UNION GLORY FINANCE INCAND OTHERS v. MERRILL LYNCH INTERNATIONAL BANK LTD AND ANOTHER

HCA 2494/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2494 OF 2013

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DECISION ON COSTS

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Introduction

1. On 22 September 2016, I dismissed the plaintiffs’ claims and ordered the plaintiffs to pay the defendants’ costs.  By written submissions, dated 6 October 2016, the defendants applied for costs on an indemnity basis and for interest on those costs at 10% above judgment rate.  The plaintiffs replied by written submissions, dated 20 October 2016.

2. By letter, dated 10 November 2016, the defendants’ solicitors asked the court to make an order that the plaintiffs pay the defendants costs on an indemnity basis from a date which the court deemed appropriate, with certificate for two counsel.

3. By letter, dated 15 November 2016, the defendants’ solicitors advised that the defendants were seeking a certificate for two counsel for both the pre‑trial review on 13 January 2016 and for the trial.

4. The grounds relied upon by the defendants are:

(1) On 30 December 2014, the defendants made a Calderbank offer to settle on the basis that the proceedings be discontinued with the parties bearing their own costs; and

(2) On 29 May 2015, the defendants made a sanctioned payment into court in the sum of HK$1,167,000.00.

5. The defendants rely upon Order 22, rule 23 of the Rules of the High Court, which provides:

“(1) This rule applies where a plaintiff —

(a) fails to obtain a judgment better than the sanctioned payment; …

(3) The court may order the plaintiff to pay any costs incurred by the defendant after the latest date on which the payment or offer could have been accepted without requiring the leave of the court.

(4) The court may also order that the defendant is entitled to —

(a) his costs on the indemnity basis after the latest date on which the plaintiff could have accepted the payment or offer without requiring the leave of the court; and

(b) interest on the costs referred to in paragraph (3) or sub‑paragraph (a) at a rate not exceeding 10% above judgment rate.

(5) Where this rule applies, the Court shall make the orders referred to in paragraphs (2), (3) and (4) unless it considers it unjust to do so.”

6. When considering whether it would be unjust to make the orders referred to in para (3) and (4) the court shall take into account all the circumstances of the case including the matters set out in Order 22, rule 23(6), namely, the terms of the sanctioned offer, the stage at which any sanctioned offer was made, the information available to the parties at the time when the sanctioned offer was made and the conduct of the parties with regard to the giving or refusing to give information for the purposes of enabling the offer to be made or evaluated.

7. The defendants ask for indemnity costs and interest on those costs from 30 December 2014 (the date of the Calderbank offer) or 26 June 2015, the latter date being the latest date (28 days after payment) on which the plaintiff could have accepted the sanctioned payment without requiring the court’s leave.

8. As the plaintiffs failed in their claim entirely, they plainly failed to better the sanctioned payment and this is a case for consideration of indemnity costs and interest above judgment rate.

9. As noted in Hong Kong Civil Procedure 2017 Vol 1, para 22/24/1, indemnity costs and interest above judgment rate are not penal.  The rules are designed to provide important incentives to encourage parties to make, and accept, settlement offers at appropriate levels.  The objective is to achieve a fair result.

Indemnity costs

10. The plaintiffs submitted an award of indemnity costs would be unjust for the following reasons:‑

(1) That the sanctioned payment was manifestly insufficient when compared with the total of the plaintiffs’ claims (HK$45,475,899.41) plus interest.

(2) The plaintiffs’ considered they had a strong case.  They had conducted financial checks on the subject borrower and found it to be in poor shape such that they would not be prepared to lend money to it unless their loans were protected by what they believed was a commitment by Merrill Lynch to lend the borrower HK$200,000,000.

(3) The plaintiffs’ witness was only prepared to recommend the loans to the defendants because he believed Merrill Lynch had committed to lending the borrower HK$200,000,000.

(4) The plaintiffs were entitled to take the view that a court, taking into account inherent probabilities and improbabilities, would accept that there clearly was something which motivated the plaintiffs to advance over HK$70,000,000 to an uncreditworthy borrower and that that something was the alleged misrepresentation that Merrill Lynch had committed to lend HK$200,000,000 to the borrower.

(5) In other words, the decision to reject the minimal sanctioned payment was a considered and not a frivolous decision.

