WING HONG CONSTRUCTION LTD v. TIN WO ENGINEERING CO LTD

HCCT 13/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDING

NO. 13 OF 2010

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BETWEEN

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D E C I S I O N

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1.  In a decision handed down on 13 May 2010, I dismissed Wing Hong’s application pursuant to s 23(3)(b) Arbitration Ordinance for leave to appeal from an award made in an arbitration between the parties. I made an order nisi that costs be Tin Wo, to be taxed on a party and party basis.

2.  Now, the solicitors for Tin Wo seek to vary the costs order, first asking that the costs be on an indemnity basis, and second that there be a certificate for two counsel.

3.  Mr Yip relies upon the following passage from the judgment of Reyes J in A v R [2010] 3 HKC 67, at 79:

“Parties should comply with arbitration awards. A person who obtains an award in his favour pursuant to an arbitration agreement should be entitled to expect that the Court will enforce the award as a matter of course.

Applications by a party to appeal against or set aside an award or for an Order refusing enforcement should be exceptional events. Where a party unsuccessfully makes such application, he should in principle expect to have to pay costs on a higher basis. This is because a party seeking to enforce an award should not have had to contend with such type of challenge.

Further, given the recent introduction of Civil Justice Reform (CJR), the Court ought not normally to be troubled by such type of application. A party unmeritoriously seeking to challenge and award would not be complying with its obligation to the Court under Order 1A Rule 3 to further the underlying objectives of CJR, in particular the duty to assist the Court in the just, cost-effective and efficient resolution of a dispute.

If the losing party is only made to pay costs on a conventional party-and-party basis, the winning party would in effect be subsidising the losing party’s abortive attempt to frustrate enforcement of a valid award. The winning party would only be able to recover about two-thirds of its costs of the challenge and would be out of pocket as to one-third. This is despite the winning party already having successfully gone through an arbitration and obtained an award in its favour. The losing party, in contrast, would not be bearing the full consequences of its abortive application.

Such a state of affairs would only encourage the bringing of unmeritorious challenges to an award. It would turn what should be an exceptional and high-risk strategy into something which was potentially ‘worth a go’. That cannot be conducive to CJR and its underlying objectives.

Accordingly, in the absence of special circumstances, when an award is unsuccessfully challenged, the Court will henceforth normally consider awarding costs against a losing party on an indemnity basis.  The respondent will here pay the applicant’s costs on an indemnity basis.”

4.  I agree entirely with these sentiments.

5.  Mr Tsang relies on the decision of the Court of Appeal in Sung Foo Kee Ltd v Pak Lik Co (a firm) [1996] 3 HKC 570 at 575, to say that there must be a special or unusual feature to justify an award of costs.  The relevant passage is:

“Here, as in England and Wales, the judge has a discretion, in a case which does fall outside the general rule, to direct taxation of the receiving party’s costs on the basis which he considers to be appropriate to that case. This is not a discretion limited by indications in previous cases, such as, e.g. the observations of Godfrey J in Overseas Trust Bank Ltd v Coopers & Lybrand [1991] 1 HKLR 177 (in which he declined to order the successful party’s costs to be taxed on the indemnity basis), as to the sort of special or unusual feature (there does have to be some special or unusual feature) which could justify an award of indemnity costs.”

6.  Mr Tsang argued that I was bound by the decision in Overseas Trust Bank, it being a decision of the Court of Appeal, and that in the absence of any special or unusual feature in the present case, an award of indemnity costs could not be justified.

7.  I am satisfied, for two reasons, but I am not bound by that decision.  First, it is a decision in relation to costs in an action, not in relation to the level of costs to be awarded on an application under the Arbitration Ordinance for leave to appeal against an award.  Second, it is a decision that predates CJR.  Consequently it is not a decision that was made at a time when the court was obliged to give effect to the underlying objectives contained in O 1A r 1, of the Rules of the High Court, as required by O 1A r 2.  Any statements of the courts as to principle in respect of costs, delivered prior to CJR, must now, necessarily, be reconsidered in the light of O 1A RHC.

8.  As I have said, I agree entirely with the sentiments of Reyes J, set out in paragraph 3 above.

9.  Mr Tsang sought to argue that the present case could neither be said to be an abuse of process, or an unmeritorious application.  In those circumstances, he said, an award of indemnity costs was not justified.

10.  It is clear that Reyes J did not consider that an application for leave to appeal against an award, or to set aside an award, or for an order refusing enforcement, were, ipso facto, an abuse of process. 

11.  They are however applications which are exceptional events.  The whole principle of arbitration is that a person who obtains an award in his favour is entitled to expect that the Court will enforce the award as a matter of course.  It is not necessary for a party successfully resisting an application seeking to challenge the award, to establish the application  itself as an abuse of process to justify indemnity costs.  The nature of arbitration is such that, having regard to the underlying objectives in the RHC, an unsuccessful application to challenge an arbitrators award will normally attract indemnity costs against the applicant.

12.  Counsel for the applicant had been obliged to accept that the clauses, the interpretation of which was sought to be challenged, were not standard clauses but were “one-off” clauses, peculiar to this particular arbitration agreement.  The burden faced by an applicant in challenging a one-off clause is high: the arbitral tribunal’s construction must be shown to be “obviously wrong”.  Mr Tsang pointed to the fact that I thought that on first impression the argument for the applicant might be right.  That, he said, the application being brought before the court.

