WIN WIN WAY CONSTRUCTION CO., LTD v. JUDEA CONSTRUCTION CO LTD AND ANOTHER

HCCT 37/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS NO 37 OF 2016

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DECISION

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A. Introduction

1.  The dispute of this action relates to a construction project known as “Proposed Residential Development at Nos 197 – 203, Castle Peak Road, Cheung Sha Wan, Kowloon” (the “Project”).

2.  The Employer of the Project is Profit Share Corporation Limited (the “Employer”). The plaintiff is the main contractor of the Project.  The 1^st defendant is the plaintiff’s sub-contractor.  The 2^nd defendant is a director and ultimate indirect shareholder of the 1^st defendant.

3.  It is not in dispute that the 1^st defendant encountered financial difficulty at some stage of the Project.  As a result, the parties entered into an arrangement contained in a written sub-contract dated 5 October 2014 signed between the plaintiff, the 1^st defendant and the 2^nd defendant (the “Sub-Contract”), whereby the plaintiff would provide financial support to the 1^st defendant by way of making direct payments to the sub-sub-contractors.

4.  For the present purposes, the material clauses contained in the Sub-Contract are as follows:

(a)   Clause 2:

“ For each interim and final payment, [the plaintiff] will deduct 7% of the contract income from source as their management fee. The remaining will be used to provide direct payment to sub-contractors. All sub-contractor payments should be authorized by [the 1^st defendant] before payment being made by[the plaintiff]. After deduction of all expenses and necessary payments, the remaining sum should be paid directly to [the 1^st defendant]. If the project income is less than the necessaryexpenses and subcontract payments, [the plaintiff] will providefinance to settle all these payments.This ‘in-advance’ amountprovided by [the plaintiff] should be fully repaid in next interim payment by the Employer.”

(b)   Clause 3:

“ Within fourteen days after the final account settlement, [the plaintiff] and [the 1^st defendant] will reach settle between themselves.”

(c)   Clause 4:

“ In case the project income ([the 1^st defendant’s] entitlement portion, ie 93% of total project income from the Employer) is less than all necessary expenses and subcontractor payments paid by [the plaintiff] directly to subcontractor, [the 1^st defendant] should re-pay [the plaintiff] all outstanding amount within 14 days after servant demand note from [the plaintiff] to [the 1^st defendant].”

(d)   Clause 5:

“ [The 1^st defendant] and [the 2^nd defendant] should provide unconditional joint and several guarantee for all outstanding amount due from [the 1^st defendant] to [the plaintiff].”

5.  In this action, the plaintiff sues the 1^st and 2^nd defendants for the sum of $9,914,006.94 under the Sub-Contract.  The said sum of $9,914,006.94 represents the difference between (a) the payments and expenses in the total sum of $92,913,869.46 paid by the plaintiff on behalf of the 1^st defendant, and (b) 93% of the project income of HK$89,247,164.00 certified under Interim Payment Certificate No 24 (“IPC-24”) of the Project receivable by the 1^st defendant as of 30 September 2015.

6.  It is the 1^st and 2^nd defendants’ case that the plaintiff’s claim is premature since, on the proper construction of the Sub-Contract, their liability to pay (if any) would not arise unless and until the conclusion of the final account between the plaintiff and the Employer. 

7.  Further, the 1^st and 2^nd defendants dispute certain items of those expenses which are said to have been paid by the plaintiff, and they also allege that the 1^st defendant had paid some expenses which should have been paid by the plaintiff under the Sub-Contract.

B.   Procedural history

8.  This action was commenced on 9 December 2015 under HCA 2920/2015.   On 18 July 2016, the parties by consent transferred this action to the Construction and Arbitration List under the present action number.  Pursuant to the Order made by 7 October 2016, this action was set down for trial on 17 November 2016 with 7 days reserved, and the trial was subsequently fixed to commence on 13 September 2017.

