PFEIFFER GmbH v. CHEUNG HAY KIT t/a SUN WAI CONSTRUCTION

CACV 245/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 245 OF 2013

(ON APPEAL FROM HCA NO. 1369 OF 2011)

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Hon Kwan JA (giving the Reasons for Judgment of the Court):

1.  This is an appeal against a costs order, brought with leave of the court below.

2.  On 24 October 2013, Zervos J gave judgment in favour of Pfeiffer GmbH (“Pfeiffer”), the plaintiff in the action, in the sum of $1,024,525.  The plaintiff’s claim was for damages for the times its crew and equipment stood idle while waiting for the defendant, Sun Wai Construction (“SWC”), to complete preparatory works so that the plaintiff could proceed with the rehabilitation works of water mains.  The amount claimed by the plaintiff under eight invoices was in the total sum of $3,025,650, covering idling times during various periods from August 2005 to December 2007.  The judge disallowed the claims of idling under the last four invoices, which amounted to $1,373,400, nearly half the total amount claimed.  The amount of damages eventually awarded in the sum of $1,024,525 represented about one-third of the total claim under the eight invoices.

3.  After considering written submissions of the parties, the judge handed down his ruling on costs on 21 November 2013 (“the Ruling”).  He decided to depart from the general rule that costs should follow the event and ordered the defendant to pay the plaintiff only half of the costs of the action.

4.  He gave the plaintiff leave to appeal against the Ruling in a decision on 16 December 2013 (“the Decision”).

5.  After hearing the parties, we dismissed the plaintiff’s appeal with costs to the defendant.  These are the reasons for our judgment.

The applicable principles

6.  The appeal court will not interfere with the exercise of a judge’s discretion in the award of costs unless it was shown that he failed to exercise the discretion, or exercised it upon a false principle, or did not exercise it judicially, or the exercise of discretion was demonstrably flawed (Hong Kong Civil Procedure 2015, vol 1, §62/2/11).

7.  For the present case, the relevant provisions in the Rules of the High Court governing the exercise of discretion as to costs are Order 62 rules 3(2), 5 and 7, which contain amendments introduced as a result of the Civil Justice Reform.  The impact of these amendments is similar to the effect of the Civil Procedure Rules as commented upon by Lord Woolf MR in AEI Rediffusion Music Ltd v Phonographic Performance Ltd [1999] 1 WLR 1507 at 1522H to 1523B and 1523H, which have been adopted by Cheung JA in giving the judgment of the court in Wong Kam Tong v Tin Shing Court, Yuen Long (IO) (No 2) [2012] 2 HKLRD 1128 at §§11 to 13.

8.  The relevant comments of Lord Woolf read as follows:

“I draw attention to the new Rules because, while they make clear that the general rule remains, that the successful party will normally be entitled to costs, they at the same time indicate the wide range of considerations which will result in the court making different orders as to costs. From 26 April 1999 the "follow the event principle" will still play a significant role, but it will be a starting point from which a court can readily depart. This is also the position prior to the new Rules coming into force. The most significant change of emphasis of the new Rules is to require courts to be more ready to make separate orders which reflect the outcome of different issues. In doing this the new Rules are reflecting a change of practice which has already started. It is now clear that too robust an application of the "follow the event principle" encourages litigants to increase the costs of litigation, since it discourages litigants from being selective as to the points they take. If you recover all your costs as long as you win, you are encouraged to leave no stone unturned in your effort to do so.”

“The “well established practice” on which Nourse L.J. based his third principle[1] is, as I have already indicated, less generally followed than it has been in the past and it is no longer necessary for a party to have acted unreasonably or improperly to be deprived of his costs of a particular issue on which he has failed.”

