LINFIELD LTD v. TAOHO DESIGN ARCHITECTS LTD AND OTHERS

cacv 58/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 58 of 2006

(on appeal from hcct NO. 68 of 2001)

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J U D G M E N T

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Hon Rogers VP:

1.  This was an appeal by the third party from an order of costs made by Reyes J on 16 January 2006.  The background to this matter can be gleaned from the judgment in the court below and the judgment of this court to be handed down simultaneously in the appeal by the plaintiff in respect of its claim against the 4^th defendant.

2.  Although this appeal relates to the order made on 16 January the origin of the matter goes back to the order nisi the terms of which were set out in the judgment of 3 September 2004.  The judge then made an order nisi that the plaintiff should pay the costs of the 4^th defendant because the 4^th defendant had been successful in defending the claim brought against it, and he further ordered that the plaintiff should indemnify the 4^th defendant in respect of its liability for the third party’s costs which had been incurred as a result of the 4^th defendant’s third party claim against the third party.  The third party claim had, naturally, fallen away once the claim against the 4^th defendant had been dismissed.

3.  The matter then went back before the judge on an application to vary the order nisi.  Although the judge did not vary his previous order he added a “post-judgment note”.  That was to the effect that depending on the outcome of the arbitration, it remains open to the plaintiff to argue before this court that the plaintiff should be able to recover the 4^th defendant’s costs and the plaintiff’s costs from PCL or the third party or both.

4.  By the order of 16 January 2005, the judge ordered that the third party should pay the plaintiff’s costs, jointly and severally with the 2^nd and 3^rd defendants, in respect of the claim against the 3^rd defendant, and further that the third party should indemnify the plaintiff against the plaintiff’s liability for the 4^th defendant’s costs and indemnify the plaintiff against the plaintiff’s liability for costs which the 4^th defendant had been ordered to pay the third party.  The judge referred to this as completing the circle.

5.  The basis upon which the judge appears to have taken this view can only be gleaned from what was said at the hearing.  At page 18 of the transcript the judge said:

“In my view, BHP’s faults reasonably caused Linfield to pursue PCL, MML and GWA.  In that circumstance, it seems to me correct to pass down Linfield’s costs, including GWA’s costs and the costs of indemnify GWA on to BHP.  I am not persuaded that the timing of the court and arbitration proceedings is a factor militating against this conclusion; nor do I think that BHP’s offer to settle GWA’s third party proceedings outweighs the normal course of passing down costs to BHP.”

6.  There appears to me to be a fundamental difficulty in the reasoning.  The order nisi which was originally made was, in my view, the standard order.  The plaintiff had started proceedings against the third party in a separate action.  But that claim was stayed in favour of arbitration.  The plaintiff and the third party had entered an agreement which required that disputes would be submitted to arbitration and the court correctly held the parties to that agreement.  There were no arbitration proceedings between the plaintiff and the 4^th defendant because there was no contract between them to arbitrate.  In those circumstances if the plaintiff considered that it had a claim against the 4^th defendant, it was entitled to bring it in court.  If the claim failed the consequences would naturally follow that the plaintiff would have to bear the costs of the action.

7.  The supposed fault which the judge referred to when he gave the reasons for his ruling, quoted above, is simply not apparent.  The only possible fault which I can see that could even be suggested was that the third party, as the coordinator of the whole project, had failed to ensure that the 4^th defendant’s contract included an arbitration clause.  Even that allegation in the present case would be adventurous.  Nevertheless, even if that were a relevant fault of the third party it would have been a breach of contract and being a breach of contract it was a claim which would have to be brought in the arbitration proceedings.

8.  If the supposed fault of the third party was something that emerged from the arbitration proceedings, it would be necessary to consider the award in the arbitration proceedings.  For my part, I perceive substantial difficulties in considering the award.  The nature of arbitration proceedings is that they are confidential to the parties.  It does appear that in some instances courts have considered the contents of awards.  I do not consider it necessary for the purposes of this case to examine whether the confidentiality of the arbitration proceedings should preclude this court from considering the award, because in my view, on the submissions made, there can be nothing relevant to be gained from it.  There are, it would seem, two fundamental difficulties if it were necessary to consider the arbitration when considering the costs of the court action.