(6) There were no adverse findings of untruthfulness made by the court regarding the plaintiffs’ witnesses.

(7) The court had rejected part of one of the defendants’ witness’ evidence.

(8) Of seven days of evidence, the plaintiffs’ case took 5½ days, principally consisting of cross‑examination by the defendants’ leading counsel.  In contrast the defendants’ case lasted only one day, including cross‑examination confined to only the essentials.  The plaintiffs did not prolong the trial unnecessarily.

Discussion

11. The procedural requirements of Order 22 were complied with.

12. Regarding the terms of the sanctioned offer, as noted in Hong Kong Civil Procedure 2017 Vol 1, para 22/24/1, a sanctioned offer does not have to be of a large amount and a nominal amount qualifies.  In CEP Ltd v Wuxi Jiacheng Solar Energy Technology Co Ltd [2014] 4 HKLRD 44, Recorder Jat Sew Tong SC held that a sanctioned payment for a nominal sum was not in itself unreasonable.

13. In a long letter to the plaintiffs’ solicitors, dated 30 December 2014, the defendants’ solicitors set out detailed reasons why the defendants considered that the plaintiffs’ claims would fail.  In that letter, the defendants proposed that the plaintiff discontinue the proceedings, with the parties bearing their own costs.  At the time the sanctioned payment was paid into court, in a letter, dated 29 May 2015, the plaintiffs’ solicitors referred to their earlier letter and repeated that the defendants considered the claims were without merit and advised that the defendants were prepared to settle the matter by way of the sanctioned payment with a view to avoiding wasting further time and costs.

14. The letters indicate that the defendants considered they had a good defence and were making a genuine offer to settle.  In the circumstances, I am not prepared to refuse indemnity costs because of the amount of the sanctioned payment.

15. As to the plaintiffs’ assessment of the strength of their case, whatever strength the plaintiffs perceived in their case, the fact remains that they failed to better the sanctioned payment.  That they believed in their case and were not frivolous does not mean that an award of indemnity costs would be unjust.  Litigation carries risk and belief in the strength of a case is a matter of assessment of that risk.  Howsoever the plaintiffs assessed their risk, the result was that the plaintiffs failed to establish fundamental elements of a case of misrepresentation.

16. Turning to the stage in proceedings at which the sanctioned payment was made, the sanctioned payment was made at an early stage, about 1½ years before trial.  By the time the sanctioned payment was made, lists of documents and witness statements (apart from one) had been filed and served.  The issues and the parties’ respective cases should have been clear by that time.  The sanctioned payment was made at an appropriate stage in proceedings and I have not been referred to any evidence demonstrating that the plaintiffs were refused any relevant information for the purposes of enabling the offer to be evaluated.

17. As for the defendants’ witness whose evidence was partly rejected, if that part of his evidence caused the plaintiffs to consider that they had a strong case, that evidence was not determinative.  The plaintiffs failed because they failed to prove their own case.  Not only did they fail to prove that the defendants’ witnesses made the representations pleaded in the statement of claim and in the evidence of their witnesses, they also failed to establish the necessary relationship to give rise to a duty of care owed by the defendants and they failed to establish reliance, both of which are elements for the plaintiffs to prove.

18. I do not consider the defendants unnecessarily prolonged the trial.

19. After considering all of the circumstances, I do not consider that an award of indemnity costs would be unjust.

20. As for the date from which indemnity costs should apply, I consider they should apply from 27 June 2015, which is the first day after the latest date on which the plaintiff could have accepted the payment.  Rules of the High Court Order 62, rule 5(1) provides:

“… the court in exercising its discretion as to costs shall, to such extent, if any, as may be appropriate in the circumstances, take into account —

(d)  any written offer which is expressed to be ‘without prejudice save as to costs’ and which relates to any issue in the proceedings, but the court may not take the offer into account if, at the time it is made, the party making it could have protected his position as to costs by means of a sanctioned payment or a sanctioned offer under Order 22.”

21. The defendants have not suggested that they could not have made a sanctioned payment or sanctioned offer when they made their Calderbank offer on 30 December 2014. Accordingly, I exclude that offer from consideration under Order 62, rule 5(1)(d).

