FAN KAI MING v. LAM SUSAN SHUI HING

DCCJ 2037/2015

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2037 OF 2015

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DECISION ON COSTS AND INTEREST

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Introduction

1.  Judgment was entered against the plaintiff after trial on 16 December 2016 (“the Judgment”). Therein I made an order nisi for costs in favour of the defendant on party and party basis (“the costs order nisi”).

2.  On 29 December 2016, the defendant took out a summons to apply to vary the costs order nisi by seeking for indemnity costs order against the plaintiff plus interest on costs at a rate not exceeding 10% above judgment rate from 23 April 2015 until payment (“the Summons”).

3.  On 15 February 2017, the parties by consent invited the court to dispose the Summons by way of written submissions.  On 24 February 2017, I directed the parties to file and serve their submissions accordingly.  The defendant and the plaintiff did so on 24 March 2017 and 10 April 2017 respectively.  Now this is my ruling.

General principles for granting indemnity costs

4.  Under Order 62 rule 28(3) of the Rules of District Court (Cap.336H) (“the RDC”), the court may award costs on indemnity basis.

5.  The court can make indemnity costs order against a party if it is appropriate to do so.  But the successful party should show that the case possesses some ‘special or unusual’ feature that would take it of the norm.  (see Town Planning Board v Society for Protection of the Harbour Ltd (2004) 7 HKCFAR 114 at paras 15 and 17; Pacific Electric Wire & Cable Company Ltd v Texan Management Ltd & Ors, CACV 90A of 2012, 11 October 2013, per Lam VP at paras 10 and 13) What constitute appropriate circumstances to award indemnity costs must also be fact-sensitive.  The conduct of the party against whom indemnity costs order is sought would be cogently relevant in light of Order 62 rule 5(1)(e) of the Rules of High Court (Cap 4A) or its counterpart in the RDC. (Huge Dragon Corp Ltd v Lung Mun Oasis (IO) [2014] 3 HKLRD 286, per Poon J at paras 11-13)

6.  Instances of decided cases which circumstances are considered to be appropriate for making indemnity costs orders are provided in the commentary at para 62/App/12 of Hong Kong Civil Procedure 2017.  Among them, the court can order taxation of the successful party’s costs on indemnity basis where the proceedings were scandalous or vexatious, or had been initiated or prosecuted maliciously, or for an ulterior motive, or in an oppressive manner. (see Choy Yee Chun v Bond Star Development Ltd [1997] HKLRD 1327)  However, the Court of Final Appeal in Town Planning Board case (supra) endorsed the previous Court of Appeal’s decisions and made it clear that the award of indemnity costs was not confined to cases brought with an ulterior motive, for an improper purpose, or where there are some deception or underhand conduct on the party of the losing party (para 16).

7.  In the more recent decision in Huge Dragon (supra), the Court of Appeal provided further guidance that if the proceedings in question is entirely devoid of merits and should never have been launched or defended but the party nevertheless unreasonably and unjustifiably persisted, he may well be visited with indemnity costs.

8.  At para 13, Poon J (as His Lordship then was) said:-

“What constitute appropriate circumstances to award indemnity costs must be fact-sensitive. As demonstrated by numerous authorities and now enshrined in Order 62, rule 5(1)(e), Rules of the High Court, the conduct of the party against whom indemnity costs are sought is cogently relevant. Thus, where the proceedings in question should never have been brought or defended but the party nevertheless unreasonably and unjustifiably persisted, he may well be visited with indemnity costs: see, for example, Montrio Ltd & Another v Tse Ping Shun David, CACV 291/2011, unreported, 31 January 2013; Grant David Vincent Williams v Jefferies Hong Kong Limited, HCA 320/2011, unreported, 12 July 2013.” (emphasis added)

9.  With the above principles in mind, I now turn to the defendant’s contentions for indemnity costs.  But before I do that, I will briefly recap the background of this case.  The fuller details can be found at paras 4-17 of the Judgment.

The background

10.  The plaintiff (purchaser) and the defendant (vendor) entered into a provisional sale and purchase agreement (“the SPA”) of a piece of land in the New Territories (“the Land”).  Subsequently, the defendant decided not to proceed, and a cancellation agreement dated 1 December 2014 was entered into by the parties to cancel the transaction (“the Cancellation Agreement”).