9.  The evidence in the arbitration proceedings was inevitably different from the evidence at the trial in court and, importantly, the assessment made of that evidence by the arbitrator may well have been different from the assessment made by the court.  In this case from the submissions which were made by Mr Clayton SC during the course of the appeal by the plaintiff, it would appear that the arbitrator may well have taken a different view of, for example, Mr Hartog’s evidence to that taken by the judge at the trial.  In this regard, the court can only adjudicate on the basis of its own findings.

10.  Furthermore, it would appear that in the arbitration proceedings, it was held that the third party was liable to the plaintiff on three grounds namely, a failure to advise that a specialist cladding consultant should be appointed, a failure to advise on the suitability of the particular limestone cladding and a failure to advise in respect of professional indemnity insurance to be taken out by the various parties.  There is a logical difficulty in ascribing those failures to a responsibility for the costs caused by the plaintiff suing the 4^th defendant.  I am unable to see the relevance of those findings in respect of the plaintiff’s claim against the 4^th defendant.

11.  It is trite law that this court does not interfere with the exercise of discretion by a judge in relation to costs unless this court considers that there has been an error of principle or that the order made below was clearly wrong.  In my view, there was an error in principle because the order made on 16 January 2005 was on the basis that the third party had committed some undefined fault.  I cannot see that the third party has committed any fault which has caused the plaintiff to bring proceedings unnecessarily against the 4^th defendant.  In so far as the judge may have relied on the contents of the award in the arbitration proceedings, the specific contents have not been identified and, for the reasons given, I consider that it would be wrong in the circumstances of this case to order that the third party should bear the costs in the manner ordered.  In my view, in the circumstances, the order made by the judge was clearly wrong and I would set aside the order made on 16 January and make an order nisi that the plaintiff should bear the costs in this court and of the hearing on 16 January 2006 in the court below.

Hon Tang JA:

12.  I agree that the appeal should be allowed.

13.  This claim arose out of the cladding works in the development of The Belvedere, 51-61 Plantation Road, the Peak, Hong Kong.

14.  The plaintiff is Linfield Limited (“Linfield”), the owner.

15.  The 1^st defendant, Taoho Design Architects Limited (“TDA”), was the architect, the 2^nd defendant, Progress Construction Limited (“PCL”), the building contractor, the 3^rd defendant, Michelangelo Marble Limited (“MML”), the cladding sub-contractor, and Greg Wong & Associates Limited (“GWA”), the 4^th defendant, the structural engineer.

16.  Brooke Hillier Parker (A Firm) (“BHP”), the third party, was the “Development Consultant and Project Administrator”.

17.  Linfield’s respective contract(s) with TDA, PCL, and BHP contained arbitration clauses, but not in its contracts with MML and GWA.

18.  Linfield’s claim against TDA, PCL and BHP, had been stayed for arbitration.

19.  Thus, there were arbitral proceedings between Linfield and TDA, PCL and BHP, and this action against MML and GWA.  BHP was the third party to GWA’s third party claim.

20.  Linfield was successful against MML at trial, but its claim against GWA was dismissed.  Consequently, GWA’s third party against BHP was also dismissed.

21.  This is BHP’s appeal against the cost orders which were made on 16 January 2006.  The relevant effect of the order is that BHP became liable for Linfield’s costs of the action against GWA.  That reversed an earlier order of 20 November 2004, whereby Linfield was ordered to pay GWA’s costs and to indemnify GWA against GWA’s liability to pay BHP’s costs.

22.  It may be helpful to trace the background to the order of 16 January 2006.

23.  The judge in his judgment of 3 September 2004, made the following costs order nisi:

“313.    There will be a Costs Order Nisi in the following terms:-

(1)  PCL is to have its costs of BHP’s claim against PCL.  PCL’s own costs are to be taxed if not agreed.  I shall refer below to such taxed costs as PCL’s costs.

(2)  There will be no costs order in respect of BHP’s claims for contribution or indemnity against TDA and MML.

(3)  BHP is to have its costs of GWA’s claim against BHP.  BHP’s own costs are to be taxed if not agreed.  I shall refer below to such taxed costs as BHP’s costs.  In addition to payment of BHP’s costs, GWA is to indemnify BHP against the amount of PCL’s costs.

