THE OWNERS OF AND/OR OTHER PERSONS ENTITLED TO SUE IN RESPECT OF THE CARGO LATELY LADEN ON BOARD THE SHIP OR VESSEL "GOLDEN GEORGIA" v. THE OWNERS AND / OR DEMISE CHARTERERS OF THE SHIP OR VESSEL "GOLDEN GEORGIA" AND THE OWNERS OF THE SISTER SHIP OR VESSEL "GOLDEN ELIZABETH"

HCAJ 45/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ADMIRALTY ACTION NO. 45 OF 2004

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Admiralty action in rem against: the ship or vessel “GOLDEN GEORGIA”
and the sister ship or vessel “GOLDEN ELIZABETH”

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DECISION ON REVIEW OF TAXATION

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Background

1. This is the Plaintiffs’ application for review of my decision on taxation.  At issue are certain items on the Defendants’ Bill of Costs, they being items 23, 24 (pre-action portion only), 25(1) to (3) (pre-action aspect only), 25(4), 27 (pre-action only), 28 and 30.  They amount to approximately HK$165,000.  The application for review was couched in the following terms.

2. A fairly discrete point of principle arises, namely whether D should be entitled to recover its pre-action costs relating to the negotiation of security and joint investigation of the cargo, in circumstances where the reason for the discontinuance of the Hong Kong action was an agreement that the proceedings should be resolved by way of an arbitration in New York, which arbitration is now ongoing.  P’s submission is that such costs are not properly regarded as costs of ‘this action’, and should not be recoverable.

Key Events

3. A brief synopsis of the events leading up to the commencement of the suit and its discontinuance, largely uncontroversial, is appropriate at this juncture.

4. Following discharge from the Defendants’ vessel “Golden Georgia” at Hong Kong on 31 December 2003, the cargo owners in Hong Kong complained of contamination of a part-cargo of approximately 2,000 m.t. of refined bleached deodorized winterized corn oil.  On 14 January 2004, the Plaintiffs’ solicitors, Messrs. Clyde & Co faxed the Defendants’ Japan P&I Club (the liability insurers) inviting them to appoint surveyors to attend analysis of cargo samples and requesting provision of security for the Plaintiffs’ potential claim in the sum of US$5 million plus interest and costs in the form of a draft letter of undertaking (LOU) attached.  The security then sought was in respect of a claim to be ventilated in Hong Kong.

5. Messrs. Holman Fenwick & Willan were then instructed by the Defendants to handle the threatened litigation.  Negotiations between the solicitors over the terms and amount of the LOU and discussion on the appropriate forum ensued.  After much to-ing and fro-ing between solicitors, a compromised LOU was issued on 11 March 2004 for such sums as may be finally adjudged or awarded by a competent court or competent court on appeal or arbitral tribunal with a maximum liability of US$995,000 inclusive of interest and costs.  Service of the writ in this action issued on 3 March 2004 followed on 20 March 2004.

6. In the interim, the Plaintiffs had issued proceedings under HCAJ 21/2004 on 7 February 2004.  That had been preceded by the erroneous arrest and subsequent release of another ship “Golden Tiffany”, a vessel not owned by the Defendants.  That action was discontinued a week later and the defendant’s claim of costs of the action was settled in early March 2004.

7. The present suit commenced on 3 March 2004 and service of the same was accepted on 20 March 2004.  Service of the Points of Claim occurred on 16 April 2004.  The Defendants requested an extension of time for the service of the Defence.  This was acceded to.

8. The Defendants sought and obtained urgent advice from lawyers in New York and from London counsel on applying for a stay of the Hong Kong proceedings in favour of arbitration in New York, there being no consensus despite the many exchanges between the parties’ respective solicitors, on whether the arbitration clause of the charterparty has effectively been incorporated in the Bill of Lading.  The advice fortified the Defendants’ position on arbitration.  The Plaintiffs for a time continued to insist on retaining Hong Kong jurisdiction.

9. On 11 May 2004 they were put on notice that unless consent was forthcoming to refer the case to New York arbitration by 14 May 2004, the Defendants would issue an application for stay on 15 May 2004.  On 14 May 2004, the Plaintiffs agreed to a stay of the Hong Kong action in favour of arbitration in New York subject to terms of the stay being agreed.  Rather than signing a consent summons staying the action, at the Defendants’ suggestion the Plaintiffs issued a Notice of Discontinuance on 24 May 2004.  On 28 May 2004, the Defendants claimed entitlement to costs estimated at HK$425,000, including expert fees in relation to the joint analysis.

10. The New York arbitration according to the Plaintiffs was launched towards the end of December of the same year.

11. The Appointment to Tax was filed on 21 February 2005.  The taxation came on for hearing on 15 September 2005 and was concluded on 12 January 2006.  I allowed the disputed items of costs. The Plaintiffs maintain that they are not the costs of the present proceedings.