9.  On 8 February 2017, the plaintiff issued a notice of arbitrationto commence an arbitral proceedings against the Employer (the “Arbitral Proceedings”) which seeks to resolve the disputes between the plaintiff and the Employer in relation to the main contract, including (but not limited to) the disputes relating to the plaintiff’s entitlement to certain extension of time, the Employer’s entitlement to liquidated damages, and the plaintiff’s liability in respect of defective works.

10.  On 26 June 2017, by a “without prejudice save as to costs” letter from its solicitors[1], the plaintiff for the first time informed the 1^st and 2^nd defendants of the existence of the Arbitral Proceedings and the fact that the tribunal for such proceedings would soon be formally constituted.  On this basis, the plaintiff proposed to adjourn this action sine die pendingresolution of the account for the main contract in the Arbitral Proceedings.‌

11.  On 3 July 2016, an arbitrator was jointly appointed by the Hong Kong Institute of Architects and the Hong Kong Institute of Surveyors to hear and determine the Arbitral Proceedings.

12.  On 11 July 2017, by a “without prejudice save as to costs” letter from their solicitors, the 1^st and 2^nd defendants rejected the plaintiff’s proposal, stating that their position had always been that the disputes in this action could only be resolved after the conclusion of the final account of the main contract.

13.  On 7 August 2017, the plaintiff took out a summons asking for an order that this action be stayed sine die with liberty to restore pending determination of the final account for the main contract works in the Arbitral Proceedings between the plaintiff and the Employer (the “Stay Summons”), which was fixed to be heard before Anthony Chan J at the pre-trial review on 9 August 2017 (the “PTR”).

14.  At the PTR, the 1^st and 2^nd defendants opposed the Stay Summons.Accordingly, Anthony Chan J gave directions to the parties to file evidence on the Stay Summons and adjourned the same to be heard on the first day of the trial.  Pursuant to such directions, the 1^st and 2^nd defendants filed their affirmation in opposition to the Stay Summons on 16 August 2017.

15.  On 16 August 2017, the plaintiff issued another summons returnable on the first day of the trial, seeking an order that leave be granted to the plaintiff to discontinue this action in the event of the Court dismissing the Stay Summons (the “Discontinuance Summons”).  On the face of the Discontinuance Summons, it is quite clear that the plaintiff’s then position was that it would only seek leave to discontinue this action if the Court was to refuse its Stay Summons.

16.  On the same day, by an “open” letter from its solicitors, the plaintiff urged the 1^st and 2^nddefendants to withhold any further preparation of the trial in view of the fact that the trial of this action would either be stayed or discontinued.

17.  On 1 September 2017, the plaintiff’s solicitors informed this Court that the plaintiff had decided not to pursue the Stay Summons and would seek leave to withdraw the same with costs to the 1^st and 2^nd defendants, to be taxed if not agreed.

18.  On 5 September 2017, the 1^st and 2^nd defendants’ solicitors wrote to this Court stating that they would not oppose the plaintiff’s application to withdraw the Stay Summons or to discontinue this action, but that they would like to make submissions in respect of the costs order sought under the Discontinuance Summons. 

C.   Issues for determination

19.  In view of the position taken by the parties, I granted leave tothe plaintiff to withdraw the Stay Summons and to discontinue this action at the beginning of the hearing.

20.  Originally, there was dispute between the parties as to the terms of the condition that this Court should impose on the bringing of subsequent action by the plaintiff.  At the hearing, Ms Wong, counsel for the 1^st and 2^nd defendants, very sensibly agreed to the formulation of the condition proposed by Mr Chong and Mr Yan, counsel for the plaintiff,with one minor amendment in relating to its wording.  I, therefore, order that unless with leave of the Court, no proceedings be instituted by the plaintiff on the same or substantially the same issues raised in the Statement of Claim.

21.  What remains to be determined by this Court is the question of costs.

22.  Regarding the Stay Summons, there is no dispute that the plaintiff should bear costs.There is, however, disagreement as to whether such costs should be taxed on indemnity basis.