22. In CEP Ltd v Wuxi Jiacheng Solar Energy Technology Ltd Co [2016] 1 HKLRD 960, Lam V‑P and McWalters JA considered, obiter, what was termed the “exclusionary rule” in Order 62, rule 5(1)(d) and stated that it should be deleted.  Notwithstanding their Lordships’ observations, the exclusionary rule has not been deleted and still operates, such that I am obliged to have regard to it.

Interest

23. With regard to interest, the first consideration is whether it would be unjust to award interest at a rate above judgment rate.  Having considered all the circumstances, including those discussed above, I consider that it would not be unjust to award interest above judgment rate.

24. The second consideration is the rate of interest.  The defendants submitted that 10% above judgment rate would be appropriate for the following reasons:

(1) the plaintiffs’ claims were without merit;

(2) the defendants adopted a reasonable approach to settlement negotiations, in contrast the plaintiffs did not provide their own proposals for settlement;

(3) the judgment demonstrates that the defendants were justified in adopting their approach to settlement;

(4) the plaintiffs’ case shifted at the beginning of and during the trial;

(5) indemnity costs would not adequately compensate the defendants for the substantial and prolonged inconvenience and injustice they have had to deal with in defending the claim.  The plaintiffs waited until the end of the limitation period before commencing proceedings and the litigation progressed at a “leisurely pace”, only reaching trial three years after the writ was filed.  In the interim, the plaintiffs unsuccessfully challenged interlocutory matters which ought to have been conceded;

(6) there is no award of damages to the defendants.  The award of enhanced interest is a proportionate and reasonable means by which to reflect a material difference to the outcome of the case; and

(7) the sanctioned payment was not a nominal sum.

25. In McPhilemy v Times Newspapers Ltd (No 2) [2002] 1 WLR 934, Chadwick LJ observed, at p 944H:

“The purpose for which the power to order interest on costs under [the equivalent of O 22, r 23(4)(b)] is conferred is, I think, plain. It is to redress, in a case to which [the equivalent of O 22, r 23] applies, the element of perceived unfairness which arises from the general rule that interest is not allowed on costs paid before judgment … . So, in the ordinary case, the successful claimant who has made payments to his own solicitor on account of costs in advance of the trial will be out of pocket even if he obtains, at the trial, an order for costs on an indemnity basis. He will get interest on his costs from the date of the order (whether he has actually paid them or not); but he will get nothing to compensate him for the cost of money (or the loss of the use of money) which he has had to bear before trial in relation to payments which he has made on account of costs. An order under [the equivalent of O 22, r 23(4)(b)] enables the court to achieve a fairer result in that respect. But, having regard to the point which, as it seems to me, [the equivalent of O 22, r 23(4)(b)] is intended to meet, I would order payment of interest at a rate which reflects (albeit generously) the cost of money, say, 4% over base rate; and I would direct that interest runs, on the costs to which the order applies, from the date upon which the work was done or liability for disbursements was incurred.” (emphasis added)

26. Following McPhilemy v Times Newspapers Ltd (No 2), the purpose of payment of interest on costs is to mitigate the general rule that interest is not allowed on costs paid before judgment by compensating for the cost of money or the loss of the use of money, and the rate of interest should reflect the cost of money.  None of the reasons given by the defendants in support of a rate of 10% above judgment rate, set out in para 24 above, concern the cost of money or the loss of its use.

27. I shall say something in particular about the reason set out in para 24(6) above.  The effect of the submission is that, because the defendants were not awarded damages, then they should be awarded interest on costs to properly reflect the outcome of the case.  This submission appears to be based upon Little and Others v George Little Sebire and Co TLR 17.11.99, (which was included in the defendants’ authorities) in which Mr David Foskett QC, sitting as a deputy judge of the Queen’s Bench Division, stated:

“Unless the discretions conferred by the rule were exercised in away (sic) that made a material, albeit proportionate, difference to the eventual award in the case, the rule itself would become redundant.

One appropriate way in which the issue might be approached was to start with the proposition that enhanced interest of 10 per cent above base rate be awarded on the whole of the judgment, excluding interest, from the earliest date when it could be awarded and then to evaluate whether the effect of doing so would itself work an injustice or result in a disproportionate advantage to the claimant or a disproportionate disadvantage to the defendant.”

