INSTITUTE OF MANAGEMENT ACCOUNTANTS, INC v. MAESC CO. LTD

HCA 280/2023

[2025] HKCFI 971

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 280 OF 2023

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DECISION ON COSTS

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1.  For determination by paper disposal are (a) the costs of the Defendant (“MCL”)’s summons dated 30 November 2023 (“the Summons”), and (b) the costs of this action.

2.  These disputes on costs arose under the following circumstances.

3.  On 26 October 2022, the Plaintiff (“IMA”), a non-profit corporation domiciled in  New Jersey of the United States, obtained a judgment in the District Court of New Jersey (“the NJ Court” and “the NJ Judgment”) against MCL, a limited company incorporated in Hong Kong, for the sum of US$16,658,420.80 on a claim that MCL had, in breach of contractual and fiduciary obligations, abused and misappropriated copyrighted materials obtained from IMA to develop a competing product.

4.  The NJ Judgment was a default judgment granted in default of MCL’s failure within the prescribed time to file a Response to, or otherwise defend, IMA’s Complaint.

5.  On 24 February 2023, IMA commenced this action in Hong Kong to enforce the NJ Judgment at common law. It endorsed its Statement of Claim on the Writ.

6.  MCL defaulted in filing its Defence in time.

7.  On 13 April 2023, IMA applied for a final judgment in default to be entered. On the next day, ie. 14 April 2023, MCL applied by summons for an extension of time to file and serve its Defence. MCL’s time summons was opposed, and affirmations were filed by both parties.

8.  On 31 July 2023, MCL applied to the NJ Court to vacate the NJ Judgment.

9.  On 5 September 2023, after a contested hearing, Master Francis Lok dismissed MCL’s time summons herein.

10.  On 10 October 2023, a default final judgment in the said sum with interest was entered against MCL in this action (“the Default Judgment”).

11.  On 9 November 2023, IMA served a statutory demand on MCL based on the Default Judgment.

12.  On 30 November 2023, MCL took out the Summons (a) for an order to set aside the Default Judgment on the ground that it has a meritorious defence and (b) for a stay of execution of the Default Judgment pending the determination of the setting aside of the Default Judgment or the determination of MCL’s application to vacate the NJ Judgment.

13.  At the substantive hearing of the Summons on 12 March 2024, this Court adjourned the hearing to 19 July 2024 pending the decision of MCL’s application to vacate the NJ Judgment which, as indicated by the parties, was expected to be rendered shortly.

14.  On 23 April 2023, the NJ Court delivered an Opinion (“the NJ Opinion”) and ordered the vacation of the NJ Judgment.

15.  On 24 April 2024, the NJ Court directed MCL to submit its Defence on or before 24 June 2024, failing which it will face default again.

16.  On 23 June 2024, MCL filed a motion in the NJ Court to dismiss IMA’s claim in the US action on the ground of lack of jurisdiction. This motion is yet to be determined by the NJ Court.

17.  By the parties’ joint application herein by a Consent Summons, and on 17 July 2024, this Court ordered by consent that the Default Judgment be set aside, IMA do have leave to discontinue this action and the said disputes on costs be disposed of on papers.

18.  This is my decision.

Costs of the Summons

19.  It is not disputed that the Default Judgment was regularly entered and that by the Summons, MCL was seeking to have it set aside on the basis that there was a meritorious defence that has a real prospect of success.

20.  Mr Yeung, counsel for IMA, relied on the well established general rule, namely, that because such a defendant is seeking an indulgence to absolve itself from the consequence of its own default, the costs of such an application should be borne by it though it was successful. He submitted that this general rule should be adhered to here and MCL should bear IMA’s costs of the Summons.

21.  Mr Liu, counsel for MCL, submitted that MCL is the ultimate successful party for the Summons in that the parties by consent set aside the Default Judgment upon MCL’s successful vacation of the NJ Judgment and that at the hearing on 12 March 2024, this Court imposed an interim stay of the execution of the Default Judgment pending the resumed hearing.

22.  Mr Liu also criticized IMA’s conduct as unreasonable in that IMA had twice refused MCL’s invitations, by 2 solicitors’ letters respectively dated 3 and 21 November 2023, to withhold action to enforce the Default Judgment pending the determination of MCL’s application to the NJ Court to vacate the NJ Judgment. He submitted that by reason of such unreasonable conduct, time and costs were wasted, which IMA ought to pay.

23.  I have no hesitation in rejecting MCL’s such submission. The said general rule on costs of an application by a defendant to set aside a regularly entered judgment was grounded very much on the fact that it was because of the defendant’s own default that allow the default judgment to be entered, and that a defendant is seeking the indulgence of the Court. Mr Liu did not dispute that such was the situation here. In fact, in its written submissions, MCL made no reference at all to its own default nor attempted to argue that there was any justification for MCL’s default in this action[1]. There is no authority cited by Mr Liu, or any contentions developed, as to why the usual rule on costs “following the event” would be applicable despite and instead of the said well-established rule, which is that albeit successful in setting aside the default judgment, the defaulting and applying party should pay the costs nevertheless.

