BIG ISLAND CONSTRUCTION (HK) LTD v. WU YI DEVELOPMENT CO LTD AND ANOTHER

HCA 1957/2005,
HCA 714/2007 &
HCA 886/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1957 OF 2005

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AND

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 714 OF 2007

(Transferred from District Court Civil Action No 5174 of 2005)

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AND

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 886 OF 2007

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(Heard together)

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D E C I S I O N

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A. INTRODUCTION

1.  These are applications for joinder of a non-party as a party for the purpose of a costs order against him pursuant to section 52A of the High Court Ordinance (“HCO”) and Order 62, rule 6A of the Rules of the High Court (“RHC”).

2.  The applicants (“the Wu Yi Parties”) are receiving parties pursuant to costs orders made by the Court of First Instance in the present 3 cases (“the Actions”) and the Court of Appeal in CACV 189/2011, 190/2011 and 191/2011 (“the Appeals”).  The non-party (“Mr Lee”) was and is a director of Big Island Construction (HK) Limited (“BIC”).

B.  LEGAL PRINCIPLES

3.  Section 52A of the HCO confers a wide discretion on the court to determine “by whom and to what extent” costs of and incidental to the proceedings before the court are to be paid. The court only has to be satisfied, in the exercise of its discretion, that it is in the interests of justice to make an order to award costs against a non-party.  See Sun Focus Investment Ltd v Tang Shing Bor [2012] 5 HKLRD 853 at §23per Mimmie Chan J.

4.  This is a summary procedure involving a 2-stage process, ie to first consider if the party should be joined and, second, to give him a reasonable opportunity to attend a hearing at which the court shall consider the matter further: Order 62, rule 6A; Sun Focus at §12 and Hong Kong Civil Procedure 2016, Vol 1, §62/6A/5.

5.  An applicant for such an order would normally be expected to explain the nature of the claim which he has against the intended party and the purpose to be served by joining that party. If the applicant is not able to do so, then the court might very well dismiss the application.  PR Records Ltd v Vinyl 2000 Ltd [2008] 1 Costs LR 19, at §34, Morgan J.

6.  At the first stage, the court will only refuse the joinder if it is plain and obvious that it amounts to an abuse of process: Sun Focus, §19:

“At the first stage of the hearing, when the court considers whether to join a non-party in the proceedings, the court should refuse the joinder only if it is plain and obvious that the application amounts to an abuse of process, by reason of delay or other misconduct on the part of the applicant, or because the application can be seen to be manifestly and fundamentally misconceived as to be an abuse by the applicant. Arguments and documents for the first stage of the hearing should be limited to those which are considered to be necessary to enable the court to determine whether non-parties should be joined in the proceedings. It is only at the second stage that the court considers whether the costs order should be made against the non-party, the overall consideration always being whether it would be in the interests of justice to do so pursuant to s 52A of the Ordinance.”(emphasis added)

7.  At the first stage, the applicant does not need to show an “arguable” case: Anstalt & ors v Hayek & ors [2005] EWHC 2435 (Ch) at §§35, 53 per Etherton J; PR Records at §44.  Nor is it open to the non-party to challenge the application on the ground that it has “no real prospect of success”.

8.  Where the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs.  He is regarded as “the real party” to the litigation.  Dymocks Franchise Systems (NSW) Pty Ltd v Todd & ors [2004] 1 WLR 2807, §§25(3) and 29; cited by the Court of Final Appeal in The Liberty Container (2007) 10 HKCFAR 256, at §§28 & 30, per Bokhary PJ.

9.  A non-party costs order can be made against a director of an insolvent company if he fell within the Dymocks principle.  See Sun Focus, §27; BE Studios Ltd v Smith & Williamson Ltd [2006] BCC 832 at §18 per Evans‑Lombe J.

10.  The courts have emphasized the importance not to allow directors or a controlling director of a one-man company to be made personally liable too readily.  Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1 BCLC 165 (CA), Millett LJ, at p 172; Taylor & anor v Pace Developments Ltd (1991) BCC 406, CA (decided before Dymocks).

11.  In Metalloy Supplies, Millett LJ held, at p 172 that:

“It is not an abuse of the process of the court or in any way improper or unreasonable for an impecunious plaintiff to bring proceedings which are otherwise proper and bona fide while lacking the means to pay the defendant’s costs if they should fail. Litigants do it every day, with or without legal aid. If the plaintiff is an individual, the defendant's only recourse is to threaten the plaintiff with bankruptcy. If the plaintiff is a limited company, the defendant may apply for security for costs and have the proceedings dismissed if the plaintiff fails to provide whatever security is ordered.