28. Although the report refers to the deputy judge awarding indemnity costs, the deputy judge’s reference to “10 per cent above base rate be awarded on the whole of the judgment, excluding interest, from the earliest date when it could be awarded” appears to be a reference to the discretion to award interest on any sum of money awarded to a claimant provided for by CPR rule 36.21(2), which is in the following terms:

“(2) The court may order interest on the whole or part of any sum of money (excluding interest) awarded to a claimant at a rate not exceeding 10% above base rate for some or all of the period starting with the latest date on which the defendant could have accepted the offer without needing the permission of the court.”

29. The discretion to award indemnity costs and interest on those costs is provided for separately by CPR rule 36.21(3), which makes no reference to “the whole of the judgment” or “excluding interest”, as referred to by the deputy judge.

30. Notwithstanding my observations as to the rule to which the deputy judge was referring, assuming the deputy judge’s observations were directed to the discretion to award interest on indemnity costs, I do not agree that the discretion should be exercised in a way that makes a material difference to the eventual award in the case, starting with the proposition that enhanced interest of 10% above judgment rate be awarded and then to evaluate whether the effect of doing so would itself work an injustice or result in a disproportionate advantage to the claimant or a disproportionate disadvantage to the defendant.  My reason for not agreeing is that the purpose of interest on costs is to reflect the cost of money (McPhilemy v Times Newspapers Ltd (No 2)), as such, 10% above base rate is not the starting point but is a maximum.  As HH Judge Mimmie Chan (as she then was) observed in Maysun Engineering Co Ltd v International Education and Academic Exchanges Foundation Co Ltd [2011] 2 HKLRD 844, para 16:

“[10% above judgment rate] does no more than to indicate the order which can be made by the Court.”

Discussion

31. I consider 10% above judgment rate to be too high.  The plaintiff submitted that the cost of money in Hong Kong is, and has been for some considerable time, low and referred me to the interest awarded by HH Judge Mimmie Chan in Maysun Engineering Co Ltd v International Education and Academic Exchanges Foundation Co Ltd supra, (2% above judgment rate) and by Recorder Jat Sew Tong SC in CEP Ltd v Wuxi Jiacheng Solar Energy Technology Ltd Co supra, (2½% above judgment rate).

32. In CEP Ltd v Wuxi Jiacheng Solar Energy Technology Co Ltd supra, the 2½% awarded by Recorder Jat Sew Tong SC was half the rate which he would otherwise have ordered, following his approach in Kai Min Fashion (HK) Ltd v Fond Express Logistics Ltd [2013] 1 HKC 563.  In Kai Min Fashion (HK) Ltd v Fond Express Logistics Ltd, after noting that to follow the principle that the plaintiffs should have interest on each item of cost from the dates on which work was done or incurred would be overly complicated, Recorder Jat Sew Tong SC adopted a “simplified process” by ordering that interest would be payable on all items of costs at half the rate which would otherwise be ordered.  Recorder Jat Sew Tong SC was applying a “simplified process”, which had been applied earlier by Johnson Lam J in Golden Eagle International (Group) Ltd v GR Investment Holdings Ltd [2010] 3 HKLRD 273 at para 18:

“… There is no evidence of actual payment of costs by the plaintiff. In principle the defendant should pay the plaintiff interest on costs incurred after 1 February 2010 running from the date when the works were done respectively. However, it would be a complicated process if each item of work were to carry interest from a different date. To simplify the process, I shall borrow a well‑established approach in working out interest for special damages in personal injuries litigation. I will order interest at half of the rate I would otherwise order on all the costs incurred after 1 February 2010 with interest starting to run from 1 February 2010 for all the items. … .”

33. This simplified process is referred to in para 22/22 of Hong Kong Civil Procedure 2017 Vol 1.

34. After noting the rationale for payment of interest on costs as explained in McPhilemy v Times Newspapers Ltd (No 2) supra, and that the Court of Appeal awarded interest of 4% over base rate, HH Judge Mimmie Chan appears to have adopted the simplified process as explained in paras 23 and 24 of her decision in Maysun Engineering Co Ltd v International Education and Academic Exchanges Foundation Co Ltd supra:

“23. In the case of KR v Bryn Alyn Community (Holdings) Ltd [2003] PIQR P30, the court pointed out that interest on costs is intended to compensate a litigant who is out of pocket, having funded litigation which he should not have had to fund, and that in cases where there is no evidence to demonstrate the actual dates when clients had put up funds from which interest will run, the court may order interest to run from the date when the work was done or liability for disbursements was incurred, as in McPhilemy v Times Newspapers Ltd (No 2).