24.  I also take particular note that in the NJ Opinion, the NJ Court (a) ruled against MCL’s contention that the NJ Court lacked jurisdiction and found that there was at least arguable basis for exercising personal jurisdiction over MCL[2], (b) found that MCL’s unexplained inaction contributed to its delay in responding to the Complaint[3] and MCL delayed for about half a year from the time it was aware of the NJ Judgment to taking action to vacate the NJ Judgment[4], (c) but opined that MCL has established a prima facie meritorious defence, and (d) by “a close call”[5] decided to vacate the NJ Judgment.

25.  Based on such findings by, and opinion of, the NJ Court, (a) I accept Mr Yeung’s submission that MCL has been trying to delay IMA from obtaining redress, (b) I do not accept that IMA had behaved unreasonably in refusing to withhold the execution of the Default Judgment as requested by MCL as I consider that MCL had not had a strong or obvious case to vacate the NJ Judgment.

26.  I do not think the fact that I granted a temporary stay of the execution of the Default Judgment on 12 March 2024 would make MCL “the ultimate successful party”, as it contended, nor do I think it has any significant bearing on the exercise of my discretion on costs. It was upon being informed by the parties at the hearing that it was their understanding then that the determination by the NJ Court was imminent that the temporary stay was imposed as a good case management measure.

27.  In the circumstances, I would exercise my discretion and order that MCL do pay IMA its costs of the Summons.

28.  Having considered IMA’s Statement of Costs and MCL’s List of Objections, I agree in principle to many of the objections by MCL relating to solicitors’ costs though do not accept the amounts MCL proposed as reasonable. Counsel fees, including the fees for the submissions for these costs disputes, are reasonable, and I allow them in full. I would summarily assess IMA’s costs of the Summons at HK$300,000.

The remainder of the costs of this action

29.  As briefly mentioned above, the parties have engaged in a substantial contest over MCL’s time summons, the costs of which I understand has been dealt with; so has the costs of the Summons, as above. At issue therefore are the remainder of the costs of this action (“the Remaining Costs”), which are not much in terms of amount.

30.  Both parties claim to be entitled to the Remaining Costs in the rather less-than-usual circumstances of this case.

31.  As I understand it, Mr Yeung was contending that:

(a)  IMA was justified in commencing this action in that IMA had obtained the NJ Judgment and IMA was entitled, and was reasonable, to pursue its claim to its logical conclusion by seeking to enforce it in Hong Kong.

(b)  This action is withdrawn because of what MCL did after the issuance of the Writ which rendered it unnecessary or academic for IMA to proceed with this action, MCL could have taken a step either prior to this action being commenced or at an early stage of this action, so as to minimize the costs of this action, but it did not. He relied on Lo Siu Tim & Another v Fitness Together Limited & Others [2022] HKCFI 2946 at §§27-30, per DHCJ Leung (as he then was) and Re Peaktop Technologies (USA) Hong Kong Ltd [2007] 4 HKLRD 207 at §8, Barma J (as he then was).

(c)  MCL was at fault in not taking timely steps to vacate the NJ Judgment earlier before the commencement of this action or at the early stage of this action. The fault would put MCL akin to the defendant in an example cited by Potter LJ in RTZ Pension v ARC Ltd [1999] 1 All ER 532 at 541d-e that “in the case of a defendant perversely encourages a plaintiff into action by concealing the existence of a defence although reasonably invited prior to proceedings to make disclosure”.  Potter LJ opined there that such would be one of the rare occasion making it appropriate to order such a defendant to pay the costs of the plaintiff who discontinued the action.

(d)  The above constituted exceptional circumstances such that IMA, though discontinuing this action, should nevertheless be entitled to the Remaining Costs.

32.  He submitted that in any case, the discontinuance was not due to lack of merits in IMA’s claim, it would therefore be unjust for IMA to bear the costs of MCL.

33.  Mr Liu’s contentions advanced for MCL were :

(a)  He relied on the general rules, namely that costs should follow the event, and that a plaintiff who discontinues the action should pay the costs unless there are exceptional circumstances.

(b)  He submitted that MCL could not have acted soon enough to vacate the NJ Judgment, relying on what Ma claimed in §17 of his 3^rd affirmation that MCL only knew about the NJ Judgment in March 2023. He disputed that MCL was at fault as IMA claimed.

(c)  He submitted, without reasoning further, that the factual background matters deposed in §20(3) of the 3^rd affirmation of Ma (relating to certain events that occurred in 2019) and in §§74 to 84 of the 4^th affirmation of Ma (relating to events occurred between 2015 to 2021) should inform IMA of the defence of MCL. He then contended that IMA all along knew about MCL’s defence which the NJ Court opined as one that was prima facie meritorious. However, he did not go as far as submitting that IMA should not have commenced this action.

