AMENITY SYSTEM SERVICE (H.K.) LTD v. FIRST CAPITAL HOLDING LTD

DCCJ7334/2003

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 7334 OF 2003

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Judgment on Costs

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1.  The Plaintiff as tenant claimed for return of rental deposit of $122,000.  The Defendant as landlord counter-claimed for damages arising from the Plaintiff's failure to reinstate the property upon termination of the lease.

2.  After trial, I found that there was failure on the part of the Plaintiff to reinstate and assessed the damages of the Defendant at $122,500.  Allowing the Defendant to deduct the rental deposit, I dismissed the claim and entered judgment for the Defendant on the counter-claim for $500.

3.  After entering judgment, I invited solicitors for both parties to make further submissions on costs.   The Defendant's solicitor asked for costs on solicitor and own client basis according to clause 7(l) (i) of the Tenancy Agreement.  Such relief was specifically pleaded.  Plaintiff's solicitor contended that the Defendant’s success was a marginal one and therefore there should be no order as to costs. Regrettably, solicitors for both parties did not assist the court with any real arguments or authorities. 

4.   I reserved my decision on costs.  As I have not had the benefit of assistance from the parties, I have taken my own initiative to refer to some relevant authorities.

The General Principle

5.  In general, costs are in the discretion of the court, which has full power to determine whether or not to award them and by whom and to what extent they are to be paid.  This discretion must, however, be exercised judicially: Kierson v Joseph L Thompson & Sons Ltd [1913] 1 KB 587,CA.  Reasonableness and proportionality must be considered.

6.  No party is entitled to recover any costs of or incidental to any proceedings from any other party to the proceedings except under an order of the court.  If in the exercise of its discretion the court sees fit to make any order as to costs, then subject to the rules relating to costs, the court must order the costs to follow the event, except where it appears to the court that in the circumstances of the case some other order should be made as to the whole or any part of the costs (see Rules of the High Court (RHC) and Rules of the District Court (RDC) O 62 r 3(2)).

7.  The liability of costs in this case is not much a problem. When a winning party only wins a nominal award, the court may not order the costs to follow the event.  The Defendant at the end only won $500.  However the award in this case was given after the deduction of the rental deposit which was not in dispute.  In fact, the Defendant won a substantial part of his counter-claim, albeit for a lesser sum than he claimed. He successfully proved his damages for $122,500. The awarded sum is therefore not nominal.

8.    I cannot see in this case any special circumstances to justify a departure from the usual rule.  I therefore order that the Defendant's costs in defending the action and in the counter-claim be paid by Plaintiff.

9.  The next question is the basis of the costs which causes my concern.

Usual Basis of Costs

10.  RHC and RDC O 62 r28 provides:

“(1) This rule applies to costs which by or under these Rules or any order or direction of the Court are to be paid to a party to any proceedings either by another party to those proceedings or out of any fund (other than a fund which the party to whom the costs are to be paid holds as trustee or personal representative).

(2) Subject to the following provisions of this rule, costs to which this rule applies shall be taxed on the party and party basis, and on a taxation on that basis there shall be allowed all such costs as were necessary or proper for the attainment of justice of for enforcing or defending the rights of the party whose costs are being taxed.” (emphasis provided)

11.  Costs to be paid to a party in any proceedings by another party are therefore normally ordered on the party and party basis.

Other Bases

12.  However O 62 r 28(3) of RHC and RDC also provides:

“(3)  The Court in awarding costs to which this rule applies may in any case in which it thinks fit to do so order or direct that the costs shall be taxed on the common fund basis or on the indemnity basis.”

13.  This rule therefore expressly provides the court power to order costs on the common fund basis and on the indemnity basis.  O62 r 31 further provides for costs payable to a trustee out of trust fund on a so-called trustee basis.

The Difference between RHC and RDC

14.  I should first make an observation here that the RHC, O 62 r 29 provides for basis of costs for taxation of a solicitor's bill to his own client (the so-called “solicitor and own client” basis).  There is however no similar provision in the RDC.

D's contractual claim for costs

15.  Having set out the basic rules in the RHC and RDC, I now come back to the Defendant's claim of costs on solicitor and own client basis.  The Defendant's claim is based on contract.