23.  As to the Discontinuance Summons:

(a)   The plaintiff’s position is that save for (i) costs order previously made and (ii) costs of and occasioned by the preparation of an account between the parties, the plaintiff shall bear the costs of the action (including the counsel brief for the trial) up to the date of the PTR (ie 9 August 2017).  Thereafter, the 1^st and 2^nd defendants shall bear the plaintiff’s costs.

(b)   As far as the 1^st and 2^nd defendants are concerned, they agree that any costs order to be made should not disturb the costs order previously made.  They, however, disagree with the plaintiff’s suggestion that the costs relating to the preparation of an account between the parties should be carved out.  Further, they also contend that the plaintiff should bear the costs of the entire action, not just up to the date of the PTR.  Furthermore, they also ask the plaintiff to bear such costs on indemnity basis.

24.  I will deal with the differences between the parties on the question of costs in the ensuing sections.

D.   Costs after the PTR

25.  The general rule is that a plaintiff discontinuing a claim should pay the defendant’s costs.  That said, the Court has complete discretion in dealing with the issue of costs and the guiding principle is fairness and justice in the circumstances.To persuade the court to departfrom the general rule, the minimum a plaintiff has to do is to show that the discontinuance is for reasons other than an acknowledgement of defeat or likely defeat.  However, costs may still be ordered against the plaintiff where justice requires the defendant should recover his costs even when the plaintiff has discontinued the proceedings for reasons other than the certainty of defeat: Coqueen Co Ltd v Chui Wai Kwan & Ors(HCMP 438/2010, 8 December 2015) per To J at paras 35 – 44.

26.  As noted above, Mr Chong on behalf of the plaintiff does notdispute that the plaintiff should bear the costs of the action in accordance with the general rule.  In fact, Mr Chong confirms that the plaintiff does not seek to argue that it would succeed if the trial were to proceed.  Mr Chong, however, submits that the general rule should not apply after the PTR on 9 August 2017, as a result of the development at that hearing.

27.  Mr Chong argues that at the PTR, Anthony Chan J raised the issue of the oncoming trial being academic.  In light of such indication from the learned Judge, the 1^st and 2^nd defendants should have agreed to the immediate disposal of the action (whether by stay of the entire action or by adjournment of the trial) such that the question of costs could have been dealt with forthwith by Anthony Chan J at the PTR, and that further costs after the PTR could have been saved.  Mr Chong emphasizes that such matters justify this Court ordering the 1^st and 2^nd defendants to bear the plaintiff’s costs after the PTR under Order 62, rule 7 of the Rules of the High Court (“RHC”).

28.  With respect, I am unable to accept Mr Chong’s submissions.

29.  The only application then placed before Anthony Chan J at the PTR was the Stay Summons.  As fairly acknowledged by Mr Chong during the course of his submission, there is a huge difference between a stay and a discontinuance of an action.  A stay does not bring an end to an action; rather it leaves the action hanging over the head of the oppositeparty.  Given that the 1^st and 2^nd defendants faced what they perceived to be a premature action, they were in my view fully entitled to insist on it being brought to an end, rather than simply being stayed or adjourned.

30.  Further, it is in my view wholly unjustified for Mr Chong tolay the blame on the 1^st and 2^nd defendants for failing to secure the speedy resolution of the matter.  No matter what was fallen from the bench at the PTR, the plaintiff is the only party who can decide whether it should or should not continue the prosecution of the action.  The Court cannot force the plaintiff to discontinue the action, nor can the 1^st and 2^nd defendants.  At the hearing, Mr Chong confirmed that at the PTR, the plaintiff did not offer to discontinue this action against the 1^st and 2^nd defendants, nor did it offer to bear the 1^st and 2^nd defendants’ costs of this action.  In these circumstances, I simply cannot see what the 1^st and 2^nd defendants could have reasonably done to save costs and court time.