The court has a discretion to make a costs order against a non-party. Such an order is, however, exceptional, since it is rarely appropriate. It may be made in a wide variety of circumstances where the third party is considered to be the real party interested in the outcome of the suit. It may also be made where the third party has been responsible for bringing the proceedings and they have been brought in bad faith or for an ulterior purpose or there is some other conduct on his part which makes it just and reasonable to make the order against him. It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified.” (underline added)

12.  Metalloy Supplies has been considered in Dymocks, at §§28 & 29.  It has not been overruled but subsequent authorities have held that it was not necessary for the judge to find that the case was “exceptional”: Systemcare (UK) Ltd v Services Design Technology Ltd & anor [2012] 1 BCLC 14, CA.  A non-party costs order can be made against a director even if he had acted in good faith and without impropriety: Goodwood Recoveries Ltd v Breen [2006] 1 WLR 2723 at §59 per Rix LJ.

13.  Predominantly, these cases in paragraphs 10-12 above may be relevant to the second stage but there is nothing in those cases to prevent the court from applying them in clear and obvious circumstances to the first stage.

C.  PARTIES’ RESPECTIVE CASE

14.  The Wu Yi Parties claim that Mr Lee was the director and sole funder behind the impecunious BIC.  He actively conducted the subject litigation.  Being 99.99% beneficial shareholder of BIC, he stood to gain personally from the litigation. Although it is not necessary to show impropriety on his part, the evidence of his impropriety was overwhelming, which included lies, findings of fabrication of many documents for the purpose of litigation and forgery of a demand letter.

15.  These are all disputed but it is common ground that the court should not make a preliminary assessment of the merits of the applications.

16.  The various costs orders obtained by the Wu Yi Parties can be classified as follows:

(a)  HCA 1957/2005: taxed costs in the sum of $650,872.89 for various interlocutory applications;

(b)  HCA 714/2007: taxed costs of $3,281,012.43 for the action;

(c)  HCA 886/2007: taxed costs of $2,304,582.81 for the action;

(d)  The Appeals: costs of $2,162, 260, taxed as drawn.

17.  The present summonses have been taken out on 1 December 2015 under the 3 Actions.  They were the first formal applications to join Mr Lee for the purpose of seeking costs against him as a non-party.

18.  Mr Lee opposes the applications on 4 grounds:

(1)  That the applications were an abuse of process because of gross and unexplained delay in their issue (“the Delay Ground”);

(2)  That there had been previous applications made to hold Mr Lee liable which had failed in respect of which there was no appeal (“the Failed Previous Applications Ground”);

(3)  That it was open to the Wu Yi Parties to apply, as against BIC, for further security for costs in HCA 1957/2005 and HCA 886/2007 and security for costs in the 3 Appeals, and yet they failed to do so (“the Security for Costs Ground”);

(4)  That there is no jurisdiction for the CFI to make an order that Mr Lee should be held personally liable for the costs of the Appeals (“the Jurisdiction Ground”).

D.  THE DELAY GROUND

D1.  General principles

19.  There is no restriction as to the stage at which the order can or should be made: Sun Focus, §23.  However, it should be made at an early opportunity: To Pui Kui, the Administratrix of the estate of Ng Po Sum, deceased v Ng Oi Che & ors (unreported, CACV 67, 156/2014, 27 February 2015), per Yuen JA, at §28.1.

20.  Where there was no cause of action against a non-party, the time to join him for costs is usually after judgment in an action.  In Deutsche Bank AG v Sebastian Holdings Incorporated & anor [2014] EWHC 2073 (Comm), §57, Cooke J held that:

“The suggestion that Mr Vik should have been joined as a party for costs purposes at an earlier stage is perhaps a surprising submission. There was no obvious cause of action to be pursued against him personally which would have justified joinder ... In the context of joinder for costs, the usual practice is for a non-party to be joined after judgment and failure of the losing party in the action to pay the costs awarded. Until judgment is given it is premature to think in terms of liability for costs and payment by the opposing party. The assets available to the other party are not known, nor whether there are funders, if no disclosure is made of any such arrangement.”

