LAI JIANPING AND ANOTHER v. ABN AMRO BANK N. V.

HCA 407/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 407 OF 2012

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D E C I S I O N

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1. This is an appeal from an order of Master Ng dated 31 October 2012 requiring the plaintiffs to give security for the costs of the defendant (“the bank”) up to the completion of discovery.

Background facts

2. The plaintiffs ordinarily reside in mainland China.  They became private clients of the bank in about June 2007.  They brought this action in 2012 against the bank for losses arising out of investments in certain equity/accumulator contracts during the second half of 2007 to the tune of $28 million.  The action is based on the bank’s alleged breach of contract, misrepresentation, negligence, and breach of regulatory or statutory duties in respect of the provision of private banking services.

3. The bank filed a defence denying the allegations and counterclaimed for a sum of just under $2.3 million with interest, that being the shortfall in the plaintiffs’ accounts after set-off from the sale of stocks and the unwinding of the accumulators.  The entirety of the defence was repeated in the counterclaim as is the usual practice.

4. In the plaintiffs’ defence to the counterclaim, they repeated the entirety of the statement of claim and defended the counterclaim by way of equitable set-off.

The appeal

5. It is common ground that the court’s discretion to order security for costs under Order 23 rule 1 (1) is wide and unfettered.  The plaintiffs being resident out of the jurisdiction, it is also accepted that they fall within category (a) of that rule.  In a category (a) situation, if the defendant were to be successful in his defence, he may find himself seriously out of pocket by not being able to enforce any costs order in his favour against a plaintiff who is out of the jurisdiction and who has no assets within the jurisdiction.  Hence, in those circumstances, an order for security for costs would give the defendant some protection.

6. On this appeal, Mr Maurellet (who appeared for the plaintiffs) submitted that the purpose of ordering security is to protect the defendant.  In BJ Crabtree (Insulations) Ltd v GPT Communication Systems Ltd (1993) 59 BLR 43, Parker LJ considered (at p 55) that the discretion was “directed to ensuring that the proposed defendant is not forced to defend himself against allegations without protection in costs”.  In the same case, Bingham LJ echoed the same sentiment (at p 53 as to which see §9 below).

7. Mr Maurellet highlighted a feature that he submitted stood out in the present case: apart from the defence, there is also a counterclaim which the plaintiffs are defending (by way of set-off) on the same legal and factual legal basis as they are advancing under their claim.  It was submitted that this feature would ordinarily render it unjust or inappropriate to order security.

8. Mr Maurellet referred to the Crabtree case in which the plaintiffs, a small private company engaged in the business of removing asbestos, claimed a sum of £78,000 for works carried out.  The defendants counterclaimed for £105,000.  The issues in that case related to the scope and quality of the works undertaken by the plaintiffs: whether there was ever any agreement for additional works to be done at an enhanced price and whether the defendants had to incur considerable additional expense in curing defects in the work carried out by the plaintiffs and in carrying out additional works. 

9. The passages from Bingham LJ’s judgment on which the plaintiffs place specific reliance are at pp 52-53:

“It is, however, necessary, as I think, to consider what the effect of an order for security in this case would be if security were not given. It would have the effect, as the defendants acknowledge, of preventing the plaintiffs pursuing their claim. It would, however, leave the defendants free to pursue their counterclaim. The plaintiffs could then defend themselves against the counterclaim although their own claim was stayed. It seems quite clear and, indeed, was not I think in controversy -- that in the course of defending the counterclaim all the same matters would be canvassed as would be canvassed if the plaintiffs were to pursue their claim, but on that basis that they would defend the claim and advance their own in a somewhat hobbled manner, and would be conducting the litigation (to change the metaphor) with one hand tied behind their back. I have to say that that does not appeal to me on the facts of this case as a just or attractive way to oblige a party to conduct its litigation.

...

One comes back, I think, at the end of the day to the reflection that this is a rule intended to give a measure of protection to a defendant who is put to the cost of defending himself against a claim made by an impecunious corporate plaintiff.  It may in some cases be fair and just to make such an order even though the defendant is himself counterclaiming, but I am persuaded that it would be wrong to do so here because the costs that defendants are incurring to defend themselves may equally, and perhaps preferably, be regarded as costs necessary to prosecute their counterclaim.”

10. Pausing there, I find the reference to the plaintiffs’ claim having to be advanced in a “somewhat hobbled manner ...  with one hand tied behind their back” in the circumstances predicated to be somewhat opaque.  Be that as it may, Bingham LJ plainly considered the fact that “these two claims -- the claim by the plaintiffs and the cross-claim by the defendants -- raise essentially the same issues and are going to be fully litigated anyway so far as one can tell” to be the most important factor which the judge appeared to have overlooked.  (See p 54)

11. Mr Maurellet submitted that in determining whether the discretion should be exercised in a case (as here) where there is an overlapping of issues, the court should look at the spending.  In the present case, the plaintiffs are relying on matters raised in the statement of claim to establish an equitable set-off against the amount counterclaimed.  Accordingly, it was submitted that the bank will have to spend exactly the same amount of money whether or not an order for security is made because all the same issues will be traversed.  He reasoned that since the purpose of the rule is to protect the defendant so that he would not have to spend money that he would otherwise have to spend, if no costs are being saved, then the purpose of the rule would not be achieved.  It was submitted that in that situation it would not be appropriate to order security.