16.  Clause 7(l) of the Tenancy Agreement (the Clause) provides:

“(1)    If the Tenant shall be in breach of any of the Tenant’s Obligations,

(i)    all legal costs and expenses incurred by the Landlord in respect of any act taken by the Landlord in relation to such breach (whether in making demand for payment by the Tenant of the rent and/or other monies due and payable or for remedy by the Tenant of such breach or in commencing proceedings in the court or tribunal of competent jurisdiction or in making such demand as well as commencing such proceedings or otherwise) shall be borne and paid by the Tenant to the Landlord on the solicitor and own client basis and shall be recoverable by the Landlord from the Tenant as a debt;”  (emphasis provided)

17.  The first question I need to decide is whether the costs in these proceedings are within the ambit of the Clause.  It is a matter of construction. In my view, the costs in these proceedings for the Defendant to defend the action and to pursue his counter-claim for damages as a result of the Plaintiff's failure to reinstate the property, being a breach of the contract, are covered by the Clause.

18.  Two issues then arise.  First, whether the District Court has the power to order costs on basis not expressly mentioned in the RDC.  Secondly, whether I should exercise the discretion in favour of the Defendant to order costs on solicitor and own client basis.

District Court’s power to order costs

19.  There is no express provision in the RDC to order costs on solicitor and own client basis.

20.  In The Grande Properties Management Limited v. Bolex Investment Company Ltd., DCCJ 21516 &21517/2001(consolidated), H.H. Judge Ng needed to decide the Plaintiff's application for costs to be paid on a solicitor and own client basis or alternatively, on an indemnity basis.  In that case, the relevant provision for contractual costs was found in the Deed of Mutual Covenant (DMC) which provides inter alia as follows:

“All amounts which may be or become payable by any owner for the time being of any undivided share in the said premises, and the said building in accordance with the provisions of this Deed and all other expenses incurred in or in connection with recovering or attempting to recover the same shall be recoverable by civil action at the suit of the Manager (and the claim in any such action may include a claim for the legal costs thereof in a solicitor-and-client basis) and the defaulting owner shall in addition to the amount claimed in such action be liable for such costs…...”

21.  H.H. Judge Ng, at para. 5 of the judgment, said:  “I find that P fails on a claim for costs on a solicitor and own client basis.  Although Mr Chan (Counsel for the Plaintiff ) relies on clause 15 of the DMC, it has not been pleaded and indeed there is no specific prayer of relief for costs on a solicitor and own client basis in reliance of the DMC.  Further, the District Court, unlike the High Court, has no jurisdiction to grant costs on a solicitor and own client basis.” 

22.   In the course of submissions, Counsel for the Plaintiff acknowledged the latter point and he therefore relied on his alternative submission that costs should be awarded to the Plaintiff on an indemnity basis.  His main argument for seeking an award of indemnity costs was based on the conduct of the Defendants in that case.  Having set out and considered all the relevant principles with her usual diligence, H H Judge Ng found that the conduct of the Defendants was not such as to justify costs on indemnity basis and refused to make this order.  However, since Counsel for the Plaintiff did not pursue on costs on solicitor and client basis, H H Judge Ng did not state the reasons for her observation that the District Court has no jurisdiction to grant costs on a solicitor and own client basis.  I think there are obvious reasons for such observation.

23.  As I have mentioned earlier, firstly, O 62 r29 of the RHC provides power for the High Court to tax a solicitor's bill to his own client.  However there is no such provision in the RDC.  Secondly, unlike the High Court, District Court is a statutory creature and enjoys no inherent jurisdiction as the High Court.  Thirdly, the word “shall” is used in O 62 r 28(2).  For these reasons, it can therefore be said that the District Court is only allowed to order costs on the bases referred to in O 62 r28 and r31, namely: party and party basis, common fund basis, indemnity basis, and trustee basis. And since there is no provision for solicitor and own client basis, the District Court has no power to order costs on this basis.  For my part, however, I would adopt a different approach.

24.  To consider the ambit of the court's discretionary power to order costs, I find it most helpful to refer to the judgment in EMI Records v Ian Cameron Wallace Ltd and another [1982] 2 ALL ER 980, where  Sir Rober Megarry V-C set out some background history of various heads of costs and analysed the relevant authorities.

