FIRST LASER LTD v. FUJIAN ENTERPRISES (HOLDINGS) CO LTD AND ANOTHER

CACV 97/2020, [2023] HKCA 857

On appeal from [2020] HKCFI 495

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 97 OF 2020

(ON APPEAL FROM HCA NO 4414 OF 2001)

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DECISION ON COSTS

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Hon Kwan VP (giving the Decision on Costs of the court):

1.  On 31 March 2023, this court handed down a judgment (“CA Remitter Judgment”)[1] allowing the defendants’ appeal from the Remitter Judgment. We set aside the judge’s order that the defendants do pay the plaintiff (or “First Laser”) HK$250,168,048 with interest and substituted that with an order that the defendants do pay the plaintiff the sum of HK$5,288,716.61 with interest. We directed the parties to file written submissions on the costs of the appeal and of the trial of the remitter proceedings before the judge.

The defendants’ proposed costs order

2.  The defendants proposed an order in these terms:

(1)  the costs of and occasioned by this appeal and the respondent’s notice (including all costs previously reserved) be to the defendants, to be taxed on an indemnity basis if not agreed, with a certificate for two senior counsel; and

(2)  the costs of and occasioned by the remitter proceedings in the court below (including all costs previously reserved) be to the defendants, to be taxed on an indemnity basis if not agreed, with a certificate for two counsel.

3.  In support of the proposed order, they advanced these arguments.

4.  First, the defendants are successful in overturning the Remitter Judgment, so costs should follow the event. Even though the CA Remitter Judgment awarded the plaintiff the sum of HK$5,288,716.61 with interest, this was not on the basis of the plaintiff’s submissions on counter-restitution. In the premises, the defendants should be entitled to costs of the appeal and of the remitter proceedings.

5.  Second and more importantly, the plaintiff ought to have accepted an open offer (“Open Offer”) made by the defendants back in June 2010 as stated in §61 of the CA Judgment[2]:

“Restitution

61. In respect of restitution the defendants have indicated both in the Court below and in this Court that they are prepared to make restitution. In this Court, the defendants openly stated that it will return HK$20 million being the amount paid by the plaintiff to the 1^st defendant with interest and will forego the return of FCO shares, and dividends declared or paid by FCO. The plaintiff has not responded to the open offer. If this offer is accepted, then there will be a judgment on such terms for the plaintiff. If not, the issue of restitution must be remitted to the Court of First Instance for determination under Mainland Law.”

6.  The Open Offer was repeated in the CFA Judgment at §59:

“FEHC has made an offer of restitution, namely that it will return HK$20 million being the amount paid by First Laser to FEHC with interest and will forego the return of FCO shares and dividends declared or paid by FCO. First Laser has rejected the offer.”

7.  The court could consider an open offer in determining the appropriate costs award. An open offer will place some legitimate pressure on the offeree, in the form of possible adverse costs consequences, to accept a reasonable offer of settlement. This is consistent with one of the principal aims of the Civil Justice Reform, to facilitate and promote fair and reasonable settlement as early as possible[3].

8.  In this instance, the Open Offer of HK$20 million is far better than the judgment sum of HK$5,288,716.61 awarded to the plaintiff by the CA Remitter Judgment. It is submitted that the plaintiff’s conduct is wholly unjustified. Had the plaintiff accepted the Open Offer, it would not have been necessary to litigate the remitter proceedings and this appeal. It should be penalised by indemnity costs to mark the court’s strong disapproval.

9.  In respect of the certificate for two senior counsel for the defendants’ costs on appeal, Mr M C Law, who was appointed senior counsel in 2021, has been retained in this protracted litigation since its commencement in October 2001. Further, the plaintiff has been represented by two senior counsel and one junior throughout the remitter proceedings.

The plaintiff’s proposed costs order

10.  The plaintiff proposed an order in these terms:

(1)  the defendants be awarded 50% of the costs of the appeal with a certificate for two counsel; and

(2)  the plaintiff be awarded 50% of the costs of the remitter proceedings with a certificate for three counsel.