12. The short judgment of Parker LJ in Crabtree (at p 55) was said to support the submission:

“... It appears to me that the principal purpose ... is thus directed to ensuring that the proposed defendant is not forced to defend himself against allegations without protection in costs. Here the situation is that, if the money is not paid into court and the plaintiff’s claim is therefore stayed, the defendant will still raise issues on the counterclaim which are precisely the same as the issues which he would raise on the claim. In the result, findings might be made on the counterclaim which clearly showed that the plaintiff’s claim which had been stayed was a good and sound claim. The result would then be in that the stay would be lifted and there would then be judgment for the plaintiff on the claim ... with appropriate orders as to costs. This being the situation, it appears to me that the only effect of the application for security will be that, if the money is not paid in, the defendant has the right to begin rather than the plaintiff. That seems to me to be nothing less than the use of the rule to obtain some tactical advantage rather than to obtain protection.”

13. I do not consider that Bingham and Parker LJJ were laying down any firm rule that where there is an overlapping of issues (which would almost inevitably occur in every case where the counterclaim does not arise from a distinct matter), it would generally be inappropriate to order security.  Rather, their remarks were directed at the particular case before them.  As Bingham LJ explained (at p 49), the discretion to order security for costs is

“to be exercised in the interests of justice having regard to the peculiar features of the case before the court. It cannot be too firmly emphasised that there can be no rule of thumb as to the grant or refusal of an order for security in these circumstances.” (emphasis added)

14. While an overlapping of issues is clearly a relevant factor, its relative importance is fact-sensitive and depends on the existence or otherwise of other relevant factors arising on the facts of the particular case.  Moreover, Bingham LJ recognized that situations could arise where it would be “fair and just” for an order for security to be made against the plaintiff even though the defendant is himself counterclaiming.  See the passages cited in §§9 and 13 above.

15. While Mr Maurellet disavowed any suggestion that his “spending test” was decisive, he maintained that “generally speaking”, where no saving of costs would be achieved, it would be inappropriate to order security.  In this connection, there is another English Court of Appeal decision subsequent to Crabtree that is highly relevant. 

16. Hutchison Telephone (UK) Ltd v Ultimate Response Ltd [1993] BCLC 307 was decided 2 years after Crabtree and, interestingly, Bingham LJ was a member of that court.  That case concerned the plaintiff’s application for security against a counterclaiming defendant, the obverse situation to the present case.  There Dillon LJ considered (at pp 311 c – 313a) Samuel J Cohl Co v Eastern Mediterranean Maritime Ltd, The Silver Fir [1980] 1 Lloyd’s Rep 371 which established that the relevant question is whether in the particular case the counterclaim is a cross-action or merely operates as a defence and that it is too narrow an approach to treat establishing that the same issues are likely to arise on both the claim and counterclaim as decisive.

17. The following principles may be discerned from that decision:

·   the fact that the same issues are likely to arise on both the claim and counterclaim is not decisive; (311h)

·   that fact does not exclude the exercise of the court’s overriding discretion which underlies all applications for security and which requires looking at all the matters which are before it; (311i, 313e-g)

·   an order for security against a counterclaiming defendant is not precluded because the counterclaim arises out of the same transaction as the claim; (317f)

·   in exercising its discretion, the substantial position of the parties must be looked at and the court has to consider what is the just order to make; (318h)

·   the correct approach is to ascertain as a question of substance and not formality or pleading whether the defendant is simply defending himself or is he going beyond mere self defence and launching a cross-claim with an independent vitality of its own.  (317d-e)

18. The bank’s claim is based entirely on the contractual documents arising out of the banking relationship which set the parameters of the action.  Its scope or ambit is thus circumscribed.  It is clear that the plaintiffs have no answer to the claim based on the contractual documents.  As Mr Dawes, counsel for the bank put it, the plaintiffs’ defence by way of equitable set-off is to attack the contractual mechanism by re-introducing all the heads of claim made in its original claim which are wide-ranging. 

19. When analysed, the plaintiffs’ defence to the bank’s counterclaim could be said to be “of a totally different order of magnitude”, adopting the description used by the deputy master in the Hutchison case.  Not only would a whole raft of new issues have to be investigated, the amount claimed overtops the counterclaim by 10:1.  In my view, adopting the metaphor used in Hutchison, this is a clear case where the boundary which divides an aggressive defence from an independent counterclaim has clearly been crossed. 

20. Having regard not only to Crabtree but also the Hutchison principles, on the facts of the present case and exercising the discretion afresh, I have no hesitation in reaching the conclusion that it is fair and just to make an order for security for costs.

Order

21. Accordingly, the appeal is dismissed with an order nisi of costs in favour of the bank.