OVERSEAS TRUST BANK LTD v. COOPERS AND LYBRAND AND OTHERS

[The Court has jurisdiction to order the costs of a successful party to be taxed on the indemnity basis : Hanwa Co (HK) Ltd v. Everbright Shipping Company Ltd, 9th December 1988, unreported, not followed]

1986, No.A5764

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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Between

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JUDGMENT

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1. In this action, the plaintiff ("OTB") claimed damages from the defendants ("Coppers"), its former auditors, for alleged professional neglience. OTB's action has now been settled; but before it was settled, Coopers brought into the action, as First Third Party, a firm of accountants practising in Bahrain and known as Peat, Marwick, Mitchell & Co. ("Peats"). Peats applied for an order to dismiss these third party proceedings, complaining in essence that the proceedings were an abuse of the process of the court. That application had a chequered history; it is sufficient for present purposes to relate that on 12th March 1990 I acceded to it, and in a reserved judgment of 27th March 1990 (in which fuller reference to the background is made and to which the interested may refer) I expressed my opinion of Coopers' case against Peats in the following terms :

"It is a case without any foundation in law or fact, intended to pass on to Peats a liability, out of all proportion to Peats' peripheral involvement in the matter, for the entirety of OTB's claim against Coopers ... it is oppressive ..."

2. I added that I would hear counsel on any question of costs or otherwise which might arise as a consequence of my judgment on a day and at a time to be fixed through the usual channels.

3. Coopers and Peats agreed soon afterwards that Coopers would have to pay Pears' costs of the third party proceedings. But they differed as to the basis on which Peats' costs ought to be taxed. Coopers claimed that these costs should be taxed on "the party and party basis" mentioned in Order 62, Rule 28(2) of the Rules of the Supreme Court (Revocation and Replacement) Rules 1988 ("the local  rules"). Peats claimed that the costs should be taxed on "an indemnity basis", a more generous basis which is not mentioned in the local rules at all.

4. Peats' application was accordingly restored to the list for argument (after an unnecessary delay, due to some ludicrous over-estimates given to the court by the parties' solicitors of the time the argument would be likely to take), as to the basis on which the taxation of Peats' costs ought to proceed. I heard argument on the points in issue for half a day, on 27th July 1990. During the course of the argument it appeared that there was some local authority at first instance which cast doubt on the jurisdiction of the court to order a taxation on the indemnity basis. Mr Michael Crystal,  Q.C., for Peats, urged me not to follow this authority. Mr Neville Thomas, Q.C., for Coopers, did not argue that the court had no jurisdiction to make an order for taxation of costs on an indemnity basis. He was content to argue merely that this was not a proper case for such an order. Accordingly, I did not have the benefit of argument on this question of jurisdiction; and I thought it right in those circumstances to take time to consider my judgment. Having done so I have concluded that I do have jurisdiction to make an order providing for Peats' costs to be taxed on the indemnity basis; but that in fact I ought not to make such an order.

5. I deal first with the question of jurisdiction. Section 52A(1) of the Supreme Court Ordinance, Cap.4, provides so far as is material as follows :

"52(1). Subject to the provision of rules of court, the costs of and incidental to all proceedings in the ... High Court, ... shall be in the discretion of the court, and the court shall have full power to determine by whom and to what extent the costs are to be paid".

6. These are very wide words. Under the identical words in the English legislation, the Court of Appeal has said the judge has "an unlimited discretion to make what order as to costs he considers that the justice of the case requires" : see Scherer v. Counting Instruments Ltd. [1986] 1 WLR 615 at p.621 D-E. So what does justice require?

7. There is no doubt that costs are given by the law as an indemnity to the person entitled to them : see Harold v. Smith (1860) 5 H. and N. 381 per Bramwell B at p.385. But an indemnity against what? If the indemnity is to extend to all the costs the person entitled to them has incurred, this could produce injustice to the paying party; for it would then extend even to costs unreasonably incurred or of an unreasonable amount. And so every bill of costs (unless agreed) is subjected to the process known as taxation. On what basis is the taxing officer to proceed?  And is it to be the same basis in each case?