25.  In the proceedings for contempt of court in EMI case, the defendants were ordered to pay the plaintiffs' costs on indemnity basis.  When the costs came to be taxed, the question arose as to how the order should be interpreted, since the Rules of the Supreme Court at that time (unlike our current RHC and RDC) made no express mention of costs on indemnity basis. The argument of the plaintiffs was that the order which had been made was equivalent more or less to an order that the costs be taxed on a solicitor and own client basis under RSC O 62, r29.  The defendants' argument was that the only orders for costs which the court could make inter partes were those authorised by r 28, and that since the 'trustee' basis set out in r28(5) was clearly inapplicable, the costs should be taxed on either the party and party basis under r28(2) or the common fund basis under r28(3) and (4).  The argument of the defendants in that case is therefore relevant in the present proceedings.

26.  It was held in the EMI case that on the true construction of the 1981 Act and RSC O 62, r28, the court was not restricted in inter partes proceedings to making an order for costs on one of the three bases set out in that rule but could order the costs to be paid on other bases (see p 987 g, p988 c and p 991 e g j). 

27.  In the case, Sir Robert Megarry V-C noted that the word 'shall' was used in O 62 r28 of RSC (same as O 62 r28(2) of RDC).  However he found that the wording of the rules is not strong enough to confine the courts to making orders within r28 only and exclude their discretionary power to make orders on other bases (p987 g).

28.  I would respectfully adopt this approach.  I would echo what Sir Robert Megarry V-C said, in his judgment at p 988 c, “the circumstances of litigation are so various that it is a matter of high importance that the judge should have a wide discretion as to the basis of costs, and not be subjected to the Procrustean bed of r 28.”  

29.  I would therefore rule that although the RDC do not mention costs on “solicitor and own client” basis, the District Court has the power nevertheless to award costs on this basis and other bases not expressly mentioned in the RDC O 62 r 28 in cases it deems fit.

30.  The next question is how should the court exercise its discretion in this case.  Two principles need to be considered.

The Contractual Entitlement Principle

31.  The primary power to order costs is conferred on the District Court by s. 53 of the District Court Ordinance, which provides:

“(1) The costs of and incidental to all proceedings in the Court, including the administration of estates and trusts, are in the discretion of the Court, and the Court has full power to determine by whom and to what extent the costs are to be paid.”

32.  The High Court Ordinance has also provided a similar power on the High Court. 

33.  The Hong Kong section is materially the same as s 51(1) Supreme Court Act 1981, which was the subject of consideration in Gomba Holdings (U. K.) Ltd & Others v. Minories Finance Ltd & Others (No 2)[1993] Ch 171.  It was a case where the Plaintiff group of companies borrowed money from the Defendant bank, secured by mortgages.  It was a term of the mortgages that the Plaintiff would pay on demand and on a full indemnity basis all costs, charges and expenses however incurred by the Bank or by a receiver under the mortgage or in enforcing the security.   The court needed to deal with the interaction between a contractual right to litigation costs and its discretionary power. The Court of Appeal in this case held at p 194A that the following principles are to be applied:

(i) An order for the payment of costs of proceedings by one party to another party is always a discretionary order.

(ii) Where there is a contractual right to the costs, the discretion should ordinarily be exercised so as to reflect that contractual right.

34.  In Chekiang First Bank v. Fong Siu Kin & Another, [1997] 2 HKC 302, the Hong Kong Court of Appeal affirmed that the decision in Gomba Holdings correctly represents the law in Hong Kong.  At 309D, Litton VP said:

“To deal with this argument, it is necessary to identify the source of the jurisdiction to award costs.  This is to be found in s52A of the Supreme Court Ordinance (Cap 4) which vests a general discretion as to costs in the High Court: a jurisdiction the exercise of which is regulated by O 62 of the Rules of the Supreme Court.

Plainly, the exercise of the court’s jurisdiction as to costs cannot be fettered by anything in the mortgage deed.

On the other hand, where parties have contractually provided for the basis upon which costs are to be quantified, the court would in the normal course of events give effect to that: the English Court of Appeal so held in Gomba Holdings v. Minories Fiance [1993] Ch 171 at 191B.”

35.  In Hang Seng Credit Card Ltd & Others v. Tsang Nga Lee & Others [2000]3 HKC 269, Yam J followed the principle in Chekiang First Bank, but he was able to distinguish it on the ground that the costs provision in the credit card agreement was unconscionable under the Unconscionable Contracts Ordinance, Cap 458.

36.  The principle has been followed in Yeung Kwok Fan v. Standard Chartered Bank [2001] 4 HKC 486; and Incorporated Owners of Fu Ning Garden & Another v. Grantwin Development Limited & another, HCA 1747/2002, unreported.

