SANCTUARY SYSTEMS LTD v. ORIENT INTERNATIONAL HOLDINGS HONG KONG CO LTD AND ANOTHER

HCA 479/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 479 OF 2010

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DECISION

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INTRODUCTION

1.  I shall adopt the same abbreviations as in my judgment dated 14 February 2014 (“the judgment”).  By the judgment, this court ordered, nisi, that Orient HK and D2 do pay SSL costs of this action including all costs reserved, save and except the costs of the summons dated 11 November 2013 (for leave to amend the amended statement of claim); and all costs of and occasioned by adducing of expert evidence shall be borne by SSL in any event, to be offset against any costs awarded to it.  

2.  Orient HK seeks to vary that order so that SSL should bear Orient HK’s costs in defending the action on a party and party basis.  Alternatively, Orient HK asks for an order that it shall pay a portion of SSL’s costs with reference to the respective liabilities of the 2 defendants under the judgment.

3.  I classify the grounds relied on by Orient HK as follows:

A.   The partial success ground;

B.   The failed allegations ground;

C.   The unreasonable conduct ground; and

D.   The Calderbank offers.

4.  SSL concedes that it should bear Orient HK’s costs of and occasioned by its application to amend the statement of claim by summons dated 11 November 2013; but submits that the order nisi should be otherwise made absolute.

THE LEGAL PRINCIPLES

5.  The principles are well established: 

(i) Costs are in the discretion of the court: Order 62 r.2(4) RHC;

(ii) They should follow the event, except where it appears to the court that in the circumstances of the case some other order should be made: Order 62 rule 3(2) RHC;

(iii) The general rule does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, but where that has caused a significant increase in the length or cost of the proceedings he may be deprived of the whole or part of his costs;

(iv) Where the successful party raises issues or makes allegations ‘improperly or unreasonably’ (in Hong Kong, ‘improperly or unnecessarily’), the court may not only deprive him of his costs but may order him to pay the whole or a part of the unsuccessful party’s costs: Order 62 rule 7(1) RHC.

See Wang Din Shin v Nina Kung, CACV 67/2003, paragraph 39, 19 April 2005; more recently in KJ v KMLM, HCMC 4/2010, 21 May 2014, To J, at §§13-19; following re Elgindata Ltd (No. 2) [1992] 1 WLR 1207, Nourse LJ.

6.  Under Order 62, rule 5(1)(e), the court may of course take into account the conduct of a party.

OVERVIEW

7.  I will not adopt the same approach of counsel in going into the details.  An overview of the salient facts and findings will suffice.

8.  SSL and Orient HK had no contractual relationship.  Their only direct contact was SSL’s transfer of the Funds to Orient HK and a demand letter 4 months later (§12 of the judgment).  Orient HK and Orient SHG had never asserted beneficial interest over the Funds. I have identified 5 issues (§15 of the judgment) which would lead to the establishment of a Quistclose trust against Orient HK.

9.  Strangely, SSL did not sue Orient SHG and Shanghai Cosco despite the invitation of Orient HK (§14 of the judgment).  On the other hand, Orient HK had not protected its own position by using interpleader proceedings.  It fought to the bitter end, to try and keep the Balance Funds which it thought belonged to Orient SHG.  It relied on a witness James Xu who did not turn up at trial despite having given 2 witness statements. 

10.  It was held that both Orient SHG and Orient HK did not have knowledge of the Purpose for which the funds were transferred by SSL to Orient HK and at the time when the funds were partly disbursed.  However, at the latest, when they were served with the statement of claim, they would have acquired such knowledge as to be bound by the Quistclose trust. 

11.  SSL sued for recovery of 100% of the Fund, but judgment was only given as to the 30% still in the hands of Orient HK.  The balance was found to be the sole liability of D2.

12.  As now accepted by Mr Suen (counsel for SSL), the case did not turn on credibility of witnesses but largely on contemporaneous documents.  In fact, this court expressly stated that it did not find the evidence of Mr Trotta of SSL to be of great use.  Mr Deutsch’s evidence duplicated that of Mr Trotta and was not really necessary. Even with the most material witness (Mr Pickell), this court expressly declined to rely on his evidence unless supported by contemporaneous documents.