8. In Hong Kong, as in England and Wales, these questions are answered, at any rate in part, by the rules of court. Under the local rules, provision is made for four possible bases of taxation. These are (1) the party and party basis; (2) the common fund basis; (3) the trustee basis; and (4) the solicitor and own client basis. And until very recently, it has been universally accepted that there is a fifth basis, not referred to the local rules. This is the indemnity basis. The existence of the jurisdiction in Hong Kong to make an order for costs on the indemnity basis was recognised (and exercised) by the Privy Council in Pacific Insurance Company Limited v. Wong [1989] 1 W.L.R. 602; it was recognised (though not exercised) by the Court of Appeal in Famous Investment Co. Ltd. v. Lau Wong & Chan, 11th December 1984 (unreported) and by Hunter J. at first instance in American Express v. Johnson [1984] HKLR 389; and it has been both recognised and exercised in the Court of Appeal and at first instance in England and Wales on rules then identical with those contained in the local rules; see EMI Records v. Ian-Wallace Ltd. [1983] Ch. 59, and the cases therein cited, and Bank of Baroda v. Panessar [1987] Ch. 335.

9. I would add, drawing upon my own experience, as well as on the many reported cases to the same effect, that the court in England and Wales, and in Hong Kong, frequently grants an order for costs on an indemnity basis in cases of contempt where it does not see fit to mark its displeasure at the contemnor's conduct by making any further or other order : see, for an example, Hoffman La Roche v. Sieczko [1968] RPC 460.

10. However, in Hanwa Co. (HK) v. Everbright Shipping Co. Ltd., 19th December 1988 (unreported), Barnett J. refused to follow EMI Records (above). He drew attention to section 52A of the Supreme Court Ordinance, Cap.4, which I have already mentioned. He drew attention to Order 62, Rule 2(4) of the local rules, which provides as follows :

"O.62, r.2 (4). The powers and discretion of the court as to costs under section 52A of the Ordinance (which provides that the costs of and incidental to proceedings of the Supreme Court shall be in the discretion of the court and that the court should have full power to determine by whom and to what extent the costs are to be paid) ... shall be exercised subject to and in accordance with this Order".

And he drew attention to Order 62, rule 28 of the local rules. He fastened in particular on the word "shall" in Order 62, rule 28(2), which provides:

"Subject to the following provisions of this rule, costs to which the rule applies shall be taxed on the party and party basis ..." (emphasis added)

11. The "following provisions" of the rule there mentioned provide by rule 28(3) that :

"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".

12. They do not provide for any other basis.

13. Barnett J. said that the Vice-Chancellor (Sir Robert Megarry) in EMI Records appeared to him to have been straining the plain wording of rule 28 in order to justify his decision. He added this :

"Read together, Section 52A of our Ordinance, Order 62, rule 2(9) and rule 28 contain a complete scheme for the award of costs between parties. The legislature and the rule making authority have seen fit to give the court a discretion in relation to costs but have prescribed limits within which that discretion can be exercised ... I cannot accept, in view of the use of the word 'shall' in rule 28, that a court is permitted to go beyond what is prescribed in that rule in the absence of an express prohibition. I am unable to agree with the learned Vice-Chancellor. If the rule-making authority felt that the court should have a wider power, they could have added a reference to indemnity costs or, indeed, have left the costs totally to the court's discretion. They could, perhaps, have incorporated rule 29 which relates to costs on taxation between a solicitor and own client which are, in effect, indemnity costs, if they had so wished. But the rule-making authority did not do so and rule 29 constitutes a code entirely separate from rule 28."

14. So, Barnett J. held that, on a true construction of the local legislation, a court has power to order a taxation of costs between parties only on a party and party or common fund basis, and, accordingly, no power to order a taxation on the indemnity basis.

15. In Goodwell Property Management Limited v. Basesmart Development Limited [1990] 1 HKLR 1, Barnett J. distinguished his earlier decision in Hanwa (above). In Goodwell Property Management, Barnett J. had made, by consent, an order restraining the defendants from contravention of the provisions of a deed of mutual covenant, providing, in accordance with the express terms of the deed, for the "costs of this action on a full indemnity basis" to be taxed if not agreed. Barnett J. held that although, as he had held in Hanwa, the court had no power to award costs between parties other than on a party and party basis or on a common fund basis, parties may make, and a court may uphold, an agreement that costs will be paid on some other basis. In so holding, Barnett J. must have overlooked the rule that parties cannot by agreement confer on the court a jurisdiction which it would not otherwise have : see for the most recent case Heyting v. Dupont [1963] 1 WLR 1192, especially at p.1195. The decision in Goodwell Property Management clearly cannot be supported. There remains Hanwa itself. I have to say that, in my judgment, this decision cannot be supported either.