37.  The principle is therefore clear that where there is expressly provided for a contractual entitlement to costs on a particular basis, while the court does retain an unfettered discretion to award costs, the court would normally exercise its discretion in accordance with the contractual provisions save in exceptional circumstances.  So are there any exceptional circumstances in this case?  In my judgment, the answer is “yes”.

The Indemnity Principle

38.  I would first emphasise the indemnity principle underlying an award of costs.  Costs are not imposed to punish the losing party.   Bramwell BinHarold v. Smith [1850] 5H. & N. 381 at 385 said:

“Costs as between party and party are given by the law as an indemnity to the person entitled to them; they are not imposed as a punishment on the party who pays them, nor given as a bonus to the party who receives them.  Therefore, it the extent of the damnification can be found out, the extent to which costs ought to be allowed is also ascertained.”    

Sir Richard Malins V.-C. in Smith v. Buller,  [1875] L.R. 19 Eq. 473, stated:

“It is of great importance to litigants who are unsuccessful that they should not be oppressed into having to pay an excessive amount of costs…I adhere to the rule which has already been laid down, that the costs chargeable under a taxation (detailed assessment) as between party and party are all that are necessary to enable the adverse party to conduct the litigation and no more. Any charges merely for conducting litigation more conveniently may be called luxuries and must be paid by the party incurring them”.                                                                  

39.  Chu J in Society for Protection of Harbour Ltd v Town Planning Board, HCAL 19/2003, unreported, 5 December 2003, observed that the power to order indemnity costs was to achieve a fairer result for a successful party.

40.  The tenancy agreement in this case does not define what is legal costs on “solicitor and own client basis” in the Clause.  It is accepted that costs on such basis would be assessed according to the standard provided by O 62 r29 of the RHC.  Under r 29(1) all costs will be allowed except insofar as they are of an unreasonable amount or have unreasonably incurred.  Under r29(1), the basis of costs would be equivalent to a costs order on an “indemnity basis” under r28 (4A). What causes my concern is the presumptions under r 29(2) and (3).

41.  O 62 r29(2) and (3) provides:

“(2)    For the purposes of paragraph (1), all costs incurred with the express or implied approval of the client shall, subject to paragraph (3), be conclusively presumed to have been reasonably incurred and, where the amount thereof has been expressly or impliedly approved by the client, to have been reasonable in amount.

(3)     For the purposes of paragraph (1), any costs which in the circumstances of the case are of an unusual nature and such that they would not be allowed on a taxation of costs in a case to which rule 28(2) applies, shall, unless the solicitor expressly informed his client before they were incurred that they might not be so allowed, be presumed, until the contrary is shown, to have been unreasonably incurred.”

42.  By Para (2), all costs which the client has expressly or impliedly approved are ‘conclusively presumed’ to have been reasonably incurred.  Under para (3) there is a rebuttable presumption that costs which ‘are of an unusual nature’ and would not be allowed on a party and party taxation have been unreasonably incurred, unless the solicitor expressly informed his client before they were incurred that they might not be allowed.

43.  The effect of the presumptions is that if an order inter partes for costs on a solicitor and own client basis is ordered, the losing party would have to bear all costs incurred by the winning party including those extravagantly and unnecessarily spent with instruction of the winning party.  And the losing party has no right to complain.  I do not think that it would be right.  The unfairness was noted by Sir Robert Megarry V-C in EMI case (at p 990 j and p991 a and b).

44.  In my judgment, an inter partes order for costs on solicitor and own client basis is severely penal in its effect and it therefore contravenes the indemnity principle of costs.  I would also add the remark at the Hong Kong Civil Procedures 2007, para 62/app/12 : “It is almost wrong to order costs inter partes to be paid on the solicitor and own client basis.”

Result

45.  For the reasons I have given, I refuse to award costs to the Defendant on solicitor and own client basis.

46.  On the other hand, I am unable to say that the Tenancy Agreement and the Clause are unconscionable.  To give effect as close as possible to the Defendant’s contractual entitlement, I think an order for costs on indemnity basis, in substitution of the contractual basis, would achieve a fairer result for both parties. 

47.  I make the order accordingly.  The Plaintiff is to pay the Defendant's costs in defending the action and the counter-claim on indemnity basis, to be taxed, if not agreed.