GROUNDS FOR ORIENT HK’S APPLICATION

13.  Although Mr Wou (counsel for Orient HK) did not make the distinction in his skeleton submission, I agree with Mr Suen that the primary case of Orient HK was that SSL should bear Orient HK’s costs.  This falls within the limb (iii) in paragraph 5 above.  As an alternative, Orient HK seeks to reduce the percentage of costs awarded to SSL.  This falls within the limb (iv). 

A.  The partial success ground

14.  Mr Wou submits that SSL was only partially successful to the extent of 30% and thus should only be entitled to a portion of the costs.

15.  In my view, costs can hardly be decided solely by reference to the percentage of the money award, unless the balance not recoverable is referrable to a distinct issue.

16.  In the present case, SSL pleaded that it had reposed trust and confidence in Orient HK, which gave rise to fiduciary duties and those duties were breached.  SSL could not have believed in the veracity of this plea with its limited contact with Orient HK (§107 of the judgment). SSL failed utterly in the recovery of 70% because it did not monitor the proper disbursements of the Funds but left it to Johnnie Wong.  SSL also failed to answer the enquiries of Orient SHG before disbursement of US$700,000 of the Funds in accordance with the instructions of James Xu whom SSL had clothed with authority.  SSL’s interest was extinguished by overreaching (§§116 and 120 of the judgment).  

17.  I am of the view that liability over 70% of the Funds constituted a distinct issue in the present case and Orient HK had successfully defended itself.  Justice also demands that Orient HK should not bear costs for a cause arising out of SSL’s own fault.

18.  Moreover, Orient SHG and Orient HK had never asserted beneficial interest over the Funds.  Had SSL acknowledged the role of Orient HK as quite an innocent agent in receipt of the Funds, concentrated on strict proof of the circumstances leading to the Quistclose trust which were not known to Orient SHG or Orient HK (issues A, B and C), refrained from alleging breach of trust in respect of the 70%, rested itself on contemporaneous documents, supplemented by some witnesses’ evidence on the background, the trial would have been reduced by at least 5 days.

19.  I find that the failed cause as regards 70% of SSL’s claim did contribute significantly to the length and costs of the action.  The partial success ground is established.  SSL should be deprived of part of its costs.

B.  The failed allegations ground

20.  Mr Wou submits that most, if not all, of the proceedings was focussed on SSL’s claims which failed and time was wasted on allegations which were unrelated to Orient HK.   His so-called failed allegations fall into 3 categories:

(a)   The primary case that SSL (instead of Shanghai Cosco) was a purchaser of the MEP equipment (§65(a) and 72 of the judgment);

(b)   The breach of fiduciary duties claim;

(c)   Various - that Orient SHG had notice of the Purpose which could be imputed to Orient HK; that SSL had an agreement or understanding with Shanghai Cosco, Orient SHG and the suppliers.

Mr Wou submits that SSL only succeeded on one issue, namely, that Orient HK was fixed with notice by the time the statement of claim was served.

21.  With regard to category (a), not every failed argument should be penalized in costs.  One should not lightly blame counsel who, out of prudence, pleaded alternative cases based largely on the same set of facts, eventually winning on one of the alternatives.  This is especially so where the alternative cases involved mixed law and fact.   The fact that this court eventually disagreed with Mr Suen on his interpretation of the facts and law was not enough to deprive SSL of costs.

22.  With regard to category (b), I repeat paragraphs 16-19 above. There could not be any suggestion that Orient HK breached fiduciary duties over 70% of the Funds.  This was a failed allegation.

23.  With regard to category (c), the allegations were part and parcel of the Quistclose trust issues. 

24.  In summary, though this court did not agree with SSL on categories (a) and (c), I am not satisfied that those allegations were improper or unnecessary; or had significantly increased the time and costs of the action. 

25.  Mr Wou relies on this court’s comments that SSL included materials in the witness statements, such as advice, inferences of the witness or submission, which were not of great use.  I do not think these matters should affect the incidence of costs.   Rather, they should be brought to the attention of the taxing master when it comes to taxation.