21.  There is a view for an application for non-party costs to be made before an appeal on the final judgment is heard.  In Leung Chung Ching Edwin v The Estate of Leung On Mei Amy [2016] 2 HKLRD 365, Zervos J at §16 held:

“It seems that it would be preferable that all matters arising from or in connection with a final judgment of the Court are dealt with before a hearing of any appeal from that judgment. The reasons for this are that all matters relating to a case should be resolved by the trial court in a reasonable time and in a just and efficient manner, and the appellate court should be seized of all matters arising from or in connection with a final judgment in the event that they need to deal with or resolve any of them in consequence of the appeal and its decision. This will depend on the particular circumstances of the case.” (Emphasis added)

22.  But note that in Leung Chung Ching, Zervos Jwas dealing at the same time applications to varying the costs order nisi of the trial and the non-party costs order. 

23.  Another view is to wait for the outcome of the appeals because if the outcome is against the applicant, there would be little purpose in his seeking costs against the non-party: To Pui Kui, at §34, Yuen JA.

24.  Delay is often a matter for the court to take into account at the second stage: Anstalt, at §55.  However, in my view, where there was serious delay as amounting to abuse of process, the court has discretion to dismiss the application even at the first stage.

25.  Delay in itself is not sufficient.  The non-party has to show real prejudice to him caused by the delay: Dymocks, §32; PR Records, at §§29-51.

D2.  The delay

26.  In the present case, the Actions were commenced in 2005.  The Trial took a total of 43 days, in January and February 2010; then adjourned part heard and resumed in November to December 2010.  Judgment was handed down on 28 July 2011.  The decision on costs was handed down by Poon J (as he then was) on 25 May 2012 (“the Costs Decision”).  The Appeals (all by BIC) were dismissed on 25 April 2014.  BIC’s appeal to the Court of Final Appeal was dismissed on 26 June 2015.  The present applications were made 5 months later.

27.  The Wu Yi Parties had seen fit to make the applications before Poon J after Trial, knowing that they did not have to wait for taxations.  Upon Poon J’s dimissal of the applications, the Wu Yi Parties have never indicated to Mr Lee that they would pursue the s.52A order. 

28.  The Wu Yi Parties explained that they had been waiting for the outcome of all the appeals before launching the present applications.  Applying To Pui Kui, this may be regarded as a good explanation for delay in respect of HCA 714/2007, HCA 886/2007 and the Appeals in the second stage.

29.  The costs in HCA 1957/2005 were of a different nature.  They stemmed from many interlocutory orders.  The total costs incurred were about $1.18 million (§10 of Lian’s affirmation), eventually taxed down to $650,872.89. Under Order 62, rule 9D(1), all costs should be taxed in one go after trial. 

30.  Neither the Trial nor the Appeals would have affected those interlocutory orders.  However, whether To Pui Kui, §34 and Deustche Bank would apply in view of there being 2 other Actions on appeal should be deferred to the 2^nd stage.

D3.  Prejudice to Mr Lee caused by delay

31.  The delay has caused 4 types of alleged prejudice to Mr Lee:

(i)    No warning of the intended joinder applications was given to Mr Lee to enable him to consider whether to fund the Actions or the Appeals;

(ii)   No cross-examination of Mr Lee at the trial of the Actions as to matters which might support or destroy the Wu Yi Parties’ applications;

(iii)  Loss of opportunity to procure relevant witnesses to demonstrate, amongst others, that Mr Lee was not the sole controller of the conduct of the Actions, that the decisions in relation to conduct of the Actions were made in good faith and not for Mr Lee’s personal benefit.  A relevant witness, Mr David Jeaffreson (also director of BIC in 2005 and up to October 2008) had passed away on 30 October 2008. 

(iv)  Applications of this sort should have been made to the trial judge, as he would have been familiar with the complex background.

32.  With regard to item (i), in Symphony Group Plc v Hodgson [1994] QB 179, Balcombe LJ stated (at p 193A-D, in relation to a non-party against whom the applicant has a cause of action), that even if the applicant can provide a good reason not to join the non-party, “he should warn the non-party at the earliest opportunity of the possibility that he may seek to apply for costs against him”.  Ms Tong submits that the same principles should apply whether or not the applicant has a direct cause of action against the non-party.

33.  However, in Deutsche Bank AG v Sebastian Holdings Inc & anor [2016] 4 WLR 17,it was held that there is no obligation on an applicant to explain why it had not warned the non-party of the risk the latter faced.  “The importance of a warning will vary from case to case and may depend on the extent to which it would have affected the course of the proceedings.  If the third party against whom an order for costs is sought is the real party to the litigation, the absence of a warning may be of little significance.” (at §32).

34.  There was no warning given to Mr Lee prior to issue of the present applications.  Whether he would have behaved differently if warning had been given would be relevant to the 2^nd stage.