31.  Furthermore, it appears to me that this hearing is in any event unavoidable in view of the position previously taken by the plaintiff.  In the Discontinuance Summons, the plaintiff simply asked for the costs of the action (including the Discontinuance Summons) be provided for.  By a letter dated 22 August 2017, the 1^st and 2^nd defendants’ solicitors asked the plaintiff to clarify who should bear the costs of the action.  By a letter in response dated 25 August 2017, the plaintiff’s solicitors simply stated that the plaintiff would take issue on who should be entitled to costs and the extent of the same.  Viewed in this light, there is every reason for the 1^st and 2^nd defendants to prepare for this hearing in order to deal with the question of costs. 

32.  For the above reasons, I am unable to see any justification for this Court to depart from the general rule that a plaintiff discontinuing his claim should bear the defendant’s costs, even after the PTR on 9 August 2017. 

33.  That said, I agree with Mr Chong’s more limited argument that the 1^st and 2^nd defendants should not be allowed to hold the plaintiff liable for costs incurred by them after 16 August 2016 for the preparation of the trial. 

34.  On 16 August 2016, the plaintiff by the issue of the Discontinuance Summons made it clear that it had no intention to pursue this action any further.  Also, on the same day, the plaintiff’s solicitors issued a letter confirming that the plaintiff would not proceed with the trial and urging the 1^st and 2^nd defendant to withhold preparation for the trial in order to save costs.  In the circumstances, after 16 August 2017, it would be unnecessary for the 1^st and 2^nd defendants to incur further costs for the preparation of the trial after 16 August 2017.

35.  At the hearing, Ms Wong confirmed that the 1^st and 2^nd defendants had ceased to incur further costs in connection with the preparation of the trial after 16 August 2017, and that they would have no objection to this Court making clear in the costs order that any costs incurred by her clients for the preparation of the trial after 16 August 2017 would be disallowed. 

E.   Costs for preparing accounts

36.  Notwithstanding that Mr Chong concedes that the plaintiff has to bear the defendant’s costs of the action (at least up to 9 August 2017), he submits that the disbursement costs on account between the plaintiff and the 1^st defendant should be carved out from the other costs incurred in this action.

37.  Mr Chong argues that in the present case, the main contract works were sub-contracted by the plaintiff to the 1^st defendant in their entirety.  The 1^st defendant has a duty to submit a final account to the plaintiff under the Sub-Contract, and that such account would be the sameas the final account to be submitted by the plaintiff to the Employer under the main contract. Hence, despite the discontinuance of the action, the costs incurred by the parties in preparing the account would not be wasted, and that it would lead to absurdity if the plaintiff were required to bear such costs under the costs order made in this action.

38.  With respect, I cannot accept Mr Chong’s submission.

39.  As rightly pointed out by Ms Wong, the issues involved in the disputes between the plaintiff and the 1^st defendant under the Sub-Contract are very different from the disputes between the plaintiff and the Employer under the main contract.  The disputes between the parties in this action concern the payments to the sub-sub-contractors as well as theparties’ respective entitlements under the Sub-Contract.  Such disputes are different from the disputes between the plaintiff and the Employer in relation to the final account.  

40.  Further, Ms Wong also rightly points out that the subject matter of this action relates to IPC-24, which is one of the many interim payment certificates issued during the course of the Project.  By their nature, such interim certificates would be superseded by other subsequent interim certificates and ultimately by the final account.  Thus, whatever disputes the parties may have in relation to IPC-24 in this action, such disputes may cease to be of any relevance by the time when the final accounts are prepared.

41.  I would also add this observation: Since there is only very scant material about the Arbitral Proceedings placed before me, I am unable to assess or form any view on Mr Chong’s submission on this point.  Given that it is the plaintiff who asks this Court to exercise its discretion to depart from the general rule by carving out those disbursement costs incurred in relation to the preparation of account, the burden must be rested upon the plaintiff to satisfy this Court that it is just and fair to do so.  In my judgment, the plaintiff has plainly failed to discharge that burden. 