24.  There is no evidence in this case as to when MEC was out of pocket in having to make payment on account of costs, or in having to actually put up funds for payment of its legal costs.  Nor is there evidence of when liability for disbursements such as counsel’s fees was incurred.  If I do not make an order for enhanced interest on costs …, interest on costs will run from the date of the judgment … .  To reflect the spirit of O 22 and the principle of compensation for the cost of money paid before trial, I will order interest on indemnity costs from [the latest date on which the defendant could have accepted the sanctioned offer], at a lower rate of 2% above judgment rate.”

35. In the present case there is no evidence as to when the plaintiffs incurred liability for costs or evidence of payment of costs or having paid money on account of their legal costs. In these circumstances, I shall adopt the simplified approach and order a rate of interest of half of what I would otherwise have ordered.  As to that rate, in the absence of evidence as to the actual cost of money, I take a broad approach and I consider the rates applied by Recorder Jat Sew Tong and HH Judge Mimmie Chan to be appropriate, in which case I order interest on the indemnity costs from 27 June 2015 at a rate of 2½%.

36. There was a dispute between the parties as to whether interest should be paid to the date of judgment or the date of payment, with the defendants seeking interest to the date of payment.  Section 49(1) of the High Court Ordinance, Cap 4, provides: 

“(1) Judgment debts shall carry simple interest‑

(a) at such rate as the Court of First Instance may order; or

(b) in the absence of such order, at such rate as may be determined from time to time by the Chief Justice by order,

on the aggregate amount thereof, or on such part thereof as for the time being remains unsatisfied from the date of judgment until satisfaction.”

37. As noted by HH Judge Mimmie Chan in Maysun Engineering Co Ltd v International Education and Academic Exchanges Foundation Co Ltd supra, an order for payment of costs is a judgment debt.

38. In Hong Kong Civil Procedure 2017 Vol 1, para 22/24/2 there is a reference to conflicting authorities as to whether the court has jurisdiction to award interest until the date of judgment or the date of payment.

39. On the one hand, Recorder Jat Sew Tong SC in Kai Min Fashion (HK) Ltd v Fond Express Logistics Ltd supra, following McPhilemy v Times Newspapers Ltd (No 2) supra, held that the court did not have jurisdiction to order enhanced interest until the date of judgment.  On the other hand, HH Judge Mimmie Chan in Maysun Engineering Co Ltd v International Education and Academic Exchanges Foundation Co Ltd supra, held that enhanced interest could be awarded until after the date of judgment.  HH Judge Mimmie Chan distinguished McPhilemy v Times Newspapers Ltd (No 2) on the basis that that court concluded, inter alia, that the courts in England did not have the power under the equivalent rule to Order 22, rule 23 to fix the rate of interest payable on judgment debts, which power is conferred on the Lord Chancellor under section 17 of the Judgments Act 1838 and section 44 of the Administration of Justice Act 1970, whereas under section 50(1)(a) of the District Court Ordinance, Cap 336 judgment debts are to carry simple interest at the rate the court orders or, in the absence of an order, at the rate the Chief Justice determines by order.  (Recorder Jat Sew Tong SC was not referred to Maysun Engineering Co Ltd v International Education and Academic Exchanges Foundation Co Ltd.)

40. With respect, I agree with HH Judge Mimmie Chan.  Under section 49(1) of the High Court Ordinance, the Court of First Instance has the power to determine a rate of interest, which rate, by operation of section 49(1), a judgment debt shall carry “until satisfaction”.  In my view, “until satisfaction” includes “until payment” such that the court has jurisdiction to award interest until payment of costs.

Orders

41. Accordingly, I order:

(1) The plaintiffs to pay the defendants’ costs on a party‑and‑party basis up to and including 26 June 2015;

(2) The plaintiffs to pay the defendants costs’ on an indemnity basis from 27 June 2015, with a certificate for two counsel;

(3) Interest on the indemnity costs at a rate of 2½% above judgment rate from 27 June 2015 until payment;

(4) The sanctioned payment to be paid out from the court to the defendants through their solicitors, Clifford Chance.