.  Since Yau was not legally represented and therefore not able to defend the matter properly, he submits that the court should exercise the discretion in favour of the defendant by ordering him to pay the costs on those which had been previously reserved on a “party and party” basis only.  Mr Yiu further submits that the court should take into account of the fact that Yau had passed away half way through the proceedings which led to the adjournment before Registrar Ho. 

60.  With respect, I cannot agree with the above submissions at all.  In my view, the fact that Yau had not sought legal advice and decided to defend the matter by himself is not an excuse for the defendant of not honouring the agreement he had signed with the plaintiff.  It is clear from the procedural history of the case that he was trying to delay the matter and buy time to repay the loans, including the principal and interest.  Mr Yiu invited the court to take a global view of the circumstances of Yau, including the fact that he had acted in person all along; not likely able to understand his legal position fully at the time; and how the interest rate was calculated under the agreement. 

61.  I do not accept such submissions. The fact that the solicitors of the defendant did not represent Yau at the time when he was still acting in person is not an excuse as the defendant, being the legal representatives of the estate of Yau (having substituted him as the defendant in this case), and who have assumed all liabilities (and rights) of Yau in the present proceedings.  This must include all costs, including those costs reserved and/or held in the cause by Master Chan and Registrar Ho on previous occasions.  Further, the defendant as personal representatives of the estate of Yau, with proper legal advice, must be in the position to realize that (i) Yau should not have contested the action at all in the first place; (2) in the light of the history of the case, there was no proper justification for the defendant to refuse to pay the costs on a basis which had been agreed by Yau under the First Legal Charge. 

CONCLUSION

62.  In conclusion, based on the above reasons, I had allowed the appeal on the day of the hearing.