WAH CHEONG CONSTRUCTION CO LTD v. SUPER BRIGHT ENGINEERING LTD AND OTHERS

HCCT 10/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS
NO. 10 OF 2003

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REASONS FOR DECISION

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Background

1. On 7 February 2003, the Plaintiff obtained an ex parte injunction from Stone J restraining the Defendants from entering or remaining at the Plaintiff's registered office and requiring them to vacate and remove all machinery belonging to the Defendants from the Plaintiff's construction sites. On return day, the Defendants consented to the injunction order to be continued until further order. The issue now before me is to determine the costs of the application for interlocutory injunction as between the Plaintiff and 2nd and 5th to 12th Defendants. Mrs Dora Chan, for the Plaintiff, submitted that the costs should be determined forthwith and be awarded to the Plaintiff, while Mr Lam, for the Defendants, submitted that the costs should be reserved to the trial judge or be in the cause.

The legal principle

2. Section 52A of the High Court Ordinance gives the Court, subject to the provisions of the rules of court, full power to determine by whom and to what extent the costs are to be paid. It has for many years been the normal practice in Hong Kong for a successful plaintiff granted an interlocutory injunction to be awarded his costs in the cause and for a successful defendant to be granted his costs in the cause. In TKI Ltd v. New Happy Ltd [1995] HKC 551, Nazareth VP held that special reasons are necessary to justify a departure from the usual rule that costs should be in the cause. However, the rationale of that practice is perhaps not clear and the Courts are showing a greater willingness to depart from it: see Hong Kong Civil Procedure 2002 at paragraph 29/1/44.

3. The different types of costs orders in respect of interlocutory costs have been considered by Hoffman J, as he then was, in Kickers International SA v. Paul Kettle Agencies Limited and Another [1990] FSR 436. I can do no better than to cite his judgment at 437-439 where he said:

"Mr Wyand accepts that although defendant's costs in the cause is an order commonly made in cases like this, there is no general practice. The court has a complete discretion. No doubt it is desirable to encourage litigants to give up when they realise that a motion is hopeless. But it may be even more desirable to encourage them not to launch such motions in the first place ..........

An order for a party's costs to be 'in the cause' is made because the court has not investigated the merits and considers that it would not be fair for him to recover those costs unless he succeeded at the trial. But the fact that the merits have not been investigated, or not fully investigated, does not necessarily mean that the court cannot dispose finally of interlocutory costs. The question cannot be settled simply by reference to practice: it must be answered on the facts of the individual case. Would it be unfair in this case for the defendants to have the costs of the motion even if they lost at the trial? On balance I do not think that it would. Although I cannot decide the merits, I can form a view on whether the plaintiff, on the material it has produced and what it must have known about the defendants, was justified in launching the motion. I do not think it was. Therefore whatever the outcome of the trial, the motion which has now been abandoned has put the defendants to a great deal of unnecessary expense.

One solution sometimes adopted is to reserve the costs of the motion to the trial judge. There is a superficial attraction about this course because the trial judge will have all the facts and be in the best position to decide whether a party should have interlocutory costs despite the fact that he has lost at the trial. But in practice it has serious disadvantages. One is the difficulty of reconstructing for the trial judge how things looked at the time of the interlocutory application, particularly when it involved questions of balance of convenience which were irrelevant at the trial. But the more important reason is that very often there is no trial. In such a case, an order that costs be in the cause or reserved to the trial judge is in practice a decision that there should be no order as to costs. Not many defendants, even with the encouragement of success at the interlocutory costs. But unless they do, the costs are left in limbo, as in Stratford v Lindley (No. 2) [1969] 1 WLR 1547. This gives the unsuccessful plaintiff a powerful bargaining weapon. He can face the defendant with the alternative to accepting a substantial discount on the interlocutory costs or having to incur the trouble, expense and risk of a trial. Furthermore, the existence of an order for substantial costs contingent upon the outcome of the trial, or reserved to the trial judge, may push the parties into a trial of an action which would otherwise have settled.

Thus it seems to me that in making a costs order at the interlocutory stage, there are two risks of injustice which have to be balanced against each other. On the one hand, a final order might award a party costs which, upon fuller consideration at the trial, he would not have been given. On the other hand, failure to make a final order might have the practical effect of depriving a party of some or all of the costs which he should in fairness have recovered. I think it is possible that in the past the courts may have been more impressed by the first risk than by the second.

The plaintiff says that it is not abandoning the action and that it intends to pursue a claim for damages to trial. Nevertheless, I think I should take into account first, possibility that it may change its mind and secondly, the effect that a contingent order for costs would have upon any settlement negotiations. Having regard to all these matters, I think that the proper exercise of the discretion is to deal finally with the costs now. I shall therefore order the plaintiff to pay the defendants' costs in any event."