11.  For depriving the defendants of 50% of the costs of the appeal, these arguments were advanced by the plaintiff:

(1)  The defendants may be regarded as only partially successful in overturning the Remitter Judgment. The Court of Appeal rejected the plaintiff’s primary claim for restitution based on Article 18 of Provisions I and the alternative claim based on Article 58 of the Contract Law, Article 61 of the GPCL, Article 92 of the GPCL, the ‘improper profits regime’ (不當得利請求權) and the ‘principle of fairness’ (公平原則), and held that the plaintiff is only entitled to the return of the total purchase price of HK$24,640,000 with interest. Further, the defendants’ contention that the claim of the 1^st defendant (or “FEHC”) for counter-restitution should include the dividends declared by FCO and the accumulated profits to the extent that it would extinguish the plaintiff’s claim in entirety was rejected and the amount that should be returned to FEHC was limited to the net asset value of FCO in the sum of HK$19,351,283.39. The net result is that the plaintiff is entitled to judgment of HK$5,288,716.61 with interest.

(2)  The defendants should be deprived of a substantial portion of their costs in light of the way they conducted this appeal. They sought to re-argue virtually every point decided against them in an amended notice of appeal of 57 pages with 80 paragraphs[4], which caused the appeal to be set down for three days although ultimately only one day was used. It was only in their skeleton argument that the grounds of appeal were refined to six broad grounds[5]. No submissions were made in the skeleton argument on a number of discrete grounds of appeal in the notice of appeal[6], which were only abandoned at the hearing, and has led to significant increase in time and costs in the plaintiff’s preparation.

(3)  The defendants did not succeed on four discrete issues they pursued on appeal: the scope of the Remitter Order (ground (1)); the nominee investment contract found by the judge was not pleaded (part of ground (2)); the omission to plead Article 92 in respect of the alternative claim (part of ground (6)); and the claim for dividends and profits in FEHC’s counter-restitution. Further, the first two issues were unreasonably raised both at trial and on appeal, as the defendants had chosen and were able to adduce extensive expert and factual evidence to address Article 18 of Provisions I. These discrete issues led unnecessarily to the increase in time and costs of the appeal.

12.  For awarding the plaintiff 50% of the costs of the remitter proceedings with a certificate for three counsel, the plaintiff made these arguments:

(1)  The plaintiff ultimately obtained judgment in its favour of HK$5,288,716.61 with interest and is the overall successful party, albeit to a limited extent. The CA Remitter Judgment rejected the defendants’ contention that the plaintiff’s claim should be extinguished and dismissed in its entirety.

(2)  The plaintiff accepts that it was unsuccessful on the two main planks of its claim based on Article 18 of Provisions I and the alternative claim, so the costs order in its favour should reflect this outcome.

(3)  The defendants had pursued unmeritorious arguments at the remitter proceedings which unnecessarily lengthened the trial and generated costs. These are the issues they advanced in the notice of appeal but were abandoned or rejected by the court on appeal.

(4)  The defendants filed an additional witness statement of Zheng Kaiyuan with extensive documentary evidence. The judge struck out Zheng’s attempt to adopt the evidence of Wan Hing Kin who had served witness statements for the original trial but was never called as a witness[7] and found Zheng’s evidence unimpressive[8]. Zheng’s evidence on various issues was roundly rejected by the judge[9].

(5)  Although the Court of Appeal ultimately found in favour of the defendants on the application of Mainland law, the court indicated that it did not derive much assistance from the experts and did not adopt the reasoning of the defendants’ expert Mr Bai[10].

(6)  As for the Open Offer, this must be considered in the context of what transpired at the time and the eventual outcome. The defendants’ offer was to return HK$20 million with interest, excluding the amount of HK$4,646,000. In the Remitter Judgment, the judge found the amount of HK$4,646,000 constituted part of the purchase price despite the defendants’ attempt to re-open this issue[11], and this finding was upheld in the CA Remitter Judgment[12].

(7)  Although in the Open Offer the defendants had offered to “forego the return of FCO shares, and dividends declared or paid by FCO”, the FCO shares were transferred to and held by COM, not the plaintiff, and it was commented in the CFA Judgment that the transfer of 100% of the shares in FCO to COM bore little relationship to the First Laser Agreement[13]. The defendants have never made any counterclaim against the plaintiff or applied to join COM as an additional party by counterclaim for the return of FCO shares or dividends. At the time of the offer, the defendants did not even raise any defence of set-off or counter-restitution and they only pleaded counter-restitution for the first time in July 2016, long after the CFA Judgment. In any case, the CA Remitter Judgment rejected the argument that the dividends of FCO should be returned[14].

(8)  Whilst it is accepted that a certificate for three counsel is exceptional, the extensive examination of Mainland law and the factual issues involved justify such a certificate.