11.  Under the Cancellation Agreement, the parties agreed that the SPA is ‘hereby cancelled and shall have no further effect whatsoever’.  They shall release each other from their obligations under the SPA, and they shall have no claim against each other.  The parties also agreed thereunder that the defendant shall pay HK$600,000 to the plaintiff as agreed compensation upon the signing of the Cancellation Agreement. 

12.  It is common ground that the defendant signed the Cancellation Agreement a few days before 1 December 2014.  At the time of her signing, the defendant also delivered a cheque of HK$600,000 as payment of the agreed compensation (“the Cheque”) to Messrs. Leung Kin & Co, who was then acting for the both parties in the conveyance of the Land.  The plaintiff signed the Cancellation Agreement on 1 December 2014.  He left the Cheque to the staff of Messrs Leung Kin & Co to cash it for him.

13.  It is undisputed that the Cheque was bounced upon presentation owing to a shortage of fund of HK$923 in the account by the defendant’s oversight.  She took immediate step to rectify after being notified of the dishonour of the Cheque.  On 3 December 2014, she instructed her former solicitor to notify the plaintiff to present the Cheque again.  But the plaintiff refused to do so, and wrote back through his solicitor on 4 December 2014 insisting on specific performance of the SPA.

14.  On 22 April 2015, the defendant made another attempt to settle her dispute with the plaintiff by tendering a cashier order of HK$600,000 to the plaintiff’s solicitor and undertook to bear such reasonable loss of the plaintiff due to the dishonour of the Cheque (“the Offer”). (see the Judgment, para 16)

15.  After this action was instituted on 8 May 2015 but before the service of defence, the defendant paid a sum of HK$600,131.50 into the Court on 28 May 2015 as statutory defence of tender (“the statutory tender”).

The defendant’s grounds for seeking indemnity costs

16.  Mr Chow contends for indemnity costs on the defendant’s behalf on two principal grounds: first, he submits that the plaintiff made unreasonable challenge to the Cancellation Agreement and failed to accept the reasonable pre-action settlement offer made by the defendant, viz the Offer. (“Ground 1”).  Mr Chow’s second ground is that the statutory tender is also a sanctioned payment, which the plaintiff has failed to beat.  This would thus attract the sanction of indemnity costs and enhanced interest as per Order 22 rule 23(4)(a) and (b) of the RDC (“Ground 2”). 

Ground 1

17.  I have explained in detail in the Judgment why the dishonour of the Cheque cannot revive the sale and purchase transaction.  I have no intention to repeat here.  The dishonour of the Cheque would not repudiate the Cancellation Agreement but only entitles the plaintiff to claim for damages, which would prima facie be his loss of interest (if any) due to the delay in receipt of the money.  However, the plaintiff made no claim for such damages in this action. (see the Judgment, paras 73-74, 78-79)

18.  In rejecting the plaintiff’s claim, this court is of the clear view that such claim was wrongly launched.  But on the other hand, it is not just to penalise a party simply for running a litigation which he or she has lost.  (see Simms & Ors v The Law Society [2005] EWCA Civ 849, per Carnwath LJ at para 16)

19.  Fairly speaking, there is a lacuna in the Cancellation Agreement which does not provide for the consequence of the dishonour of the Cheque.  And yet the plaintiff was supposedly to be paid with the agreed compensation of HK$600,000 according to the term of the Cancellation Agreement on 1 December 2014, which was also the completion date of the original sale and purchase transaction.  This anomaly thus created room for argument as to what legal impact the dishonour of the Cheque may have on the Cancellation Agreement.  It was a fair point raised by the plaintiff to call for the court’s determination. It was only upon the construction of the Cancellation Agreement as a whole against the factual matrix in this case, then this court found the plaintiff’s purported implied term of ‘time is of the essence’ for such payment obligation incompatible with the overall tenor of the Cancellation Agreement. (see the Judgment, paras 48-57)  The fact that the plaintiff was merely wrong or misguided in hindsight in launching his claim would not be sufficient to attract indemnity costs sanction.

20.  In Kiam v MGN (No.2) [2002] 1 WLR 2810, Simon Brown LJ at para 12 said:-

“12 I for my part understand the court there to have been deciding no more than that conduct, albeit falling short of misconduct deserving of moral condemnation, can be so unreasonable as to justify an order for indemnity costs. With that I respectfully agree. To my mind, however, such conduct would need to be unreasonable to a high degree; unreasonable in this context certainly does not mean merely wrong or misguided in hindsight…”

21.  Apart from the aforesaid, it is also observed that the plaintiff has sensibly confined his contention on short points of construction of the Cancellation Agreement, all the material facts were undisputed between the parties at trial.  The whole trial can be finished within 2 days. 