Probably, the above represents the rationale for the Hong Kong courts' departure from the practice of making the usual order of costs in the cause. The courts are now more keen to exercise its discretion and make a final costs order after considering the facts of the case than to leave it to be determined at trial. I, for one, adopt the rationale in Kickers International SA v. Paul Kettle Agencies Limited and Another.

4. The position in the United Kingdom has been modified by the English Civil Procedure Rules, which do not apply to Hong Kong. In Desquenne et Giral UK Ltd v. Richardson [2001] FSR 1, a case decided after the enactment of the above rules, the English Court of Appeal held where an injunction was granted or continued on the basis of balance of convenience in order to hold the ring until the dispute between the parties could properly be decided at trial, it was inconsistent to say that there were successful or unsuccessful parties for the purpose of the rules relating to costs and the proper order was that the costs be reserved to the trial judge because only then could it be determined which party was successful and which was not. Though this is a decision based on the English Civil Procedure Rules which do not apply to Hong Kong, I think the rationale of holding the ring an appropriate factor to be taken into account in determining costs particularly where it is difficult if not impossible to consider the merits at the interlocutory stage or where all the considerations are nicely balanced.

5. In Hong Kong, the court has complete discretion as to the type of costs order to be made. There is no rule of law that interlocutory costs must be in the cause. The type of costs order to be made depends on the facts of the particular case. If the plaintiff is unsuccessful, the position is clear. If he cannot even satisfy the lower threshold required in an interlocutory application, there is prima facie no justification for bringing the proceedings. Of course, costs must follow the event, the plaintiff shall pay the defendant's costs.

6. Difficulties arise where the plaintiff is successful. Should he be awarded his costs or should the issue be deferred until trial when the merits of the case could be determined? While the court cannot determine on merits of the injunction at the interlocutory stage, it can nevertheless form some view as to whether the plaintiff was justified in launching the interlocutory application. If it is of the view that the plaintiff was justified in launching the application, it shall balance, on the one hand, the risk of injustice to the defendant in making a final costs order in favour of the plaintiff when upon a mature consideration at the trial it would not have been made against the risk of injustice to the plaintiff, on the other, by delaying its decision until conclusion of the trial which might have the practical effect of depriving the plaintiff of some or all of the costs which he should in fairness have been awarded. If the balance is in favour of the plaintiff, the plaintiff shall be awarded interlocutory costs. If the consideration is nicely balanced or is against the plaintiff, then costs should be reserved to the trial judge or be in the cause. Such a costs order accords with the principle in TKI Ltd v. New Happy Ltd as under such circumstances, the plaintiff would have failed to provide the special reasons required for departure from the usual costs order.

The facts

7. In the present case, the Plaintiff is the main contractor in a road improvement contract. At the commencement of works at the site, the 1st Defendant was the Plaintiff's sub-contractor, the 2nd to 5th Defendants were sub-contractors of the 1st Defendant and the 6th to 12th Defendants were agents or servants of the 2nd Defendant. The 6th Defendant was in fact the person in control of the 2nd Defendant and the father of the 8th Defendant.

8. It was not in dispute that the 1st Defendant failed to perform the works properly and its contract was properly terminated by the Plaintiff on 30 January 2003. From 31 January to 3 February 2003 were public holidays. On 4 February 2003, the Plaintiff's solicitors sent letters to the 2nd, 3rd and 4th Defendants informing them of the termination of the contract with the 1st Defendant and that they were not to enter or work at the site. The letter to the 2nd Defendant was subsequently returned and marked "moved new address unknown." But in fact the 2nd Defendant had not moved its office.

9. It was also not in dispute that on 5 February 2003, the Plaintiff's foreman, Andy Yip, telephoned the 6th Defendant and told him that the Plaintiff had sent the above letter to the 2nd Defendant and the contents of that letter. To that the 6th Defendant replied that it would not be so easy to get him or the 2nd Defendant out of the site unless they would be fully paid and said that the 2nd Defendant would resume work on 7 February 2003. The 6th Defendant also refused the Plaintiff's request to have a meeting with the new contractor to discuss if the 2nd Defendant could continue to work at the site.

10. In view of this conversation, the 6th Defendant had knowledge of the content of the letter of 4 February 2003 from the Plaintiff's solicitors. The return of the letter suggests that the 2nd Defendant refused to accept the letter by making a false representation that it had moved to an unknown address. The conclusion to be drawn from the 6th Defendant's conversation and the 2nd Defendant's refusal to accept the solicitors' letter is that the 2nd Defendant was not going to comply with the request in the letter and was not willing to discuss the matter with the Plaintiff.