(4)  There will be no costs order in respect of GWA’s claims for contribution or indemnity against TDA and MML.

(5)  GWA is to have its own costs of Linfield’s action against GWA.  GWA’s own costs are to be taxed if not agreed.  I shall refer below to such taxed costs as GWA’s costs.  In addition to payment of GWA’s costs, Linfield is to indemnify GWA against the amounts of PCL’s costs and BHP’s costs respectively.

(6)  Linfield is to have the costs of its action against MML, such costs to be taxed if not agreed.  

(7)  Sub-§(5) has the consequence that Linfield will bear PCL’s and BHP’s costs.  Such result will be without prejudice to any argument by Linfield in these proceedings that, consequent on the outcome of Linfield’s arbitration against PCL and BHP, Linfield should be entitled fully to recoup those costs from PCL and BHP.”

24.  On 20 November 2004, after hearing arguments pursuant to Linfield’s application to vary the order nisi, the judge made the following orders absolute:

“There be a Costs Order in the following terms:

1.   The Third Party pay the Second Defendant’s costs of the Third Party’s contribution claim against the Second Defendant, such costs to be taxed if not agreed.

2.   There be no order as to costs in respect of the Third Party’s claims for contribution against the First and Third Defendants.

3.   The Fourth Defendant pay the Third Party’s costs of the Fourth Defendant’s claim for contribution against the Third Party, such costs to be taxed if not agreed.  In addition, the Fourth Defendant is to indemnify the Third Party for the costs payable by the Third Party to the Second Defendant pursuant to paragraph 1 of this Order.

4.   The Fourth Defendant pay the Second Defendant’s costs of the Fourth Defendant’s claim for contribution against the Second Defendant, such costs to be taxed if not agreed.

5.   There be no order as to costs in respect of the Fourth Defendant’s claims for contribution or indemnity against the First and Third Defendants.

6.   The Plaintiff pay the Fourth Defendant’s costs of the Plaintiff’s claim against the Fourth Defendant, such costs to be taxed if not agreed.  In addition, the Plaintiff is to indemnify the Fourth Defendant for both the costs payable by the Fourth Defendant to the Third Party pursuant to paragraph 3 of this Order and the costs payable by the Fourth Defendant to the Second Defendant pursuant to paragraph 4 of this Order.

7.   The Third Defendant is to pay the Plaintiff’s costs of the Plaintiff’s claim against the Third Defendant, such costs to be taxed if not agreed.  In addition, the Third Defendant is to indemnify the Plaintiff for the costs payable by the Plaintiff to the Fourth Defendant pursuant to paragraph 6 of this Order.”

25.  In his judgment of 20 November 2004 on costs, the judge said: 

“9. In my view, as Mr Manzoni (appearing for GWA) points out, GWA were neither brought into the action by MML nor as a result of anything said or done by MML to implicate GWA.  The decision to sue GWA was Linfield’s own.  It would be wrong in the circumstances to make a Sanderson order with the effect that GWA bears MML’s insolvency.

10. I also have in mind the fact that on 21 November 2003, before substantial costs in the preparation for trial had been incurred, GWA offered to pay Linfield $1,000,000 in full and final settlement of all Linfield’s claims against GWA.  The offer remained open until it was withdrawn in February 2004.  Had Linfield accepted the claim, it would have been $1,000,000 better off and GWA would not have incurred the substantial costs of trial preparation.  In that light, I do not think it would be fair now to leave GWA to recover its costs from MML.

11. As for PCL’s and BHP’s costs, in my view it was reasonable and inevitable that GWA would seek contribution from PCL and BHP upon being sued by Linfield.  The same would be true of BHP’s seeking contribution from others.  Such reactions on should have been foreseeable by Linfield at the time when it brought its claim.  It is therefore right for Linfield to bear PCL’s and BHP’s costs.”

26.  The judge went on to say: 

“21. Finally, Linfield asks for clarification of §313(7) of the Judgment.  There I left it open to Linfield to argue later in this Court, depending on the outcome of its arbitration proceedings against PCL and BHP, that Linfield should be able to recoup PCL’s and BHP’s costs from PCL or BHP. 

22. I did not mean by that to preclude any argument before the arbitrator as to Linfield recovering PCL’s and BHP’s costs from one or either or both of PCL and BHP.  The arbitrator may or may not wish to consider the question.  It is not for the Court to dictate to the arbitrator how to conduct the arbitration.