35.  With regard to item (ii), it was held in Chung Wah Steel Works Co Ltd v Chan Kwong Kwan (unreported, DCCJ 4763/2011, 21 January 2014)His Honour Judge Wilson Chan:

“[13] ... Where serious allegations are made against a non-party having brought the action for improper motive, or that they had relied upon fabricated or false evidence and these allegations were not put to the non-party at trial, it would be a denial of the fundamental right of the non-party to be heard on such serious allegations if the court was to decide them on a costs application. Further, since this kind of application is a summary procedure, it is not appropriate for the court to embark upon an enquiry of the type which justice would require [see: Barndeal Ltd v Richmond-Upon-Thames [2006] 1 Cost LR 47 at 55-56].”

36.  Mr Lee, of course, was not cross-examined at the trial on the issue of non-party costs.  Had the Wu Yi Parties issued the present applications before the Trial, it was not clear if the trial judge would have adjourned them until after Trial anyway.  The procedure in the second stage is usually summary but I cannot see why a judge handling the second stage would not allow cross-examination on one or more aspects of the applications if justice demands it.  In Deutsche Bank, the hearing took 2 days before Cooke J.

37.  With regard to item (iii), prejudice is a question of fact: Pickering Phipps v London and North Western Railway Company [1892] 2 QB 229 at p 237 per Lord Herschell. 

38.  Nowhere in Mr Lee’s affirmation was it stated that the death of David Jeffreson had caused him prejudice and it is not open to Ms Tong to submit that it had.  In fact, there was documentary evidence which might help Mr Lee to show that he did not owe 30% of the beneficial ownership.  What weight the court will attach to the lack of some evidence is a matter to be considered in the second stage. 

39.  With regard to item (iv), the trial judge has been elevated to the Court of Appeal.  It may be more time consuming and costly to inform another judge handling the second stage of the complex background at the Trial. However, that goes to costs but should not bar the applications from proceeding.

E.  THE FAILED PREVIOUS APPLICATIONS GROUND

40.  There was a prior application by the Wu Yi Parties to seek costs against Mr Lee when they sought, by summonses filed on 10 August 2011, to vary the costs order nisi under the Costs Decision.  However, it was dismissed because the failure to apply to join Mr Lee as a party to the Actions pursuant to Order 62, rule 6A was held to be “fatal”.  Moreover, Poon J held that that application “must fail on substance” as no evidence was laid before him and he would not act on submissions alone (§22 of the Costs Decision dated 25 May 2012).

41.  For lack of an appeal against Poon J’s dismissal, I also reject the Wu Yi Parties’ claim that Mr Lee has had notice since 2012 that he may be subject to an order for costs.  More funding had been provided by Mr Lee for the litigation in the meantime until issue of the present applications.

42.  Ms Tong, rightly, accepted that issue estoppel was not open to her as Mr Lee was not a party to Poon J’s Costs Decision.  I consider that the Failed Previous Applications Ground does not assist her in the first stage.

F.  THE SECURITY FOR COSTS GROUND

43.  The availability of an option for security for costs that could but was not taken is a strong argument against an order for costs against a non-party. Sun Focus, at §§25-26; Metalloy supplies, p 172; Chung Wah Steel Works, at §18.

44.  However, security for costs is not a remedy in all cases.  As held by the High Court of Australia in Knight v FP Special Assets Ltd [1992] 174 CLR 178 (at pp190-191 per Mason CJ and Deane J):

“... there are limitations attaching to the availability of security for costs. These limitations are such that security for costs is not a remedy in all cases in which justice calls for an order for the award of costs against a non-party. Security cannot be ordered against a defendant ... The amount awarded as security is no more than an estimate of the future costs and it is not reasonable to expect a defendant to make further applications to the court at every stage when it appears that costs are escalating so as to render the amount of previously awarded insufficient. And the availability of the remedy is scarcely a reason for denying the existence of jurisdiction to make an order for costs against the ‘real party’ at the end of the trial of the action ...”

45.  Sun Focus was decided before Deutsche Bank, in which the English Court of Appeal affirmed the judge below and held (at §49 per Moore-Bick LJ) that “a failure to apply for security does not preclude a successful application for an order for costs against a third party”.  See also Petromec Inc v Petroleo Brasileiro SA Petrobras [2006] EWCA Civ 1038 (at §14 per Longmore LJ).

46.  Ms Tong submits that the Wu Yi Parties, knowing full well of BIC’s impecuniosity could have applied for security in HCA 1957/2005, HCA 886/2007 and the Appeals, but did not do so.  The orders for security covered costs “up to trial”.  The Wu Yi Parties could have asked for further security when the trial was adjourned with more dates allotted.

