BESTWAY INFLATABLES & MATERIAL CORPORATION v. GREYLAND TRADING LTD AND ANOTHER

HCA3709/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3709 OF 2002

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D E C I S I O N

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Appeal

1. This is an appeal brought by the 1st defendant against Master Kwan's order of 16 February 2004 whereby she ordered the plaintiff to pay into court security for its costs in the sum of HK$520,000.

2. There is no dispute in this appeal that the plaintiff, a company incorporated in the Mainland, is liable to give security for costs. The only issue is on quantum.

3. It is convenient to first look at the major steps taken by the parties in these proceedings. I will begin with the plaintiff's claim.

The plaintiff's claim

4. The plaintiff is a manufacturer of inflatable plastic swimming pools and other products associated with aquatic leisure activities. The 1st defendant is a Hong Kong company and is associated with the 2nd defendant, a corporation based in Massachusetts, USA.

5. On 2 October 2002, the plaintiff commenced the proceedings against the 1st defendant (which was the only defendant at the time) for some US$328,000.00 in respect of unpaid invoices for goods supplied between 8 March 2002 and 20 May 2002.

6. The 2nd defendant was only joined as a party on 27 January 2004.

Order 14 and Order 23 Summonses

7. By summons dated 8 November 2002, the plaintiff applied for summary judgment against the 1st defendant ("the Order 14 Summons").

8. By summons dated 31 December 2003, the 1st defendant applied for security for costs ("the Order 23 Summons").

Defence and counterclaim

9. On 20 January 2003, the 1st defendant filed its defence and counterclaim. The 1st defendant first alleged that it was not liable because it was only an agent of the 2nd defendant. Alternatively, the 1st defendant alleged that even if it was liable to pay for the goods, which had been supplied, there is a claim in respect of defective goods, which had been supplied under some other orders. The 1st defendant would be entitled, so it is alleged, to an equitable set-off in respect of the losses caused by the defective goods.

10. The 1st defendant then raised a counterclaim for the loss it had allegedly suffered from the defective goods for a sum of US$491,604.22 and other relief.

Hearings on the Order 14 and Order 23 Summonses

11. Both the Order 14 and Order 23 Summonses went before Master Au-Yeung on 7 February 2003. She granted summary judgment and dismissed the application for security for costs.

12. The 1st defendant then appealed against the orders of Master Au-Yeung. The appeal was heard by Deputy Judge Gill on 4 April 2003. The learned deputy judge allowed the appeal, set aside the summary judgment and ordered the plaintiff to pay security for costs in the sum of HK$1 million.

Appeal to the Court of Appeal

13. The matter did not stop there and went further to the Court of Appeal. On 26 November 2003, Rogers VP sitting together with Le Pichon JA, affirmed the decision of Deputy Judge Gill on the Order 14 Summons but dismissed the application for security for costs.

14. In the Reasons for Judgment handed down on 2 December 2003, Rogers VP had this to say on the defence of equitable set-off :

"7. In relation to the question as to whether the claim for defective goods could be relied upon by the defendant as a set-off should it be held liable for the price of the goods, the judge below came to the conclusion that, although the defendant's evidence may be short on proof of defective products, he did not consider that its counterclaim was a sham. He considered that if the issue of equitable set-off were a live one he would have found, on the facts, that the case fell within the category warranting a judgment in favour of the plaintiff but with execution stayed pending resolution of the counterclaim.

8. This aspect of the case is not now in point in view of my conclusion as to the disposal of the summary judgment application. I would, nevertheless, say that for my part, I would not rule out the possibility that the defendant could rely upon a true equitable set-off. The principle to be applied is clear. Simon Brown LJ put it shortly at page 950D of his judgment in Esso Petroleum Co. Ltd v Milton [1997] 1 WLR 938 when he said:

'For equitable set-off to apply it must therefore be established, first that the counterclaim is at least closely connected with the same transaction as that giving rise to the claim, and second that the relationship between the respective claims is such that it would be manifestly unjust to allow one to be enforced without regard to the other.'