42.  Mr Chong also argues that this action is one necessarily involving the taking of an account, and he seeks to pray in aid of RHC Order 43, rule 1(1) to support his contention that the costs incurred in the accounting exercise should be carved out from the costs order in favour of the 1^st and 2^nd defendants.

43.  With respect, I am unable to see the relevance of RHC Order 43, rule 1(1) to the question of costs.  Order 43, rule 1(1) is not a rule concerning costs.The characterization of the plaintiff’s claim as an action for account, which I in any event do not agree, would not provide arational basis for this Court to depart from the general rule that a plaintiff seeking to discontinue his claim has to bear the defendant’s costs.

44.  For the above reasons, I am unable to accede to Mr Chong’s request to carve out the disbursement costs relating to the preparation of the account between the plaintiff and the 1^st defendant from such costs order made in favour of the 1^st and 2^nd defendants.

F.   Indemnity costs

45.  Ms Wong asks this Court to order costs on indemnity basis. 

46.  She refers to the decisions of the Court of Final Appeal in Town Planning Board v Society for Protection of the Harbour Ltd (No 2)(2004) 7 HKCFAR 114 at paras 16 – 18 and emphasizes that whilst the successful party has to show some “special or unusual feature” in order to justify indemnity costs, the Court’s discretion is not to be fettered or circumscribed beyond the requirement that indemnity costs must be “appropriate”.  Further, in the exercise of its discretion, the Court can consider any matter relating to the litigation and the parties’ conduct in it, and also to the circumstances leading to the litigation.

47.  On this point, Mr Chong submits that the Court’s jurisdictionto award indemnity costs is not engaged since the plaintiff has discontinued this action and, hence, there is no “successful party”.  Mr Chong has not provided any authority to support this proposition.  I cannot see why a defendant is not a “successful party” when the plaintiff has withdrawn or discontinued a claim. Further, I am also of the view that Mr Chong’s proposition is against common sense in that it is tantamount to a complete bar to the Court ordering indemnity costs against a party withdrawing or discontinuing a claim.  This cannot be right.

48.  Hence, I am of the view that I do have jurisdiction to order indemnity costs.  The question is whether or not I should exercise my discretion to make such order in light of the guidance laid down by the Court of Final Appeal in Town Planning Board.

49.  Ms Wong submits that the plaintiff’s claim is unmeritorious.  This is because it is clear from the Sub-Contract that the parties’ liabilitiesonly arise after the conclusion of the final account, and that the plaintiff’s claim in this action is premature.

50.  Further, Ms Wong submits that this action has been brought and prosecuted in a vexatious manner to cause trouble to the 1^st and 2^nd defendants.  In this regard, she points to the following conduct and circumstances relating to this action:

(a)   The plaintiff was fully aware of the 1^st defendant’s financial difficulty.  Despite such knowledge, the plaintiff issued statutory demands in November 2015 and later brought this action in December 2015 against the 1^st and 2^nd defendants.

(b)   Before the commencement of this action, the 1^st and 2^nd defendants’ former solicitors had written a letter to the plaintiff on 4 December 2015 informing them that the claim would be premature since, pursuant to the terms of the Sub-Contract, the parties’ liabilities would not arise until after the conclusion of the final account.

(c)   Notwithstanding that the plaintiff’s case against the 1^st and 2^nd defendant is weak, the plaintiff still insisted on bringing this action. Yet, the plaintiff itself had from time to time delayed in taking steps in the prosecution of this action.  In particular, the plaintiff only took out the Stay Summons, and subsequently the Discontinuance Summons, when the case was on the verge of trial.

51.  At the heart of Ms Wong’s submission is that this action was brought and prosecuted by the plaintiff for the purpose of exploiting the financial vulnerability of the 1^st and 2^nd defendants.