11. On the same day, the Plaintiff posted 15 Chinese notices at the site to inform everyone of the termination of the 1st Defendant's contract.

12. On 6 February 2003, the Plaintiff faxed a letter to the 2nd Defendant, repeating the contents of its solicitors' letter of 4 February 2003. A copy of this letter was also given by Andy Yip to the 8th Defendant, when he delivered a letter on behalf of the 2nd Defendant to the Plaintiff denying it was a sub-contractor of the 1st Defendant. The 6th Defendant said that he had no one in the office to receive the faxed letter. However, he had knowledge of the contents of that letter as a copy had been given to his son by Andy Yip. There is no reason why the 8th Defendant would withhold that letter from the 6th Defendant. Hence, the 2nd Defendant through the knowledge of the 6th Defendant was aware of the termination of the 1st Defendant's contract via Andy Yip's telephone conversation on 5 February 2003. It is therefore obvious that the 2nd Defendant's explanation that it had no knowledge of the Plaintiff's letter of 6 February 2003 was not a bona fide explanation and the events on the following day were deliberate acts done in defiance of the Plaintiff's demand to vacate the site.

13. On 7 February 2003, the 2nd Defendant's workers forcibly entered the site and tore up the notices posted up by the Plaintiff on 5 February 2003. The 2nd Defendant admitted that four of its workers entered and worked on the site but denied that his workers entered by force and tore the notices.

14. On the late afternoon of that day, the Plaintiff obtained an ex parte injunction from Stone J restraining the Defendants from entering or remaining at the Plaintiff's registered office and to vacate from the site within 48 hours, i.e. by midnight of 9 February 2003.

15. On 8 February 2003, five of the 2nd Defendant's workers returned to the site and worked. On the afternoon, the injunction order was served on the 6th to 8th, 11th and 12th Defendants on two separate occasions, after which they left the site, but without removing their machinery.

16. On 11 February 2003, the Plaintiff's solicitor wrote to the 2nd Defendant threatening to issue contempt proceedings against the 6th Defendant unless the machinery was removed by 5 p.m. that day.

17. On 12 February 2003, the 8th, 11th and 12th Defendants entered the site office at about 9:30 a.m. They left and returned several times without prior consent from the Plaintiff. It was only until after the Plaintiff's solicitor gave a verbal warning at 11:45 a.m. to the Defendants' solicitor that unless those Defendants left within half an hour the Plaintiff would take legal action that these Defendants eventually left at 1 p.m.

Was the Plaintiff justified in seeking the injunction?

18. The 2nd Defendant's defence is that it was the Plaintiff's sub-contractor. It was paid directly by the Plaintiff and the termination of the 1st Defendant's contract did not affect its right and obligation to work at the site. This allegation is inconsistent with the contemporaneous correspondence since October 2002 among the Plaintiff, the 1st and 2nd Defendants, in particular the 2nd Defendant's own letter dated 2 October 2002 to the 1st Defendant and copied to the Plaintiff complaining about the 1st Defendant's management of the contract and the Plaintiff's letter dated 20 November 2002 offering to enter into direct sub-contractual relationship with the 2nd Defendant. That offer was not taken up by the 2nd Defendant and the Plaintiff confirmed that the offer lapsed. The inference that could reasonably be drawn from these letters is that the 2nd Defendant was a sub-contractor of the 1st Defendant and the payments made by the Plaintiff to the 2nd Defendant were payments made on behalf of the 1st Defendant. While there is no need for me to consider the merit of the defence at this stage, in my view the defence does not appear credible.

19. Regardless whether the Defendants have a valid defence or good justification for refusing to vacate the site, they were informed that the Plaintiff regarded the 2nd Defendant as a sub-contractor of the 1st Defendant and as such had no right to remain on the site upon termination of the 1st Defendant's contract. The 2nd Defendant informed the Plaintiff on 5 February 2003 that it was not going to comply with the request to vacate the site. With knowledge of the content of the letter dated 4 February 2003 being sent to the 2nd Defendant, it refused to accept the letter. It is obvious that the 2nd Defendant was going to adopt an uncooperative attitude and was going to resist any attempt to evict it from the site.