23. All I was doing was making it clear that, as far as the Court was concerned, the question of recovering BHP’s and PCL’s costs could be raised in Court at the end of the arbitration proceedings, when the existing stay is lifted.  In other words, the Court is not ‘functus’ on those specific issues.  Obviously, if the question of recoupment is conclusively dealt with by the arbitrator, there will be no need to restore that matter for the Court’s consideration.

24.       I note that Mr Houghton (appearing for BHP) further asked me to leave open the possibility of BHP passing any costs payable to Linfield further down onto GWA.  I declined that request.

25.       POST-JUDGMENT NOTE:  For the avoidance of doubt, it occurs to me I should also state by way of clarifying §313(7) that, depending on the outcome of the arbitration, it remains open to Linfield to argue before this Court that Linfield should be able to recover GWA’s costs and Linfield’s costs from PCL or BHP or both.”

27.  The relevant arbitral award was made on 21 June 2005.  Linfield was successful against TDA, PCL and BHP.  Mr Clayton SC, counsel for Linfield, told us that BHP was found to be at fault in respect of:

(i)     the choice of the material for the cladding;

(ii)    failing to advise on the appointment of a cladding consultant;

(iii)   failing to advise on procuring professional indemnity insurance.

28.  Following the arbitral award there was a further hearing before the judge on 16 January 2006, when the judge said: 

“COURT : No, thank you very much, Miss Cheng.  If I might just have a moment.

In my view, BHP’s faults reasonably caused Linfield to sue PCL, MML and GWA.  In that circumstance, it seems to me correct to pass down Linfield’s costs, including GWA’s costs and the costs of indemnifying GWA on to BHP.  I am not persuaded that the timing of the court and arbitration proceedings is a factor militating against this conclusion; nor do I think that BHP’s offer to settle GWA’s third party proceedings outweighs the normal course of passing down costs to BHP.

Miss Cheng, I said we would discuss the form of the order.”

29.  He then made orders including the following which were the subject of BHP’s appeal:

“(1) The 2^nd Defendant and the Third Party are to be jointly and severally liable with the 3^rd Defendant to pay the Plaintiff’s own costs of its action against the 3^rd and the 4^th Defendants;

(2) The 2^nd Defendant and the Third Party are to be jointly and severally liable with the 3^rd Defendant to pay to the Plaintiff the costs of the 4^th Defendant which the Plaintiff is liable to pay to the 4^th Defendant;

(3) The costs of the Third Party proceedings which the 4^th Defendant is liable to pay to the Third Party and in respect of which the Plaintiff is liable to indemnify the 4^th Defendant are to be paid by the Third Party to the Plaintiff.”

30.  Mr Clayton submitted that when the judge referred to BHP’s faults, he was referring to the faults found by the arbitrator.  The judge probably took the view that had proper advice been given in relation to the choice of the cladding material and the appointment of a cladding consultant, the matters which gave rise to this litigation would not have occurred.  In that sense, BHP could be said to have “caused” Linfield to sue PCL, MML and GWA.

31.  In the course of Ms Teresa Cheng’s (counsel appearing for Linfield at the trial) submission, the judge said:

“… It would be as if you sued everyone, MML, PCL, BHP in these proceedings; you won against MML and it was found, you now know, that PCL, BHP were also liable, so you say you should be able to claim the costs against them jointly and severally.” (page 7 of the transcript)

32.  Mr Sussex SC, who appeared on behalf of BHP acknowledged that this could be taken as part of the reason for the order appealed from.  Be that as it may, it is clear that the principal reason for the order of 16 January 2006 is to be found in the passage quoted at para. 28 above.

33.  Mr Clayton further submitted that the judge had jurisdiction to make the order pursuant to section 52A of High Court Ordinance, Cap. 4, under which:

“… the Court shall have full power to determine by whom and to what extent the costs are to be paid.”

34.  Mr Sussex, submitted that BHP should be regarded as a successful party in the third party proceedings, which was recognised by the order made on 20 November 2004, and that the judge erred in principle in reversing the order of 20 November 2004.