9. In this case, it is clearly arguable that there was, starting in late 1999, a series of transactions constituted on the basis of an arrangement which had been arrived at the commencement. There were a series of orders which could clearly be treated as part and parcel of a continuous series of ongoing transactions. Although each order would have to be dealt with as a separate order and each item of defective goods would have to be treated separately, nevertheless it would not stretch the imagination that the parties would treat their relationship as being part of, or at least under the umbrella of, the original arrangement. It might be expected that if there were a claim for defective goods and that claim were honoured by the plaintiff, the parties would make adjustments in payments for later orders to take account of any reimbursement."

15. Rogers VP then continued on the question of security for costs thus :

"Security for costs

10. Not only was the defendant successful in obtaining leave to defend the action but it also successfully obtained an order against the plaintiff for security for costs in the sum of $1 million. As already mentioned, the security was intended to cover the costs up to and including trial. Initially the defendant had requested security in the sum of $1 million but when the application was made the defendant sought security in the sum of $2,360,000. The way that sum was arrived at was set out in an estimate contained in an affirmation made by the defendant's legal representative.

11. The estimates given in that affirmation are clearly both very generous and rough and ready. For example a total of $150,000 is claimed in respect of the application of security for costs. Moreover, an item of $1 million is given in respect of discovery and inspection. Without any estimate of the length of trial, the cost of the trial is put at $600,000. The judge below came to the conclusion that a fair and reasonable sum to provide was $1 million. In doing so he clearly took a figure which he considered was reasonable in contrast to the figures given by the defendant. In respect of the defendant's estimate he said that it may or may not be 'grossly excessive and unreasonable' as the plaintiff argued.

12. No doubt the judge took a course which arrived at what he considered would be practical justice. In doing so, it must be observed that a very substantial amount of security was ordered in comparison to the size of the claim. As noted, the plaintiff's claim is not contested insofar as it is not denied that the plaintiff had manufactured and supplied goods and was entitled to be paid by at least somebody, whether that was the defendant or somebody else. So not only was the plaintiff being kept out of money to which it is entitled from somebody but it was being asked to pay an amount in respect of security for costs which would cover the trial, which, at this stage, would be of unknown length. Furthermore, the court was being asked to order security on the basis of estimates as to costs which clearly it did not accept. In my view, the proper course in those circumstances was for the party claiming security to put its case in order and make an application supported by acceptable material. In the circumstances of the present proceedings, given the issues between the parties, it may also not be appropriate to order security which would cover the trial, but rather it may be right to make an order that would take the matter up to a suitable stage in the preparation of the case."

Second application for security for costs

16. By summons dated 6 January 2003, the 1st defendant applied for security for costs again. The quantum sought was HK$1,953,150.00. The application was supported by the 2nd affirmation of Lui Chi Lan filed on the same day. The skeleton bill of costs exhibited to that affirmation was however far from satisfactory. The costs incurred were not separated from those to be incurred. The narrative in the bill was incomprehensive and confusing. The hearing eventually came before Master Kwan on 16 February 2004. The learned master heavily criticized the 1st defendant for having failed to provide a meaningful skeleton bill of costs. Doing the best that she could in the circumstances, the learned master came to a figure of HK$520,000.00. She further ordered that there shall be no order as to costs.

17. On 8 March 2004, the plaintiff paid the said sum of HK$520,000 into court pursuant to Master Kwan's order.

New skeleton bill of costs

18. By summons dated 18 May 2004, the 1st defendant sought leave to adduce a skeleton bill of costs for the purposes of this appeal ("the New Bill"). Eventually, leave was given by Reyes J on 31 May 2004.

19. The New Bill is prepared by a law costs draftsman. It is divided into two parts. Part I relates to the costs said to be have been incurred already. The total amount is HK$1,082,076.33. Part II gives an estimate of future costs in the sum of HK$1,379,000.00. Thus, the total amount of security for costs that the 1st defendant seeks in this appeal is HK$2,461,076.33.

20. It should be noted that the plaintiff has already paid into court a separate set of funds as security for costs of the appeal to the Court of Appeal against the order of Deputy Judge Gill. I am therefore not concerned with those costs.