47.  With respect, security is most often insufficient to cover taxed costs after a trial.  In any case, this ground in opposition does not apply to HCA 714/2007, wherein the Wu Yi Parties (being the plaintiff) could not have applied for security.  This ground of opposition does not assist Ms Tong in the first stage in this case.

G.  THE JURISDICTION GROUND

48.  Section 52A of the HCO is set out below:

“(1)  Subject to the provisions of rules of court, the costs of and incidental to all proceedings in the Court of Appeal in its civil jurisdiction and in the Court of First Instance, including the administration of estates and trusts, shall be in the discretion of the Court, and the Court shall have full power to determine by whom and to what extent the costs are to be paid.

(2)  Without prejudice to the generality of subsection (1), the Court of Appeal or the Court of First Instance may, in accordance with rules of court, make an order awarding costs against a person who is not a party to the relevant proceedings, if the Court of Appeal or the Court of First Instance, as the case may be, is satisfied that it is in the interests of justice to do so.”

49.  Properly construed, section 52A of the HCO confers a statutory power on the Court of First Instance or the Court of Appeal, as the case may be, to make orders in respect of the costs of and incidental to all proceedings before that court.

50.  Under Order 59 r 10 RHC, the Court of Appeal shall have all powers of the Court of First Instance.  However, neither the HCO nor RHC confer upon the Court of First Instance powers to make orders as to costs in respect of proceedings in the Court of Appeal.  It is not just a matter of quantum of costs which a non-party has to bear if he is successfully made liable, but a matter of jurisdiction.

51.  Hong Kong Civil Procedure 2016, Vol 1, at §62/6A/7, refers to Zanussi v Anglo Venezuelan Real Estate and Agricultural Development Ltd (The Times, 18 April 1996) for the proposition that the discretion to award costs under the English equivalent of section 52A was held not to confer jurisdiction on the court to award costs other than those incurred in the proceedings before it.  Aldous LJ held that the provision did not confer jurisdiction on the court to award costs other than those incurred before it, ie in a 1993 case but not a 1992 case although it involved the same parties.  Zanussi is inapplicable as it concerned costs in 2 different cases rather than 2 levels of court.

52.  An example of separate applications for non-party costs orders being made to the Court of Appeal and the trial court respectively can be found in Bournemouth & Boscombe Athletic Football Club Ltd v Lloyds TSB Bank plc [2004] All ER (D) 126 (11 October 2004); [2004] All ER (D) 323 (28 June 2004).

53.  It is true that Sun Focus (at §§3 & 24) purported to deal with the costs of the CFI and of CA.  However, the jurisdiction ground was not raised there (nor in Dymocks).  In fact, one does not know what happened in the second stage of Sun Focus. 

54.  Accordingly, insofar as the applications concern costs of the Appeals, they should be dismissed for want of jurisdiction in this court. 

H.  CONCLUSION

55.  Having analysed the grounds of opposition individually, I also look at them collectively.  There has been delay in making the present applications, pending appeals to the Court of Appeal and Court of Final Appeal.  Some security was obtained for costs of the Actions but none for the adjourned Trial or the Appeals.  There was no prior warning to Mr Lee that these applications would be made until long after the costs orders were made.  He was therefore not cross-examined on matters relating to costs at the Trial.  There would be lack of some evidence in that a relevant witness of Mr Lee has died.

56.  Considering these matters collectively, it is not plain and obvious that these applications are an abuse of process so as to justify dismissal at the first stage.

57.  I therefore order that:

(1)  Mr Lee be joined as a party to HCA 1957/2005, HCA 714/2007 and HCA 886/2007 for the purpose of making costs orders against him;

(2)  The application for joinder in respect of costs of the Appeals be dismissed on the ground of lack of jurisdiction of the Court of First Instance to make a non-party costs order in respect of proceedings before the Court of Appeal.

(3)  There be leave to Mr Lee to file and serve an affirmation(s) in opposition to the applications within 28 days from the date of this order;

(4)  There be leave to the Wu Yi Parties to file and serve an affirmation(s) in reply within 28 days thereafter;

(5)  No further affirmations shall be filed without leave;

(6)  On a nisi basis, the costs of the applications in respect of the Actions be in the cause;

(7)  On a nisi basis, the costs of the applications in respect of the Appeals be paid by the Wu Yi Parties to Mr Lee; and

(8)  On a nisi basis, the costs of the hearing for these applications be apportioned at 25% for each of the 3 Actions and 25% for all the Appeals.

58.  I thank counsel for their assistance.