9.  After quoting the above comments, Cheung JA went on to say in §13 in Wong Kam Tong:

“One can see immediately that Hong Kong has adopted a similar approach under O.62 r.3(2) in terms of the “follow the event principle” and its departure and also under r.5 in terms of the consideration whether a party has succeeded on part of the case, even if he has not been wholly successful, and conduct. In our view, one can say with equal confidence that after 2 April 2009, while the “follow the event principle” will still play a significant role in Hong Kong, it will nonetheless only be a starting point from which the Court can depart, the rationale being that a mechanistic adoption of the “follow the event principle” may result in parties incurring unnecessary costs in civil litigation. We do not consider the provisions of O.62 r.7(1) (which enable the Court to disallow a party’s costs or order it to pay the other party’s costs if there is anything done or omitted which is improper or unnecessary) will by itself curtail the power of the Court under the new regime. The amendment to r.7(2) had specifically added the new (aa), namely, regard to the underlying objectives set out in O.1A, r.1. In our view O.62 r.7 enables the Court to address the costs issue when there are improper or unnecessary acts or omissions but it does not confine the Court’s power only to such situations.”

10.  The guiding principles with regard to the exercise of discretion on costs are as stated in the passages quoted above.

The judge’s exercise of his discretion on costs

11.  The judge decided to depart from the general rule that costs should follow the event for two reasons[2].

12.  Firstly, he found that the plaintiff’s claim under the last four invoices was “doomed to fail” due to the lack of evidence[3].  He had “practically no evidence” to support these four invoices; no evidence as to when, if at all, the Pfeiffer crew came to Hong Kong from July 2007 onwards; no evidence if any work orders were issued from July 2007 onwards, and if they were, no information or particulars in relation to them; no evidence if there were any agreed schedules of works or at least a failure by SWC to perform the works and whether or not such schedules were followed; no evidence if Pfeiffer’s system was idle except what was claimed in the invoices, or how SWC caused Pfeiffer’s system to be idle.  In comparison with the other invoices that Pfeiffer was relying on in its claim, the evidence was far more extensive and included documentary evidence in the form of minutes of meetings for the works, schedules of works and written and electronic communications.  These documents were absent in relation to the last four invoices[4].

13.  Secondly, he found that the plaintiff’s delay of three and a half years in commencing the proceedings was “inordinate and unreasonable”[5].

The plaintiff’s arguments

14.  Mr Damian Wong contended on behalf of the plaintiff that the judge’s departure from the general rule that costs should follow the event was demonstrably flawed so that his costs order should be set aside and the defendant should be ordered to pay the plaintiff all its costs of the action.

15.  He submitted that the plaintiff’s failure in its claim in respect of the last four invoices due to insufficient evidential support should not, in itself, justify the departure from the general rule, as it is not uncommon in a commercial dispute that the winning party may fail in some items of its claim, quoting from Commissioner of Inland Revenue v HIT Finance Ltd, FACV Nos 8 and 16/2007, 26 June 2008, at §6.  He prayed in aid §7 of HIT Finance and Moulin Global Eyecare Holding Ltd (in liquidation) v Olivia Lee Sin Mei, HCA 167/2008, 3 June 2009, §16 for the statement that there is a discretion to deprive a successful party of the whole or part of his costs because he had caused a “significant increase” in the length or costs of the proceedings by raising issues on which he did not succeed, which was based on the third principle of Nourse LJ in In re Elgindata Ltd (No 2).  He made the point there was no suggestion the plaintiff had caused a significant increase in the length or costs of the proceedings by claiming damages in the last four invoices and asserted that the time spent at trial on the last four invoices was minimal.

16.  Mr Wong further submitted it could not be said that the plaintiff was unreasonable to pursue all eight invoices in its claim.  He pointed out that all eight invoices were issued contemporaneously between 2005 and 2007, so the claim in respect of the last four invoices was not invented for the purpose of exaggerating the plaintiff’s claim when the action was commenced in 2011.  Moreover, the dispute relating to the last four invoices was not so distinct and separate that the decision of it constitutes an ‘event’.