C.  The unreasonable conduct ground

26.  Mr Wou’s complaints were as follows: 

(a)   That SSL never disclosed the criminal complaint against its witness, Mr Pickell, which was relevant to the court’s assessment of his credibility;

(b)   That Mr Pickell’s evidence contradicted SSL’s case;

(c)   That SSL never joined Shanghai Cosco and Orient SHG despite invitation of Orient HK, but maintained that it had a strong claim against Orient HK for breach of trust. 

27.  With regard to complaints (a) and (b), in deciding on costs, the court is entitled to take into account the credibility of witnesses and the conduct of the parties regarding the case they sought to prove: Ho Shu Kwong v Chiang Chun Yuan [2002] 3 HKLRD 419, at §§ 429G-J.

28.  Witnesses do lie.  They may contradict one another.  Pleaded cases may not come up to proof.  A party would not disclose the weakness of its witness to the other party.  These are common occurrences in civil litigation.  However, it is not in every instance where the court finds a witness to be incredible or unreliable that the relevant party calling him should have to bear costs or be deprived of costs. 

29.  However, I am of the view that complaints (a) and (b) are of substance in at least one major aspect.  Mr Pickell confessed to Mr Trotta that he had misappropriated not only US$50,000 out of the US$700,000 but US$300,000 and repaid half (§23 of the judgment). That matter could have reduced the quantum recoverable in this action but it was never disclosed to Orient HK.  Instead, SSL insisted on full recovery from Orient HK.  It was unreasonable, improper and opportunistic conduct on the part of SSL. 

30.  With regard to complaint (c), I repeat my observations in paragraph 9 above.  Both SSL and Orient HK had contributed to this position.  Despite its failure to join parties, SSL had won in part.

31.  Having regard to the failed allegation on breach of trust in Section B above, and complaints (a) and (b) in Section C, it was unreasonable and improper in the circumstances of this case for SSL to sue Orient HK for the 70%.  SSL should bear part of Orient HK’s costs of defending.

D.  The Calderbank offers

32.  One of the factors that the court can take into account under Order 62, rule 5(2) is whether there was any written without prejudice offer relating to any issue in the proceedings where the offering party could not have protected its position by means of either a sanctioned offer or payment under Order 22.

33.  Orient HK made 2 Calderbank offers (32 and 12 months before trial, respectively) to hand over the 30% to SSL.  This ground is raised only in Mr Wou’s reply submission.  This is not the right course to take for SSL is deprived of the opportunity to state its views.

34.  In any case, the Calderbank offers do not assist Orient HK.  Both offers were subject to, among others, the condition that Shanghai Cosco would give consent to the settlement or waive its claim.  Moreover, the 2^nd offer was subject to deduction of costs for Orient HK.  SSL had beaten both offers after trial.

VARIATION OF THE COST ORDER

35.  It would not be worthwhile to decide on what percentage of costs to deprive SSL of or to grant to Orient HK.  It would give rise to 2 taxations and unnecessary accounting.  It is better to consider the overall picture and come to one costs order.

36.  Despite failing in 70% of the claim, SSL still had to come for trial, for Orient HK fought bitterly over the 30% even to the extent of producing James Xu as witness.  I am of the view that Orient HK should bear 30% of SSL’s costs in this action.  For the avoidance of doubt, the taxing master is still entitled to take into account my criticism in the judgment about inclusion of unnecessary contents in the witness statements (eg see §§17 and 28 of the judgment).

CONCLUSION

37.  I order that the order for costs dated 14 February 2014 be varied as follows:

(1)   The 1^st defendant do pay 30% of the plaintiff’s costs of this action including all costs reserved; and

(2)   The 1^st defendant’s costs of and occasioned by the summons dated 11 November 2013 shall be borne by the plaintiff.

The rest of the order nisi is made absolute.

38.  The true winner in this summons is Orient HK.  I thus order, nisi, that SSL should bear Orient HK’s costs to be summarily assessed if not agreed. 

39.  I thank counsel for their assistance.