22.  In these circumstances, I do not see the plaintiff’s conduct of the proceedings in launching his claim (though rejected by this court) was such as to take his case out of the norm to warrant indemnity costs against him.  Viewing thus, Mr Chow’s submission that the plaintiff was being opportunistic in bringing this litigation would therefore also lack merit.

23.  As for Mr Chow’s contention that the plaintiff’s unreasonable refusal to accept the Offer should warrant the Court to grant indemnity costs order.  Such argument might sound attractive at first glance.  Had such offer been accepted, all the costs incurred for this litigation could have been saved.  Nevertheless, after closer examination of the circumstances of this case, and the interplay of the governing rules and principles, I cannot accept such argument.

24.  First of all, the Offer is a pre-action offer, and not qualified as a sanctioned offer made pursuant to Order 22.

25.  Under Order 62 rule 5(1)(g), this court may take into account such open offer in exercising its discretion as to costs.  However, it does not automatically mean that the plaintiff’s failure to beat such offer would attract indemnity costs.  It is important to bear in mind that indemnity costs orders granted pursuant to Order 62 rule 28(3) (which finds its English counterpart under Part 44 of the CPR) and those made by virtue of a party’s failure to beat a sanctioned offer or a sanctioned payment under Order 22 (which finds its English counterpart in Part 36 of the CPR) are sourced from different governing rules and they have different roles to play.

26.  In Kiam v MGN Ltd (supra), Simon Brown LJ at paras 7, 12 and 13 had the following to say:-

“7 I myself put it thus, at pp 945–946, para 28[1]:

“The judge below, without the benefit of this court's judgment in Petrotrade Inc v Texaco Ltd (Note) [2002] 1 WLR 947, wrongly directed himself that an indemnity costs order under CPRr 36.21 is of a penal nature and implies condemnation of the defendants' conduct and so would be unjust unless the defendants have behaved unreasonably in continuing the litigation after the offer.  That misunderstands the rationale of the rule.  It is not designed to punish unreasonable conduct but rather as an incentive to encourage claimants to make, and defendants to accept, appropriate offers of settlement.  That incentive plainly cannot work unless the non-acceptance of what ultimately proves to have been a sufficient offer ordinarily advantages the claimant in the respects set out in the rule.”

12 … An indemnity costs order made under Part 44 (unlike one made under Part 36) does, I think, carry at least some stigma. It is of its nature penal rather than exhortatory…

13 It follows from all this that in my judgment it will be a rare case indeed where the refusal of a settlement offer will attract under Part 44 not merely an adverse order for costs, but an order on an indemnity rather than standard basis[2]…” (emphasis added)

27.  In hindsight, the plaintiff should of course have accepted the Offer.  But his refusal to do so has already brought upon himself an adverse costs order against him by losing in his claim.  If the plaintiff wants to seek for a higher scale of costs, the proper question to ask remains to be: whether the plaintiff has so unreasonably and unjustifiably persisted with his claim in the first place that he should be penalised with an indemnity costs order.  Given such proper perspective and in light of this court’s observation made in paragraphs 19-22 above, I do not think the plaintiff’s refusal to accept the Offer under the circumstances of this case should render him liable for indemnity costs either.

Ground 2

28.  Mr. Chow submits that the statutory tender also qualifies as a sanctioned payment under Order 22 of the RDC.  I agree.  Its form and content both comply with the requirements specified in Order 22.  Mr Lai made no contrary submission for plaintiff that the statutory tender does not so qualify.

29.  Given the dismissal of the plaintiff’s claim in its entirety, he obviously cannot do better than the sanctioned payment.  This would thus attract the consequences specified under Order 22 rule 23(4)(a) and (b): the court may order indemnity costs and enhanced interest (as provided thereunder) in the defendant’s favour. 

30.  Order 22 rule 23(5) mandates the court to make such order for costs paid on indemnity basis and the enhanced interest unless it considers unjust to do so.  Mr Lai did not refer to any matter to contend it would be unjust for this court to make such orders under Order 22 rule 23(4)(a) and (b).  In fact, Mr Lai’s written submission does not appear to have dealt with Mr Chow’s contention for indemnity costs and enhanced interest under Ground 2 at all.