Points of objection

21. Challenging the 1st defendant's application, the plaintiff essentially takes three points :

(1) Security for the costs of prosecuting the counterclaim by the 1st defendant should not be allowed.

(2) The 1st defendant is not entitled to seek security for costs up to trial at this stage.

(3) The quantum claimed is grossly excessive.

The first two points involve questions of principle. The third point relates to quantum only.

22. I will look at the points in turn.

Security for costs for counterclaim?

23. It is trite that a counterclaiming defendant is not entitled to seek security for costs against the foreign plaintiff on the counterclaim. For it is in substance the 'plaintiff' in the counterclaim while the plaintiff is exercising its right to defend the counterclaim. Though resident outside jurisdiction, the plaintiff cannot be required to give security for costs for the counterclaim.

24. Here, the 1st defendant alleges that the subject matter of the counterclaim also give rise to the defence of equitable set-off. The question is therefore whether having regard to the circumstances of the present case, the court considers the counterclaim must be treated as made, substantially, by way of defence to the plaintiff's action, or whether it must be regarded as being in the nature of an independent claim made in respect of matters foreign to that action : New Fenix Compagnie Anonyme D'Assurances de Madrid v. General Accident, Fire and Life Assurance Corp. Ltd [1911] 2 KB 619, Smarking International Ltd v. Lau Chi Keung George [1999] 4 HKC 669.

25. Initially, Mr Chan, counsel appearing for the plaintiff, has asked me to make a ruling on the question whether the subject matter of the counterclaim did give rise to the defence of equitable set-off. In the end, he agrees with my observation that it will be premature to make a ruling at this stage of the proceedings.

26. As noted above, Rogers VP has already observed that it is arguable that the defendant could rely on a true equitable set-off. I respectfully agree with his observation. Two points then follow.

27. First, it is not for the court, faced with an application for security for costs, to make a preliminary run at deciding the ultimate success or failure of the claim. The court should proceed on the basis that the plaintiff has a bona fide claim and the defendant has a bona fide defence. The court is not required to reach any conclusion on the merits of the case : Sunchase International Group (China) Ltd v. Vinchor Group of Companies (Investment) Ltd [2994] 1 HKLRD 731. Here, the parties have rightly refrained from making any submissions on the merits of their respective case.

28. Second, if it is clear that the defendant relies on substantially the same facts both in defence of the plaintiff's clam and in support of its own counterclaim, then a modest discount on apportionment of costs for the claim and the counterclaim can properly be given : Easy Watch Products Manufactory Co. Ltd v. Epson Precision (Hong Kong) Ltd [2004] HKEC 431, per Barma J at paragraph 22. In this regard, the 1st defendant suggests a 20% discount to be made to the security for costs claimed for the counterclaim whereas the plaintiff suggests a discount of 80%. In my view, any discount suggested at this stage of the proceedings is only a rough estimate. It would indeed be very difficult to come to an appropriate ratio, which can only be done after trial. Bearing in mind Barma J's observation and having regard to all the circumstances, I am prepared to go along with the plaintiff's suggestion.

Security for costs up to trial?

29. At the stage when the application went before Master Kwan, no particular progress has been made in respect of the plaintiff's claim. (It is understandable as subject to the defence raised, the factual matters relied on by the plaintiff in support of its claim are hardly in dispute.) The parties concentrated their efforts in the preparation of the counterclaim. The steps taken in that regard included application for further and better particulars of the defence and counterclaim, discovery and a checklist hearing before the listing master on 11 February 2004.

30. Master Kwan must have taken into account of the progress of the case when she fixed the quantum of security for costs at HK$520,000. However, it is not clear if that figure only covered the costs already incurred. The learned master was not to be blamed. For it is the plaintiff who had failed to separate the costs already incurred and future costs in the skeleton bill placed before her.

31. Preparation of the counterclaim has progressed since Master Kwan's order of 16 February 2004. The pleadings have been further amended. The 1st defendant has also taken the steps of preparing witness statements, although an order has yet to be made for exchange of witness statements. It is probable that a further summons for direction or checklist hearing will be required before leave can be given to set the case down for trial.