35.  The judge gave leave to appeal.

36.  The grounds on which an exercise of discretion can be interfered with are well known and do not require repetition.

37.  Since this exercise of discretion is in respect of costs, I believe I must approach the matter with the utmost circumspection.  The fact that the judge gave leave to appeal does not in any way reduce the heavy burden of an appellant against a costs order.

38.  But, with diffidence, I find myself able to say that the judge has taken into account some matter which he should not have taken into account, or has left out of account some matter which he should have taken into account, so that the exercise of discretion in this case can be questioned.

39.  It is not disputed that BHP was entitled to exercise its right to insist on arbitration to resolve its differences with Linfield.  That right is recognised by the Arbitration Ordinance, Cap. 341.

40.  That being so, a party to an arbitration agreement could not be said to be at fault in insisting on an arbitration.

41.  That is perhaps why Mr Clayton accepted that the judge did not have this in mind when he said:

“In my view, BHP’s faults reasonably caused Linfield to sue PCL, MML and GWA.”

42.  I believe Mr Clayton is correct when he submitted that the judge had in mind the faults found against BHP by the arbitrator.

43.  That being so, as the judge himself recognised, the costs in the present proceedings might have been recoverable in the arbitration.  See para. 22 in his judgment of 20 November 2004 quoted at para. 26 above.

44.  It is clear that whether such costs were recoverable as damages and if so, the quantum of recovery, were covered by the agreement to arbitrate.  I believe recovery should be decided by arbitration.

45.  Perhaps, the matter could be tested in this way.  Suppose BHP had not been made a third party to the proceedings by Linfield so that because of section 52A(2) no order of costs could be made against BHP in the action.  In that event, if Linfield were to bring proceedings against BHP to recover the costs of the proceedings against GWA as damages flowing from BHP’s breach of duties, the claim would be stayed for arbitration.  The rationale behind the stay is that the parties having agreed to have their differences resolved by arbitration, the court should give effect to it, so that, for example, it is no answer to a stay to say that the outcome is a foregone conclusion.  Whether that is so must be determined by arbitration.  Tai Hing Cotton Mill Limited v Glencore Grain Rotterdam BV [1996] 1 HKC 363 at pages 372-373.

46.  Mr Clayton submitted that such damages would not be recoverable by arbitration because they are too remote.  I am not persuaded that he is correct.  But, if he is correct, then I find it difficult to see why such faults should lead to an adverse costs order, particularly, having regard to the fact that as the judge has said in his judgment of 20 November 2004 that:

“… The decision to sue GWA was Linfield’s own.” (See para. 25 above.)

47.  I do not believe it would be right for the court to override the agreement to arbitrate by making an order for costs under section 52A.  I am of the view that any difference covered by the agreement to arbitrate should be resolved by arbitration.

48.  The judge was able to make the order because BHP had been made a party to the proceedings by third party proceedings.  The discretion is wide, but in deciding whether or not to exercise the discretion the court should take into consideration the fact that Linfield and BHP had agreed to submit their differences to arbitration.

49.  Mr Clayton submitted that it was not opened to the judge to leave it to Linfield to seek recovery by way of damages in arbitration.  He submitted the judge was obliged to deal with the matter as a matter of discretion under section 52A.

50.  I do not agree.  I believe the judge should leave Linfield to recover the costs by way of damages against BHP by arbitration.  In any event, he should have taken that into consideration.  Since he had not, I believe I am entitled to exercise the discretion afresh.  I would leave Linfield to seek recovery by arbitration.  I do not know whether Linfield can still do so, but that would not affect my decision.  Linfield had ample opportunity to do so.

51.  Mr Clayton has a fallback position, namely, that BHP should in any event be deprived of its costs.

52.  However, Mr Clayton accepted that the judge had not considered that as a fallback position.  In other words, it was not the judge’s view that even if he was wrong in relation to the order for costs against BHP he would, for other reasons, have exercised his discretion to BHP deprive of its own costs.

53.  That being the case, so far as the fallback position is concerned, I believe I am able to approach it on the basis that the judge had not exercised his discretion.

54.  I believe for the reasons that I have stated above, this part of the order should also be set aside.

55.  I would therefore set aside the order of 16 January 2006.

Hon Chung J:

56.  I agree with the judgments of Hon Rogers VP and Hon Tang JA.