Discussion and disposition

13.  The plaintiff seeks to downplay the Open Offer.

14.  It is correct that the Open Offer was to return only HK$20,000,000, not HK$24,640,000 as claimed by the plaintiff. The purchase price for 51% interest in FCO and FCL was HK$24,640,000. The defendants contended in the remitter proceedings that only HK$20,000,000 was paid by cheque (which amount FEHC was prepared to return) and the balance of HK$4,640,000 had not been paid as it was just an accounting entry and could be reversed[15]. The judge rejected the defendants’ contention and held that the total price paid by the plaintiff was HK$24,640,000.

15.  However, the amount of money to be returned was just part of the Open Offer. Apart from returning HK$20,000,000, the defendants offered to forego the return of FCO shares and the dividends declared or paid by FCO so the plaintiff would keep the FCO shares and the dividends. In contrast, the CA Remitter Judgment held that the plaintiff is entitled to the return of the purchase price paid of HK$24,640,000, that FEHC is entitled to the entire equity value of FCO in the amount of HK$19,351,283.39 (as the shares in FCO have been sold and cannot be returned), and that FEHC is not entitled to be returned the dividends declared by FCO and distributed to COM. The net outcome is that the plaintiff is entitled to judgment in the sum of HK$5,288,716.61.

16.  The plaintiff would be far better off had it accepted the Open Offer. Had it done so, there would be no remitter proceedings and no appeal. It is not correct to say that ultimately the plaintiff should be regarded as the overall successful party in obtaining the judgment sum of HK$5,288,716.61.

17.  The transfer of the FCO shares to COM and not to the plaintiff is irrelevant. Although that was not in accordance with the First Laser Agreement, it was held in the Remitter Judgment that the transfer of the FCO shares to COM was in accordance with the spirit of that agreement[16]. The fact that the defendants did not make any counterclaim or counter-restitution when they made the Open Offer is likewise irrelevant. The offer to forego the return of the FCO shares and dividends must have been on the premise that FEHC was entitled to the shares and dividends.

18.  The plaintiff contended that it had not acted unreasonably in rejecting the Open Offer as it had succeeded before the judge in the remitter proceedings and at most, with the benefit of hindsight, it was unwise not to accept the offer. We do not agree with this, in light of our rejection of the main planks of the plaintiff’s case on its primary claim and alternative claim in the CA Remitter Judgment. The plaintiff should bear the costs of the remitter proceedings and the appeal which could have been avoided.

19.  It does not necessarily follow that the costs awarded to the defendants should be on an indemnity basis. The court still has a discretion to exercise whether it is just and appropriate to order costs in this kind of situation on a higher basis. An example was cited in which the court declined to order costs against a party on an indemnity or common fund basis[17].

20.  In the particular circumstances of this case, we do not think the plaintiff’s conduct in pursuing the remitter proceedings was so improper to warrant indemnity costs in order to mark the court’s strong disapproval. The restitution relief that the plaintiff was entitled to pursue was determined in accordance with Mainland law. The relevant areas of Mainland law are far from straightforward. Difficult issues are involved in the remitter proceedings. If the plaintiff had succeeded in its primary claim in restitution or its alternative claim, the sum to be returned would be very substantial. We decline to exercise our discretion to order indemnity costs. We think justice would be served by awarding costs on a party and party basis.

21.  There is still the matter whether the defendants should be deprived of part of their costs in light of the unsuccessful issues contested by them in the remitter proceedings and on appeal. Even though the costs of the two sets of proceedings could have been avoided had the Open Offer been accepted, insofar as the unsuccessful issues raised by the defendants had caused significant increase in the length and costs of the proceedings, there is no good reason not to deprive them of part of their costs. But we decline to reduce their costs to the extent of 50% as proposed by the plaintiff. On a broad brush basis, we would reduce the defendants’ costs by 20%.

22.  We make the following orders on costs:

(1)  the defendants be awarded 80% of the costs of and occasioned by this appeal and the respondent’s notice (including all costs previously reserved), to be taxed on a party and party basis if not agreed, with a certificate for two senior counsel; and

(2)  the defendants be awarded 80% of the costs of and occasioned by the remitter proceedings in the court below (including all costs previously reserved), to be taxed on a party and party basis if not agreed, with a certificate for two counsel.

23.  For the costs of the present application, as the defendants are not entirely successful, we make an order nisi that they be awarded 80% of the costs, with a certificate for two senior counsel.