16. The fact is that, for a very long time, the courts of England and Wales, at every level, and on rules identical with the local rules, have regularly been making orders for taxation of costs on an indemnity basis in a variety of different cases, and it is worth noting that the editors of Atkin's Court Forms, 2nd Edition, Vol. 13 (1987 issue) title "Costs", provide a precedent for such an order (see p.206). Apart from contempt cases, to which I have already referred, orders for the taxation of costs on an indemnity basis are frequently made in England and Wales in favour of trustees and others acting in some sort of representative capacity (it is to this sort of case that the precedent in Atkin is directed). I can perfectly well see that if order 62, r.28 is given a strict construction, and if the actual practice of the courts is wholly disregarded, the logical conclusion may well be the one to which Barnett J. found himself driven. But in the classic words of Holmes J. : "The life of the law has not been logic; it has been experience" : see Holmes, The Common Law (1938) p.1. And there are many matters in the practice of the law, as the same judge reminds us in New York Trust Company v. Eisner (1921) 256 US 345 at 349, where "a page of history is worth a volume of logic". For my part, I do not think it necessary to place so strict a construction on the provisions of rule 28 as did Barnett J.; and in any case I do not think it right to construe the rule without paying regard to the established practice of the court. No doubt, it may sometimes happen that a practice of the court, although one of many years' standing, can be shown to be contrary to some rule of law and therefore one no longer to be followed. But it must be rare indeed that a decision to do this may properly be taken by a judge of first instance. It is undesirable for one judge to disagree with another judge of co-ordinate jurisdiction, especially on a point of practice; but for the reasons I have endeavoured to state, I have no hesitation in preferring the decision of Sir Robert Megarry in EMI Records to that of Barnett J. in Hanwa.

17. I, therefore, hold that I do have jurisdiction to make an order here for the taxation of Peats' costs on an indemnity basis. I regard the matter as falling within the ambit of the wide discretion conferred on me by section 52A of the Supreme Court Ordinance, Cap. 4.

18. Then how should I in fact exercise that discretion?  I think I should exercise it against making such an order.  The order I think I should make is an order for the taxation of Peats' costs on the party and party basis.

19. I come to this conclusion for the following reasons. The usual practice of the court, in hostile litigation, is to order the costs be paid by the unsuccessful party to the successful party, and taxed as between party and party. That means that the successful party will be allowed all such costs as were necessary or proper for the attainment of justice or for enforcing or defending his rights : see Order 62, r.28(2). However, the court does have a discretion to order that the successful party's costs should be taxed, not as between party and party but on what is called (for historical reasons) the "common fund" basis : see Order 62, r.28(3). That is more generous and means that the successful party will be allowed a reasonable amount in respect of all costs he has reasonably incurred : see Order 68, rule 28(4). And, as I have held in this judgment, the court also has power to order that the costs of a successful party be taxed on the yet more generous indemnity basis. It is now settled that that means that all costs are to be allowed, except any which have been unreasonably incurred or are of an unreasonable amount (in this connection, the successful party will be given the benefit of any doubt) : see the EMI Records case.

20. To justify an order for costs on the common fund basis, the case has to have some special or unusual feature : see Preston v. Preston [1982] Fam. 17 and my own judgment in Wharf Properties Limited v. Eric Cumine Associates, 24th February 1988, unreported. In my opinion, in order to justify a taxation on the indemnity basis, the successful party has to show, either that the case is one of a type already recognised in the practice of the court as warranting a taxation on that basis (such as, for example, the contempt cases to which I have already referred) or that there is some feature in the case even more special or unusual than one which would justify a taxation on the common fund basis. A case in which the successful party has demonstrated that the proceedings were initiated or prosecuted by the unsuccessful party in a manner which constitutes that party's proceedings an abuse of the process of the court might well be a candidate for an award of taxation of costs on an indemnity basis. A taxation of the successful party's costs on an indemnity basis could properly be ordered, in my opinion, where the proceedings were scandalous or vexations, or had been initiated or prosecuted maliciously, or for an ulterior motive, or in an oppressive manner. Any proceedings instituted or prosecuted in such circumstances as to constitute an affront to the court could properly be the subject of a direction for the taxation of the successful party's costs on the indemnity basis. But were the third party proceedings here of that character? In my opinion, they were not.