13.  But when regard is had to the hurdle to be mounted by the applicant, it is immediately seen that a mere first impression will fall a long way short of being able, even arguably, to meet the standard of showing that the interpretation is “obviously wrong”.  I accept that the challenge was not of itself an abuse of process, but it was a challenge made in circumstances where the prospect of establishing that the interpretation was “obviously wrong” was at best remote.  In those circumstances there is no reason to depart from what is now the usual rule, that costs on a failed challenge to an arbitrators award should be on an indemnity basis.

14.  Where the prospect of success is at best remote, an application to challenge an award may properly be characterised as unmeritorious.

15.  Mr Yip drew my attention to four factors which he said, in addition to the principles set out above, justified indemnity costs.

16.  First, he said that Wing Hong had sought leave to appeal two aspects of the award, but that it had pursued only one of those aspects at the hearing.  That only one aspect was to be pursued was not notified to the solicitors for Tin Wo until 10 days before the hearing, by which time argument had already been prepared.

17.  Mr Tsang responded by saying that it was a regular event in litigation that a particular argument would be signalled in a summons, but not pursued in the event.

18.  That is right, but it must not be open to parties to include, without proper consideration, unmeritorious arguments, whether to use them as bargaining points or not, only to abandon them later.  Once the argument has been signalled by its inclusion as a ground in a summons, an applicant must appreciate that the other side would need to give that argument consideration in order to properly respond.  If a ground is abandoned there may be a consequence in costs.

19.  Second, Mr Yip said that the proposed abandonment of the retention money aspect was used as a bait in an attempt to persuade Tin Wo to settle for what he described as unreasonable and onerous terms, including as to Tin Wo’s own costs.

20.  Mr Tsang responded by saying that that was nothing more than the usual negotiation that takes place in the course of litigation.

21.  That may well be right, but when such conduct takes place in the context of the enforcement of arbitration proceedings then, having regard to the right of the party to an arbitration who has succeeded in obtaining an award to have that award enforced, the matter comes in a different light.  Where threats are made to attack an award, if then used as a basis to settle for a lesser amount, and the basis of the attack is subsequently abandoned, or are unsuccessful at the hearing, the party making the attack cannot expect to have to meet merely party and party costs.  If a challenge is to be made to an award must have a proper basis.

22.  Third, Wing Hong’s solicitors had set the application down for a 15 minute hearing on 13 April 2010, without first consulting the solicitors for Tin Wo.  Tin Wo’s solicitors came to that hearing prepared to argue the matter, having sensibly taken note of the decision of Reyes J in Free Firm Construction Co Ltd v Shinryo (Hong Kong) Ltd [2008] 3 HKC 415, to the effect that an application for leave to enforce an award might well be dealt with in a 30 minute hearing.  In that case the judge pointed out that in practice leave to appeal against an award is rarely granted and that:

“…it is the Court’s custom to rule quickly, at the earliest possible opportunity, with a minimum of flurry, on the question of leave.”

23.  That is quite right.  A party who seeks to prevent the enforcement of an award must come to court expecting the matter to be dealt with expeditiously.  By Wing Hong not being prepared to argue the matter on 13 April 2010, costs were wasted.

24.  Fourth, as at 27 May 2010, the date on which Mr Yip prepared his skeleton for the costs argument, full payment of the amount due under the award had still not been made.  In fact, final payment was made only on 28 May 2010, the date of the hearing of the costs argument.  The award was originally published on 3 February 2010, but could not be collected immediately because Wing Hong delayed payment of the arbitrators fees until 19 February 2010.  They then delayed making payment and sought to settle the matter by paying less than the amount awarded.  When that did not succeed they then challenged the award.  Even after the handing down of the decision rejecting the challenge to the award, the final payment was still not made immediately.

25.  By these tactics, Wing Hong effectively delayed payment by three months.  It is plain that the tactics adopted were designed, at least in part, with a view to delay payment.

26.  I am satisfied, first, that as a matter of principle in the special circumstances of arbitration proceedings, where an applicant fails to successfully establish a basis to challenge the award, the proper award of costs will usually be an award of indemnity costs.  There is no reason to depart from that principle in this case.  Second, I am satisfied that while the four factors set out by Mr Yip do not themselves justify indemnity costs, they do go to substantiate Mr Yip’s submission that there was no basis in the present case to reduce the level of costs.

27.  I accordingly order that Wing Hong must pay Tin Wo’s costs, of and incidental to the proceedings, on an indemnity basis.

28.  Mr Yip sought a certificate for two counsel.  Mr Tsang opposed the grant of a certificate, arguing that the complexity of the matter was not such as to justify two counsel.  Mr Yip reminded me that Wing Hong had been represented by leading counsel and junior counsel in the original application.

29.  The factors that are relevant in determining whether there should be a certificate for two counsel are set out in Hong Kong Practice, paragraph 62/App/48.  They are not exhaustive factors.  The mere fact that one side has instructed two counsel is not of itself sufficient to justify a certificate: see British Metal Corporation Ltd v Ludlow Bros (1913) Ltd [1938] Ch 787[1], at 790.  But it is a factor which may be taken into account.

30.  Looking at the case as a whole, I am satisfied that the amount of money involved, the importance to the client, and the specialised area in which the dispute lay, together with the fact that the applicant had instructed both leading counsel and a junior, justified Tin Wo in instructing two counsel, albeit both juniors.

31.  Accordingly, there will be a certificate for two counsel.

[1] Incorrectly cited in Hong Kong Practice, 2010, Vol 1 1157 as [1938] Ch 774.