GIORDANO INTERNATIONAL LTD v. HENRY FOK ESTATES, LTD

HCA 2251/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2251 OF 2016

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D E C I S I O N

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Background

1.  The arbitration clause in the parties’ lease provided that any dispute “shall be referred for determination by a single arbitrator to be appointed by the Chairman for the time being of the Hong Kong General Chamber of Commerce (“HKGCC”), such arbitration to be conducted in accordance with the arbitration rules of the Chamber from time to time in force.”

2.  By the time the dispute arose, the HKGCC had long ceased to administer arbitrations in any way and had repealed its own set of arbitration rules.  It was the plaintiff’s case that since HKGCC has ceased to provide arbitration, the arbitration clause has become “irredeemably defunct” and “incapable of being performed”.  Hence it commenced this action.

3.  The defendant has throughout invited the plaintiff to resolve the dispute by way of arbitration instead of litigation but to no avail.  The defendant issued a summons for stay of proceedings.

4.  Eventually the action was, by consent, stayed for arbitration only at the first hearing of the defendant’s summons for stay.

5.  The defendant asks for costs of over $570,000.  The plaintiff does not oppose an order for costs but objects to its being on indemnity basis. 

Legal principles

6.  Unsuccessful challenge to proceedings “arising out of or in connection with arbitral proceedings” will be met with an order for indemnity costs unless special circumstances can be shown.  See the recent statement of principle in Chimbusco International Petroleum (Singapore) Pte Ltd v Fully Best Trading Ltd [2016] 1 HKLRD 582, §5, Mimmie Chan J, applying the Court of Appeal authorities in Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 2) [2012] 4 HKLRD 569 and in Gao Haiyan v Keeneye Holdings Ltd [2012] 1 HKLRD 627.

7.  Relying on Town Planning Board v Society for Protection of Harbour Ltd (No.2) (2004) 7 HKCFAR 114, by Mr Brown (counsel for the plaintiff) contends that the defendant has to show some special or unusual circumstance to justify indemnity costs.

8.  With respect, a similar argument has been rejected by the Court of Appeal in Gao Haiyan, at §5.  Rather, it is for the plaintiff to show special circumstances to depart from the usual rule of indemnity costs.

Analyses

9.  This application for costs is self-defeating.  Having agreed to stay the proceedings, the parties effectively asked the court to consider the merits of the stay application and to conduct a minute analyses of their correspondence. I have read the lengthy arguments but shall not repeat them here.  I only deal with the points crucial to the costs issue. 

10.  The submission of Mr Brown can be broadly categorized as follows:

(a) Relying on §14 of Chimbusco, Mr Brown contends that the challenge to the arbitration agreement in this action was not unmeritorious.  Because of the arbitration clause being defunct, the arbitral clause was inoperable without the intervention of the court.  Chimbusco only applies where a  party refuses to refer the dispute to arbitration in accordance with the arbitration agreement.

(b) If the defendant had provided the costs estimates earlier, the plaintiff would have paid.

11.  With regard to point (a), this is at best an arguable point and not special circumstance at the time of institution of the action.  In Lucky-Goldstar International (HK) Ltd v Ng Moo Kee Engineering Ltd [1993] 1 HKC 404, notwithstanding that the agreement referred to a non-existent arbitration institution and arbitration rules, that did not render the arbitration agreement void. 

12.  The present case is not distinguishable.  The parties have chosen Hong Kong as the seat for arbitration.  They could have applied to the Hong Kong International Arbitration Centre for appointment of an arbitrator and agreed upon a set of rules under section 47 of the Arbitration Ordinance, Cap 609. The arbitration agreement was performable.  In fact, the plaintiff was able to give notice of commencement of arbitration after the summons was issued.

13.  The plaintiff gave no notice to the defendant before commencement of this action.  The defendant has right from the start referred the plaintiff to the relevant authorities like Lucky-Goldstar and Chimbusco which are accepted by this court.  Having an arguable point (which was not pursued) is not special circumstances to justify departure from the usual rule.  Moreover, Chimbusco is not limited in its use as suggested in paragraph 10(a) above.  Accordingly, the plaintiff has to bear costs on indemnity basis.

14.  With regard to point (b), it goes to quantum but not whether indemnity basis should apply. 

Quantum

15.  Indemnity basis means that:

“all costs shall be allowed except insofar as they are of an unreasonable amount or have been unreasonably incurred and any doubts which the taxing master may have as to whether the costs were reasonably incurred or were reasonable in amount shall be resolved in favour of the receiving party”: Order 62, rule 28(4A) of the Rules of the High Court.

16.  As early as 16 November 2016, the plaintiff’s solicitors have already asked the defendant’s for the estimates of costs so as to better assess the commercial feasibility of acceding to the request for indemnity costs.  The defendant’s solicitors did not provide anything until ordered by the court. 

17.  The defendant’s explanation was, amongst others, that the plaintiff had not even agreed on the principle of an unconditional or temporary stay with indemnity costs.

18.  I do not see why the defendant’s solicitors could not talk about costs in money terms whilst negotiating on matters of principle.  It would certainly be in furtherance of the spirit of cooperation under Order 1A, rule 3 of the Rules of the High Court and facilitate the plaintiff’s making of a commercial decision.  I find there was undue delay in providing the costs estimates.

19.  That said, it has to be borne in mind that resolution of the substantive dispute has not advanced a step.  The substantive work of the defendant in this action was to draft a summons and an affirmation, having one call-over hearing and engaged in heavy correspondence and filed an affirmation over the question of costs. 

20.  The plaintiff made an open offer in correspondence to pay $100,000 to settle the costs.  I consider that offer too low anyway even if the defendant had supplied the costs estimates earlier.

21.  At the first hearing, the defendant engaged senior and junior counsel. It was contradictory to the defendant’s own stance that the stay application involved no dispute of fact and was based on “settled” and “entrenched” law so much so that the plaintiff should even be deprived of the opportunity to file evidence.  I disallow the engagement of senior counsel as unreasonable and substitute it with a hypothetical junior in the costs assessment.

22.  The plaintiff’s affirmation in relation to the issue of costs was mostly a regurgitation of the correspondence.  It triggered a lengthy response from the defendant, also with much reference to the correspondence. The plaintiff has caused costs to escalate out of proportion to the original procedural step of a stay.  Had the stay application been adjourned for substantive arguments, the costs (even with senior counsel) should not have exceeded $300,000 on party-and-party basis.  The indemnity costs now sought for an application that has been withdrawn was totally unreasonable, in my view, and the plaintiff has contributed substantially to it after the call over in January.

23.  Accordingly, though I award indemnity costs to the defendant, I take into account proportionality as if the solicitors had sensibly dealt with the matter.  I award a sum of $230,000 to the plaintiff.