31.  After taking into account those matters stipulated under Order 22 rule 23(6) as well as the overall circumstances of this case, I do not see it unjust to impose the sanctions of indemnity costs and enhanced interest as provided under rule 23(4)(a) and (b) against the plaintiff. 

32.  The sanctioned payment was made on 28 May 2015, and it could have been accepted by the plaintiff without leave within 28 days.  The plaintiff would therefore have up to 25 June 2015 to accept such payment (see Order 22 rule 15(1)).  As such, the enhanced interest should start to accrue on the costs in question from 26 June 2015.

33.  Mr Chow made no submission and cited no authority as to what appropriate rate of the enhanced interest should be adopted in this case.

34.  It is worthy to note that such rate as specified in Order 22 rule 23(4)(b) is only the maximum permitted enhancement. In principle, the enhanced interest is compensatory, not penal, in nature. The purpose of award of such interest is essentially to make good the loss of use of funds which the relevant party had paid over to his lawyer as costs on account in advance of the trial. (see Golden Eagle International (Group) Ltd v GR Investment Holdings Ltd [2010] 3 HKLRD 273 per Johnson Lam J (as His Lordship then was) at paras 16-17.)

35.  This no evidence of the actual payment of costs by the defendant here.  However, in principle, it should run from the date when the works were done or liabilities for disbursements were incurred. In choosing the appropriate rate, I would respectfully adopt the same approach used by Lam J in Golden Eagle International.  His Lordship at para 18 said,

“18. I propose to adopt a similar but modified approach here. There is no evidence of actual payment of costs by the Defendant. In principle the Plaintiff should pay the Defendant interest on the costs incurred after 1 February 2010[3] running from the date when the works were done respectively. However, it would be a complicated process if each item of work were to carry interest from a different date. To simplify the process, I shall borrow a well-established approach in working out interest for special damages in personal injuries litigation. I will order interest at half of the rate I would otherwise order on all the costs incurred after 1 February 2010 with interest starting to run from 1 February 2010 for all the items. I consider this approach to be appropriate bearing in mind that we are not talking about a substantial period. The relevant period is between 1 February 2010 and the date of this judgment on costs and interest when the judgment is finalized.” (emphasis added)

36.  After considering the circumstances of this case in the round, I also see it appropriate to order the enhanced interest be accrued on the defendant’s costs of this action from 26 June 2015 onwards until the date of judgment at half of the relevant rate, viz 4% above the prevailing HSBC’s prime rate, as held by Lam J to be appropriate in Golden Eagle International.  Prima facie, such rate is also applicable here, and I have heard no submission from either party to the otherwise.

37.  In Golden Eagle International, Lam J at paras 10 and 19 observed that:-

“10. In England, it has been explained in several cases that these powers under Order 22 Rule 24[4] are not meant to be penal in nature. Rather, they aim at achieving a fairer result for the winning party. Though our rules set the maxima of the interest to be awarded by reference to 10 % above the judgment rate instead of the base rate, I do not see any material distinction in terms of the rationale behind the rules. In the context of enhanced interest, Chadwick LJ identified its purpose as follows in McPhilemy v Times Newspapers (No 2) [2001] 4 All ER 861 at para. 21:

I conclude, therefore, that the power to award interest … at an enhanced rate … is conferred in order to enable the court, in a case to which r 36.21 applies, to redress the element of perceived unfairness, otherwise inherent in the legal process, which arises from the fact that damages, costs (even costs on an indemnity basis) and statutory interest will not compensate the successful claimant for the inconvenience, anxiety and distress of having to resort to and pursue proceedings which he had sought to avoid by an offer to settle on terms which (as events turned out) were less advantageous to him than the judgment which he achieved.”

19. As regards the interest rate, the English authorities adopted 4% above the base rate as a generous assessment of the costs of money.  Mr Ng argued that since our rule 24(3)(b) referred to the judgment rate, the proper award should be 4% above judgment rate.  I cannot accept that submission.  The rule only sets the maxima.  Given the rationale for the exercise of the power and that it is not penal, I should ask what should be the appropriate rate in Hong Kong which can generously reflect the costs of money to the Defendant.  Based on the information from Mr Chan, 4% above prime in Hong Kong is 1% above judgment rate.  I shall adopt this (9%) as our generous assessment of costs of money. Applying that to my simplified approach, I will order interest on costs incurred after 1 February to the date of this judgment be paid by the Plaintiff to the Defendant at 4.5% and such interest shall run from 1 February 2010.” (emphasis added)