(d)  He essentially submitted that there were no exceptional circumstances shown.

34.  I am not persuaded by either party that the Remaining Costs should simply be awarded to IMA or to MCL as each has contended.

35.  I do not accept that this action has been rendered “unnecessary or academic” as one usually understands it in the context of adjudicating the costs of an action which was discontinued. Here, this action was discontinued because the very basis of IMA’s claim, the NJ Judgment, was successfully vacated by MCL, which therefore meant that MCL defeated IMA’s common law action.

36.  On the other hand, I accept that IMA acted reasonably and was justified to commence this action to enforce the NJ Judgment, when at the time the NJ Judgment was left standing and not challenged by MCL for 4 months and MCL only filed a motion to vacate the NJ Judgment in late July 2023, when this action was well under way. In view of the dismissal of MCL’s time summons and the above-mentioned findings in the NJ Opinion, I also accept that MCL had delayed in taking steps to vacate the NJ Judgment, that it was at fault essentially in the manner as complained by IMA.

37.  The ultimate guiding compass on the exercise of the discretion on costs is that the discretion is very wide and the objective is to do justice between the parties.

38.  In my view, awarding the Remaining Costs to IMA would be inconsistent with the bare-bone fact MCL has defeated this action. Awarding the Remaining Costs to MCL would subject IMA to a degree of injustice when it was reasonably enforcing the NJ Judgment, which was a valid judgment not challenged by MCL for about 4 months, when I accepted that MCL was at fault as aforesaid, and when further and additional costs were spent in this action as compared to the costs that would have been spent had MCL acted in a timely fashion to seek to vacate the NJ Judgment. I would add that in my view such fault is a rather weighty matter to consider in the circumstances. Moreover and after all, the merits of the parties’ substantive disputes are yet to be determined by the NJ Court.

39.  In the circumstances, in my judgment, the costs order that would best serve justice between the parties is to effectively make the instance of the Remaining Costs to follow the event in the US action, so that the party who ultimately prevails on the substantive merits would have a better entitlement to the costs. However, as said earlier, I regard the said fault of MCL is a weighty factor, and it is not right and just to ignore it as something having no effect on the costs order. In my judgment, the just and fair order is to make the Remaining Costs IMA’s costs in the cause of the US action. In other words, if IMA is the winner in the US action, it will recover from MCL the Remaining Costs; if MCL is the winner in the US action, it does not need to pay IMA the Remaining Costs but it cannot recover the same from IMA either.

40.  As making the Remaining Costs to follow the event in the US action was not a scenario that has been canvassed at the hearing, for procedural fairness, I invited the parties to lodge another round of short submissions, if they desired. Both parties have so lodged their short submissions on 4 March 2025. Both commented that the discretion on costs of this Court is wide enough to make such a costs order to follow the event of a litigation outside Hong Kong. Both addressed me also on the costs of the Summons, which is a topic over which I did not invite submissions, I only invited submissions on the dispute regarding the costs of the action. I therefore, and without disrespect, do not consider their submissions there on the costs of the Summons. On the costs of the action, MCL said nothing in support or against making it to follow the event of the US action. IMA reiterated that it should be entitled to the costs and re-emphasized the fault on the part of MCL. As said, I would take into account such fault in the manner set out in the preceding paragraph.

41.  I thus would proceed to summarily assess IMA’s Remaining Costs. Having considered IMA’s Statement of Costs and MCL’s List of Objections, I would summarily assess IMA’s Remaining Costs at HK$110,000.

42.  Thus, I order that in the event and when IMA wins the US action, it may recover from MCL, and MCL do pay IMA, IMA’s costs of this action assessed at HK$110,000.

43.  As the costs is assessed at HK$110,000, and therefore not much, I trust that if the US action is settled without a trial or where each party wins some at trial, the parties would be sensible enough and be able to come to some  agreement and not resort to a contest before the Hong Kong Court, and it would not be proportionate or appropriate use of scarce judicial resources any way; such that there would be no liberty to apply if those contingencies occur and this matter should be considered as concluded.

Disposal

44.  Accordingly, I order MCL to pay IMA the costs of the Summons assessed at HK$300,000 and also make the costs order set out in §42 above.

45.  I would consider IMA as the winner of these costs disputes and be entitled to the related costs. However and as above mentioned, the costs of IMA’s counsel in preparing these submissions (save the one on 4 March 2025) have been claimed in IMA’s Statement of Costs for the Summons which I have awarded. Thus, on nisi basis, I would order MCL to pay IMA’s costs of these costs disputes summarily assessed at HK$20,000, being the solicitors’ costs and the costs of the short supplemental submissions. Unless any party seeks to vary within the next 14 days, this order nisi will become absolute.

46.  I thank Mr Yeung and Mr Liu for their assistance.