21. I know that, in my judgment of 27th March 1990, I described them as "oppressive". I do not seek to resile from that. The word means "burdensome, harsh and wrongful" : see Scottish CWS v. Meyer [1959] AC 324 per Lord Simonds at p.342. The "oppression" here lay in the effect that the proceedings had upon Peats, dragging them into very substantial litigation, in which they had only a peripheral interest, for what on analysis could be demonstrated to be no good reason. It did not lie in anything disgraceful in the conduct of Coopers or their legal representatives. If I had felt that the institution and prosecution of these proceedings by Coopers had constituted an affront to the court I would have been prepared to exercise my discretion in favour of directing a taxation of Peats' costs on the indemnity basis. But I do not so regard the conduct of Coopers or their legal representatives and accordingly, as it seems to me, there is no proper ground on which I can or should exercise my discretion in favour of making such an order. The court has a discretion to order that the costs of the successful party be taxed on the indemnity basis; but, in my judgment, in ordinary hostile litigation it should only exercise that discretion in that way, and so depart from the ordinary rule that the costs ought to be taxed as between party and party, when it feels a proper sense of indignation at the unsuccessful party's conduct, and that is not this case. For the same reasons, I do not think this is a suitable case for an award of costs on the common fund basis either. This is, in my judgment, ordinary hostile litigation; and I see nothing in it to justify a departure from the ordinary rule. I note that in the case most strongly relied on by Peats in their application to have the third party proceedings against them dismissed, Lawrance v. Lord Norreys (1888) 39 Ch.D. 213, no special order as to the taxation of costs appears to have been made. Nor, so far as I have been able to ascertain, was any such order made in the recent local case of C.S. Low v. Freshfields, 26th June 1990, unreported, in which the Court of Appeal, on the application of the defendants, dismissed the action on grounds similar to those on which I have dismissed the third party proceedings in the present case.

22. I appreciate that substantial sums of money turn on my decision. I was told by Mr Crystal (though I must record that Mr Thomas was in no position to agree the figures) that Peats' costs actually amounted to some $22 m. but, if taxed on a party and party basis, would be likely to amount only to some $11 m. If taxed on an indemnity basis, they would be likely to amount to some $19 m. (A taxation on the common fund basis would, it was said, lead to a result somewhere between $14 m. and $18 m. depending on whether any special directions were given to the taxing officer pursuant to the provisions on that behalf contained in the rules.) In these circumstances, not surprisingly, each party told me that, whichever way I decided the matter, it would be likely to want to appeal my decision. I think it right to indicate that in my judgment this is a proper case for such an appeal. The case raises a point of principle, as to the jurisdiction of the court to order a taxation of Peats' costs on an indemnity basis; and, although the other point in the case is only a point as to discretion, this is I think one of those special cases where a review by the Court of Appeal of the exercise of the discretion as to costs would be justified.

23. As to the costs of the hearing before me of the argument as to costs, I understand that the parties may have come or  may come to some agreement; subject to that, I would be disposed to order that the costs should follow the event and that Coopers (who have succeeded) should have the costs of the hearing before me, to be taxed, again, as between party and party.

24. I would only add this. In England and Wales, the rules as to taxation of costs have now been rationalised. It is now provided that the costs of a successful party in hostile litigation may be ordered to be taxed either on what is called the "standard" basis, or on the indemnity basis. The standard basis provides for a taxation which allows the successful party all reasonable costs reasonably incurred; the onus of satisfying the taxing officer that the costs are reasonable and have been reasonably incurred rests on the successful party. When the costs are ordered to be taxed on the indemnity basis, the successful party is entitled to be allowed all costs other than those unreasonably incurred or of an unreasonable amount; the onus of satisfying the taxing officer that the costs have been unreasonably incurred or are of an unreasonable amount lies on the unsuccessful party.

25. As it seems to me, nothing could be fairer, simpler, or more sensible than that. In my judgment in the Wharf case (above) I suggested as much. It is a matter for regret that the suggestion has not yet been taken up. The local rules should now be amended so as to provide for these two alternative bases of taxation, and these two only. Once again, I express the hope that those who are responsible here for the administration of justice should now take the necessary steps to do so.