12. The disputed heads of costs, all or in the main, concern the Defendants’ pre-action costs incurred in respect of a joint analysis of oil samples at a laboratory in Rotterdam, the possible sale of the oil in mitigation, and protracted negotiations for security by the Defendants for the Plaintiffs’ threatened claim that was eventually provided by way of an LOU on 11 March 2004, some 8 days after the writ was issued in the present action.

13. The Plaintiffs’ reiterated their stance on review with further arguments.  Shortly stated, it is said that such costs properly relate to the substance of the dispute which is now pursued in the arbitration in New York and as a matter of fairness ought not to be regarded as the costs of the discontinued action, particularly in light of the circumstances leading up to the abandonment of the proceedings in Hong Kong.  The Defendants contend otherwise.  It is said that the costs were necessarily and/or properly incurred for the purpose of this action and were of use and service in the proceedings when the various items of work were undertaken.  Further, the commencement of arbitration in New York months after discontinuance does not alter their entitlement to those costs.

The Defendants’ Entitlement to Costs

14. Under the present costs regime, a successful litigant is entitled on a party and party basis to “all such costs as were necessary or proper for the attainment of justice or for enforcing or defending the rights of the party whose costs are being taxed.”  This is evident from O.62 r. 28(2).  Accordingly, the taxing master has a very wide discretion to allow all costs that are either necessarily or properly incurred in litigation for such costs are by their nature the ‘costs of the action’.  And those are the only costs a successful party can recover.

15. The term ‘costs of the action’ may encompass costs incurred for work legitimately undertaken before an action is brought so long as they are related and useful to the action.  This invariably means that costs are not limited to those incurred after the commencement of proceedings.  In this regard, reference is made to the decision in Societe Anonyme Pecheries Ostendaises v Merchants Marine Insurance Co. [1928] 2 KB 751.  At page 757, Lord Hanworth MR observed:

It appears to me, therefore, that there is power in the Master to allow costs incurred before action brought, and that if the costs are in respect of materials ultimately proving of use and service in the action, the Master has a discretion to allow these costs, which he probably will exercise in favour of the party incurring them, because they have been made use of during the course of the action.

16. Whether pre-action costs are in the end recoverable would depend very much on ‘whether they ‘have been necessary or proper for the attainment of justice’ – that is (as I think), necessary or proper having regard to the state of things at the time the [work in question was carried out]”, per Stirling LJ in Bartlett v Higgins [1901] 2 KB 230 at 238.  This approach was adopted in Scheff v Columbia Pictures Corporation Ltd [1938] 4 All ER 318 where following the dismissal of the action for want of prosecution before a statement of claim was served, allowance of the substantial costs of preparation to meet the plaintiffs’ claim was granted.

17. All these principles, the parties wholly accept.  What is controversial is the outcome of their application to the circumstances of this short-lived piece of litigation in Hong Kong.  Mr. Dunlop for the Defendants contends that on a proper reading of the facts, to which I shall return, all the challenged items of costs on review were incurred necessarily and/or properly for the purposes of this action and were of use and service in the action at the time the work in question was carried out.  Mr. Stock, counsel for the Plaintiffs seeks to argue that the discontinuance of the Hong Kong action (not tantamounting to an abandonment of the underlying claim) pursuant to a mutual decision of the parties that the claim should proceed by way of  arbitration in New York must mean that the costs in question were incurred in respect of the cause of action in general, rather than the Hong Kong proceedings.  As the arbitration is still afoot, it would be grossly unfair to award the Defendants those costs regardless of the outcome of the arbitration.

18. For the purpose of the review, the parties have put in a total of 3 arch lever files containing, inter alia, communication passing between the parties’ legal advisors, between clients and solicitors, and some legal advice.  I have had the benefit of perusing all the documents, not all of which are pertinent or have been referred to in submissions.  The relevant portions of the papers documenting the pre-action and post commencement activities and the circumstances attending upon the discontinuance of the action were helpful to my determination.

19. The first shot across the bow came when Clyde & Co faxed the liability insurers, the Japan P&I Club on 14 January 2004 giving notice of the Plaintiffs’ potential claim and loss and seeking an LOU for the claim to be brought in Hong Kong.  Holman Fenwick were then instructed on 21 January 2004.  As is already apparent from the chronology of key events summarized above, negotiations for the actual wording of the security sought exercised the attention of the parties’ respective legal advisors.

20. It is patent from the exchanges that followed on from 14 January 2004, that the Japan P&I Club were not keen to issue an LOU other than one on their standard terms and conditions that provided for negotiated security for final awards to be adjudicated by a competent court.  They were, however, not in principle against proceedings being launched and ultimately determined or compromised in Hong Kong.

21. On 19 January 2004 Clyde & Co again faxed the liability insurers with a further draft of their proposed LOU which provided for payment on demand of such sums as may be adjudged or declared by the Hong Kong Courts.  It also sought agreement from the shipowners that the claims shall be subject to Hong Kong Law and to the exclusive jurisdiction of the Hong Kong Courts.