38.  For completeness sake, I should also mention that Mr Chow refers me to the first instance decision in Leung Lai Kwan v Lo Kwai Wing & Anor [2015] 3 HKLRD 152 (at paras 25-27) and the subsequent Court of Appeal’s decision on leave application (HCMP 1554 of 2015, 20 August 2015, at paras 7-8) and ask this court to exercise the discretion conferred upon it under Order 22 rule 2(4) to treat the Offer as a sanctioned offer.  In other words, Mr Chow wants to push the time for attracting enhanced interest on the costs further backward, to such time before this action was even commenced.

39.  With respect, such submission is misconceived and I do not accept the same.  Sanctioned offer and sanctioned payment can only be made after proceedings have been commenced. (Order 22 rule 3(3) and 5(6))  Before that, the court would not have taken cognizance of the parties or their dispute.  In my view, Order 22 rule 2(4) can only be invoked for consideration of those offers made by the parties after the commencement of the legal proceedings.  Order 22 rule 2(1) also makes it clear it is ‘a party to an action’ who may make offer to settle the whole or part of a claim or any issue arising from it in accordance with Order 22.  In these circumstances, I do not see that this court has the jurisdiction to invoke Order 22 rule 2(4) for the purpose of considering a pre-action offer so as to impose indemnity costs or enhanced interest against a party pursuant to the mechanism as provided under Order 22.

40.  In Hong Kong Civil Court Practice 2016, [22.2.4] states that:-

“[22.2.4] Stage at which sanctioned settlement proposal may be made

Sanctioned offers and sanctioned payments may only be made after proceedings have been commenced: rules 3(3) and 5(6). See the commentary under those rules. This is different from the situation in England under CPR Part 36. The Chief Justice’s working party noted resistance in Hong Kong to adopting the English position, and decided against it (final report, para 301). This does not mean that the parties are not encouraged to settle their disputes before action is commenced. It simply means that the costs and other consequences laid down in Order 22 will not apply to a pre-action proposal. The Chief Justice’s working party made it clear that ‘parties should be encouraged to settle their disputes by negotiation’ even where Order 22 is not extended to apply to pre-action proposals (recommendation 40).

The Chief Justice’s working party did envisage the possibility that sanctioned offers (though not sanctioned payments) could be made before proceedings have been commenced in specialist proceedings if provision is made accordingly by pre-action protocol (final report, para 301). At the consultation stage, the draft Order 22 contained provision to that effect, but it was omitted when the Amendment Rules 2008 were made. The requirement that proceedings have been commenced is discussed further under rule 3.” (emphasis added)

41.  And the Final Report of the Chief Justice’s Working Party on CJR (recommendation 40) states:-

“While parties should be encouraged to settle their disputes by negotiation, offers made before commencement of the proceedings should not qualify as sanctioned offers save to the extent that a pre-action protocol which has been adopted in relation to particular specialist list proceedings provides otherwise in respect of such specialist list proceedings.”

42.  In Leung Lai Kwan, the defendants made the Calderbank offer in question after the proceedings had commenced.  Saunders J found that it would be impossible for the defendant to pay into court the proposed monthly payment (as contained in the settlement offer) because it is simply impossible to assess the amount.  It thus follows that the plaintiffs could not have protected their position in respect of that offer by making a sanctioned payment. (Leung Lai Kwan, paras 10 and 11)  At para 22 of his judgment, when Saunders J discussed about an offer to settle (which may be made in a myriad of situations where it is not possible to make a payment in) as caught by Order 22 rule 2(4), he also referred to such offer as one ‘to resolve the litigation’ (para 22), in contradistinction to any pre-action offer made to prevent litigation from springing up. 

Disposition

43.  Due to the above reasons, I order that the costs order nisi be varied to the following terms:-

(a)  the plaintiff do pay the defendant’s costs of this action to be taxed if not agreed with certificate for counsel on an indemnity basis; and

(b)  the plaintiff shall also pay the defendant enhanced interest accrued on the defendant’s costs as mentioned in sub-paragraph (a) above from 26 June 2015 onwards up to the date of judgment at half of 4% above the prevailing HSBC’s prime rate.

44.  I also order the costs of the Summons be to the defendant, to be taxed if not agreed.

45.  Lastly, I thank counsel on both sides for their assistance rendered to this court.