20. On 7 February 2003, the 2nd Defendant and its workers returned to the site. Despite they were told by the Plaintiff's staff not to enter, they ignored them and entered the site and worked. The 2nd Defendant disputed that its workers did so by force and tore off the notices informing them of the termination of the 1st Defendant's sub-contract. Given the effort the Plaintiff took in preparation for re-possession of the site, I have no reason to doubt that the Plaintiff had informed the 6th Defendant and hence the 2nd Defendant that they should vacate the site as the contract with the 1st Defendant had been terminated. In the circumstances, in view of the avowed intention of the 2nd Defendant not to vacate the site or to have a meeting with the Plaintiff and the new contractor, it was reasonably necessary and justifiable for the Plaintiff to seek an ex parte injunction to secure the timely possession of the site so as to mitigate its loss caused by the 1st Defendant's default.

21. The Defendants had been served the injunction order on the afternoon of 8 February 2003. They had legal advice there and then and thereafter. They did not remove their machinery before mid night on 9 February 2003 as required by the order of Stone J. They ignored the Plaintiff's solicitors' demand to remove their machinery by 5 p.m. on 11 February 2003. They entered the site again on 12 February 2003 and left and re-entered in fragrant breach of the order. It was not until the Plaintiff's solicitors threatened to issue proceedings did they eventually leave. Despite they had legal advice, neither did they comply with the injunction order nor did they seek to vary the order. Had they any legitimate reason not to comply, they would and should have resisted the continuation of the injunction order. But they did not. In view of the conduct of the Defendants, it was reasonable for the Plaintiff to apply for the ex parte injunction order and to apply for the order to be continued.

22. Mr Lam submitted that the Defendants consented to continue with the injunction order for the purpose of "holding the ring" and hence it would be appropriate to defer costs to the conclusion of the trial. In my view, as I can form the view that the application for injunction order was justified, the argument of "holding the ring" is not applicable. In my view, the Defendants' defence is not credible and it was justified for the Plaintiff to apply for the injunction. The issue is whether a trial is likely and how the risks of injustice to the parties should be balanced.

Likelihood of a trial

23. In this type of cases, delay by the sub-contractors' or their workers' refusal to vacate and hand over the site would cause the greatest loss or damage to the plaintiff. Such delay may trigger the operation of the penalty clause under the contract which may result in hefty monetary fine for the contractor. There may also be a claim for damages for breach of contract. But in the majority of this type of cases, these actions are seldom continued beyond the interlocutory injunction stage unless there is a substantive claim for damages for breach of contract and the defendant is good for the damages. This is because the main purpose of the plaintiff would have been achieved by securing possession of the site so that work could be resumed by some other contractors and its potential loss mitigated. These actions are seldom proceeded against the defendant's sub-contractors or their workers because the legal costs usually do not justify the end and in the end the judgment obtained may be empty.

24. In the present case, a statement of claim was filed by the Plaintiff on 3 March 2003 seeking damages for breach of contract against the 1st Defendant and injunction and damages for trespass against all the Defendants. The 2nd, 5th to 12th Defendants filed their defence on 17 March 2003. Apart from claiming damages for trespass, there is no claim for damages for breach of contract against these Defendants. The 1st Defendant, who may be liable for damages for breach of contract, had abandoned the contract a long time ago. There is no claim for damages for breach of contract against the other Defendants and there is nothing to suggest the damages for trespass against them is likely to be substantial. This is precisely the type of case where the Plaintiff's main objective was to recover possession of the site and no useful purpose would be served by continuing the action against the other Defendants. In my view, the prospect that this case may go to trial is very remote.

Balancing the risk of injustice

25. Thus, if in fact the case will not go to trial, an order reserving costs to the trial judge or that costs shall be in the cause would place the Defendants in an unduly and unfairly advantageous position against the Plaintiff. The Plaintiff would be forced to agree to accept a substantial discount on the interlocutory costs or to incur the trouble, expense and risk of a trial for no other purpose than recovering costs. The Court has a duty to ensure that no costs are unnecessarily incurred and should not push the parties into a trial for no practical purpose but to obtain costs, which would be unnecessary had a final costs order been made at the interlocutory stage. Having regard to the conduct of the parties, the possibility that there will be no trial and that in my opinion it was justified for the Plaintiff to apply for the ex parte injunction and for the order to continue at the inter parte hearing, the balance is in favour of making a final order at the interlocutory stage.

Conclusion

26. Though the 2nd, 5th to 12th Defendants were unsuccessful in resisting the costs application, the 2nd Defendant, being the employer of all the other Defendants, and the 6th and 8th Defendants who are the controlling mind of the 2nd Defendant are fully to blame. The other Defendants were employees only acting upon the instruction of the 6th and 8th Defendants and had no knowledge of the communication between them and the Plaintiff. Accordingly, I order that the Plaintiff shall have costs of both the ex parte and inter parte application for injunction against the 2nd, 6th and 8th Defendants.