32. While I accept that there should be security for future costs as the case progresses, it is premature to order security for costs up to trial. As observed by Rogers VP, an order should be made that would take the matter up to a suitable stage. A suitable stage, in my view, is up to the checklist hearing before the listing master at which leave would be sought and be given to set the case down for trial.

33. Before I turn to the next question on the quantum, I note that according to the New Bill, much of the preparation work to enable the case to be set down for trial has in fact been done. What is left is the work relating to further discovery of evidence; finalizing the 1st defendant's witness statements, perusing the plaintiff's witness statements and taking instructions and giving advice thereon; and senior counsel's advice on evidence.

Whether quantum claimed grossly excessive?

34. Part I of the New Bill is very comprehensive. Part II is relatively rough and simple. The plaintiff takes a number of objections to both Parts. The objections can be found in paragraphs 9, 21 to 23 of the 4th affirmation of Eugene Julian Kwok dated 21 June 2004. Mr Chan has attached to his written submissions a table which reduced the objections into monetary terms in respect of each of the items objected to.

35. It is, in my view, wrong in principle to turn this application into a mini-taxation of costs. The New Bill and the objections only serve the purpose of providing the court with acceptable materials to support the parties' case on quantum. I have already reviewed the New Bill and the objections carefully. For present purposes, other than the following matters, which in my view are quite obvious, I will not go into details of the New Bill and the objections. For I do not wish to pre-empt any determination on any matter in dispute by the taxing master in the event that the 1st defendant's costs are to be taxed. The matters that I wish to comment on are :

(1) It seems to me that there is no justification to use the hourly rate of HK$2,500 and HK$2,700 for two of the fees earner whose normal hourly rates accepted on taxation are HK$2,300 and HK$2,500 respectively. I am unable to accept that 1st defendant's submissions that the higher hourly rates are justified because they have worked without much supervision from the handling partners or counsel.

(2) The 1st defendant is not entitled to claim the costs of the application before Master Kwan in light of her costs order.

(3) This appeal is attended by Mr Ho of the 1st defendant's solicitors. It is therefore wrong to have claimed costs on the assumption that counsel is briefed. In any event, the time charged by the handling solicitors in connection with the preparation of this appeal (20 hours) is clearly excessive.

(4) Discovery has already been completed. It is not clear from the evidence before me what further discovery is required.

(5) It would appear to be wrong in principle to include a separate item of finalizing witness statements in addition to the preparation of the same.

(6) It seems unnecessary to engage a senior counsel to advise on evidence. I am unable to foresee any particular difficulty on evidence that requires senior counsel's advice.

(7) It is premature to include the costs of the trial.

36. In my view, a reasonable amount of security for costs up to the stage where leave would be given to set the case down for trial is HK$800,000. What the 1st defendant is claiming is clearly excessive.

Order

37. For the above reasons, I will allow the appeal and substitute Master Kwan's order with an order that the plaintiff do give security of costs in the sum of HK$800,000 by paying the same into court. The plaintiff has already paid into court the security of HK$520,000 as ordered by Master Kwan. It should pay the balance of HK$280,000 into court within 14 days from today. In the meantime, all proceedings are to be stayed until that payment is made.

38. On the costs of the hearing below, I do not propose to disturb Master Kwan's costs order. As noted above, the skeleton bill of costs then placed before the master was deficient in various aspects. The 1st defendant cannot possibly blame her for having arrived at the sum of HK$520,000. I am able to come up with a higher figure only with the benefit of the New Bill. The master's costs order was well justified on the materials then before her.

39. On the costs of this appeal, the 1st defendant is only partially successful in that they only managed to persuade me to raise the quantum to HK$800,000, which is much less than the sum of HK$2,461,076.33 that it sought in the New Bill. The 1st defendant should therefore be entitled to a fraction of the costs of the appeal only. One-third of the costs is, I believe, reasonable in the circumstances. I will therefore make an order nisi that the 1st defendant shall have one-third of the costs of this appeal in any event, to be taxed if not agreed.