52.  In my view, one very important element of Ms Wong’s submission is the strength of the defendants’ case or, put it differently, the lack of merits of the plaintiff’s case. 

53.  Whilst I can see the force of Ms Wong’s submission that upon the proper construction of the Sub-Contract, the plaintiff’s claim is premature since no liability would arise until after the conclusion of the final account, I am unable to say that the defendants must have prevailed on this point had there been a trial proper.

54.  It is now well established by the Court of Final Appeal in Fully Profit (Asia) Ltd v Secretary for Justice(2013) 16 HKCFAR 351 at para 15 that context is of great importance in construing the meaning of a contractual term. In the absence of a trial proper in which the context surrounding the conclusion of the Sub-Contract would be fully investigated, I am unable to say with certainty that the 1^st and 2^nd defendants must prevail on the point that the plaintiff’s claim is premature.  At the end of the day, the Sub-Contract does not contain any express prohibition against the parties seeking payments from the other side before the conclusion of the final account.

55.  In this regard, I accept Mr Chong’s submission that if this is really an open-and-shut case, the 1^st and 2^nd defendants could have applied to strike out the plaintiff’s claim, or to determine the issue concerning the construction of the Sub-Contract under RHC Order 14A, or to have the issue tried as a preliminary issue.  I fully appreciate that the 1^st and 2^nd defendants are not obliged to choose these options.  However, the fact that the 1^st and 2^nd defendants did not explore these possibilities to bring an end to what they perceived to be a plainly hopeless case militates against their suggestion that the plaintiff’s case is so unmeritorious to the extent justifying an order of indemnity costs.

56.  As to Ms Wong’s contention that this action has been brought and prosecuted for the purpose of exploiting the defendants’ financial vulnerability, given my view on the merits of the case, I do not think there are sufficient primary facts before me justifying the drawing of such serious inference. 

57.  The plaintiff might have a weak case. It, however, does not follow that this action was brought by the plaintiff with ulterior motives.  Moreover, as pointed out above, if the 1^st and 2^nd defendants are so adamant that this action is hopeless, they could have stopped the plaintiff by making appropriate interlocutory application.

58.  For the present purposes, I am prepared to accept Ms Wong’s submission that there might be certain degree of tardiness on the part of the plaintiff in the prosecution of this action.  This, without more, is in my view insufficient to ground an inference that this action is a tactical manoeuver engineered by the plaintiff to exploit the defendants’ financialvulnerability, nor is this on its own sufficient to justify this Court ordering costs on indemnity basis.

59.  Having considered all the relevant circumstances, I do not think it is appropriate for me to order costs on indemnity basis.

G.   Disposal

60.  For the above reasons, I make the following orders:

(a)   Leave be granted to the plaintiff to withdraw the Stay Summons;

(b)   Costs of the Stay Summons be paid by the plaintiff to the 1^st and 2^nd defendants, to be taxed if not agreed;

(c)   Leave be granted to the plaintiff to discontinue this action;

(d)   Unless with leave of the Court, no proceedings be instituted by the plaintiff on the same or substantially the same issues raised in the Statement of Claim filed in this action;

(e)   Without prejudice to any costs order previously made by theCourt, costs of this action (including the counsel brief for the trial) be paid by the plaintiff to the 1^st and 2^nd defendants, to be taxed if not agreed, save that any further costs incurred by the 1^st and 2^nd defendants after 16 August 2017 for the preparation of the trial should be disallowed.

61.  Regarding the costs of the hearing, I make an order nisi that the costs of the hearing be paid by the plaintiff to the 1^st and 2^nd defendants, to be taxed if not agreed.  I consider that the 1^st and 2^nd defendants are the parties who are substantially successful at the hearing, and that they have to come before me in order to get a costs order in their favour in view of the position taken by the plaintiff.

62.  Lastly, I wish to thank counsel for their assistance.