22. A number of drafts of proposed LOUs then passed between the legal representatives as negotiations on the amount of the security and its wording progressed.  Against that backdrop, attempts were made to strike an amicable overall settlement, an objective the Japan P&I Club seemed most happy to achieve where possible to minimize costs and to bring a speedy end to the dispute.  From the papers, the Plaintiffs were not prepared to offer any discount on the value of their claim for settlement purposes even as at 27 April 2004.  This is no criticism of them as they are plainly entitled to have their claims fully ventilated.

23. It was in these circumstances that Mr. Dunlop advised his clients to apply for a stay of the Hong Kong proceedings.  It was envisaged or at least wishfully contemplated that the risk of being compelled to proceed to New York arbitration might render the Plaintiffs more amenable to make a reasonable settlement offer.  It plainly was a tactical move as the liability insurers were content to retain Hong Kong jurisdiction.  Having obtained consent to launch a stay, Mr. Dunlop continued to aggressively pursue the matter in that direction.

24. The Plaintiffs dug in and maintained their stance that the dispute should remain in Hong Kong, but eventually agreed to discontinue the suit.  This they did by Notice of Discontinuance on 24 May 2004.  As late as 14 May 2004, they wrote to the Defendants’ solicitors in these terms:

Our client takes the view that it will be of the best interest of both parties to continue the Hong Kong proceedings.  Our client believes that the merits of the claim is very strong and wishes to proceed with the substantive action as soon as possible.  Our client is prepared to consent to the stay of the Hong Kong proceedings in favour of arbitration in New York subject to the terms of the stay being agreed.

25. Mr. Dunlop submits that there was no agreement, as the Plaintiffs allege, that the claim would continue in New York by way of arbitration.  However, given the thrust of his communication with Clyde & Co, it does seem disingenuous to suggest otherwise.  Having emphatically pushed for a consensual end to the Hong Kong action with the threat of launching a stay application, he has unquestioningly obtained the concurrence sought.  In so doing, he has also pointed out to the Plaintiffs that as there was a security in place responding to a New York arbitration award, there was no further reason for continuing the Hong Kong action, which could equally be resolved by a summons for discontinuance. The consent eventually secured, was it seems, given with much reservation on the part of the Plaintiffs.

26. In my considered view, whether or not there was consent or agreement to discontinue, enforceable or otherwise, is of little assistance in determining whether the disputed costs fall to be assessed as the costs of these proceedings.  The New York arbitration did not commence until the end of 2004.  Had taxation of this action begun before the launch of the arbitration, the Defendants could quite legitimately have expected their pre-action and other disputed items of costs to be considered and taxed, there being no other suit extant with which such costs could conceivably be tied.  The mistaken arrest and release of “Golden Tiffany” and the discontinuance of the related proceedings under HCAJ 21/2004 concerned an entirely different defendant, who quite incidentally was also represented by Holman Fenwick.  Even those minimal costs, totally unrelated to the costs in issue, have been settled and presumably paid.

27. The decision in Daewood Hong Kong Ltd v Mana Maritime Inc & ors, 1996, No. CL-22, consequent upon a review of taxation by Ms. Registrar Chu (as she then was) though prayed in aid is necessarily facts sensitive.  The learned Registrar in disallowing certain investigation fees, stated:

Ultimately, the question, as I see it, is what is the purpose for which the fees of GMLO was incurred.  It is evident from the correspondence I had been referred to that the investigation work was carried out for the purpose of establishing the circumstances leading to the Plaintiff’s claim.  The decision to commission the investigation was prompted by the discovery of the Singapore Writ.  The P & I Club did not instruct the investigation work to be done earlier when they learnt of the in rem action commenced in Hong Kong.  It must therefore follows (sic) that the investigation work was occasioned by the Singapore Writ and the costs of the investigation should form part of the costs of the Singapore proceedings.

28. The disputed costs were, in my view, unambiguously triggered off by a clear, communicated intention on the part of the Plaintiffs to the Defendants’ P & I Club on 14 January 2004 that the Plaintiffs were seeking suitable security in respect of their claim for contaminated goods.  What was sought in the ensuing exchange was an appropriate LOU for a threatened suit within the jurisdiction.  All this is plain from the correspondence referred to.  The Hong Kong owners of the damaged oil went after a wrong ship and had to discontinue the related action under HCAJ 21/2004.  They were clearly desirous of prosecuting their claim in the Hong Kong courts.  On 3 March 2004, the Plaintiffs not surprisingly issued the writ in the present case, serving it on the 20^th of the same month.

29. It is artificial, to say the least, to argue that the disputed costs ‘were plainly incurred in relation to Plaintiffs’ alleged cause of action, in whatever forum that cause of action might ultimately be determined, given the circumstances of this case.  That those costs may inure to the benefit of some other action, potential or actual, here or elsewhere is not a determinative factor as Daewood Hong Kong Ltd has demonstrated.  There is no doubt that the costs under discussion were incurred properly and/or necessarily in the present litigation.  They are the legitimate costs of the action and should therefore be recoverable.  That being so, the review must be dismissed with the costs of the application and of the hearing to the Defendants, taxed if not agreed.