17.  As for the delay in commencing proceedings, he submitted that this delay of three and a half years would not have any significant impact on costs and in any event the plaintiff was already penalised as the judge had refused to award interest on damages for the period before the issue of the writ.

Our decision

18.  We are not persuaded that the judge’s exercise of his discretion on costs was demonstrably flawed or that there is any basis to interfere with his discretion.

19.  The judge was clearly aware of the general rule and his discretion to depart from it, and that he was to consider “the justice of the situation and examine all the factors and circumstances”, taking into account “the extent to which a party has succeeded or lost as the case may be, the nature and basis of the case, and how it has been conducted and presented throughout the proceedings, including the efforts made by the parties to resolve issues in the case, and whether or not assistance has been rendered by the parties to the court for the prompt and proper disposal of the case”[6].  He had referred to Order 62 rule 5[7] and, bearing in mind the underlying objectives in Order 1A, noted that “an unsubstantiated claim whether it represents the whole or part of the action can impact on proceedings inappropriately or adversely in a number of ways”[8].

20.  It is apparent that the judge had correctly moved away from the more restrictive approach in the cases decided before the Civil Justice Reform.  The authorities cited by Mr Wong (HIT Finance and Moulin Global Eyecare) must now be read in the light of the amendments to the Rules of the High Court as a result of the Civil Justice Reform.  Although the general rule that costs will follow the event still plays a significant part, it is but a starting point from which the court is more ready to depart, mindful that too robust an application of the general rule encourages litigants to increase the costs of litigation since it discourages them from being selective as to the points they take.  And it is no longer necessary for a party to have acted unreasonably or improperly to be deprived of his costs of a particular issue on which he has failed.

21.  Under Order 62 rule 5(1)(e), the court may take into account “the conduct of all the parties”.  Rule 5(2) provides that “conduct” for this purpose includes “(a) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue; (b) the manner in which a party has pursued or defended his case or a particular allegation or issue; (c) whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim; and (d) conduct before, as well as during, the proceedings”.

22.  We agree with Mr Sanjay Sakhrani that the judge must have the matters stated in Order 62 rule 5(2) in mind when he exercised his discretion to deprive the plaintiff of half of its costs for the reasons he gave.  He was in the best position to decide how his discretion should be exercised in the light of the evidence adduced at the trial and the litigation conduct of the parties.  The plaintiff took no issue with the judge’s assessment that its claim in respect of the last four invoices was “doomed to fail”.  As submitted by Mr Sakhrani, the state of the evidence that could have been adduced in support of these invoices should have been apparent to the plaintiff from the start.  And yet it chose to pursue a claim that was nearly half of the total amount claimed and was doomed to fail.  That is clearly a matter the judge was entitled to take into account, as well as the considerable delay in pursuing the claim, which was conduct before the proceedings.

23.  Insofar as it was argued that a successful party should be deprived of his costs only in the situation where the issue on which he failed had caused a significant increase in the length or costs of the proceedings, we would reject this argument.  The court should eschew a mechanistic or restrictive approach in exercising its discretion as to costs in view of the amendments to the relevant provisions in the Rules of the High Court.  Besides, this argument makes no sense in a case where a claim is doomed to fail due to the lack of evidential support, as naturally little time and costs would be spent where no or little evidence is adduced in support of such a claim.

24.  If delay in pursuing the claim had been the only factor taken into consideration by the judge in depriving the plaintiff of part of its costs, Mr Wong might have a point that the plaintiff should not be penalised for this again as the judge had already decided not to award interest on damages for the delay of three and a half years in bringing proceedings.  But that was not the only factor the judge took into account.  On a proper reading of the Ruling, in particular §9, it is apparent that the plaintiff had chosen to pursue a claim which was doomed to fail for lack of evidential support was the far more important consideration.

25.  The judge exercised his discretion judicially and we could discern no error of principle.  For all the above reasons, we dismissed the plaintiff’s appeal with costs.