HSIN YIEH ARCHITECTS & ASSOCIATES LTD v. CONCORD PROPERTY DEVELOPMENT LTD

HCCT 28/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION & ARBITRATION PROCEEDINGS

NO. 28 OF 2004

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DECISION ON COSTS

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1.  The background facts as I now set them out are taken from my Decision on 26 January 2010, on an application by Hsin Yieh, (the architects), against Concord, (the developer), for specific discovery. By virtue of that decision the developer was compelled to provide specific discovery of certain documents.

2.  In April 1995, the developer engaged Hsin Yieh, to carry out work in respect of the development of the property at Ma On Shan in the New Territories.  The contract required both design and supervision of the construction of the development which was to be carried out by Kumagai Gumi (HK) Ltd, later incorporated as Hong Kong Construction (Holdings) Ltd, (the contractor).

3.  In January 2002, the architects commenced proceedings against the developer claiming some $2.5 million, said to be outstanding fees owed by the developer to the architects in respect of work done and services rendered in the development.

4.  The developer formally denied liability for the outstanding fees, but it was plain from the papers that the real defence lay in a counterclaim pleaded against the architects.

5.  By a total of FIVE payments made as follows, 16 January 2010, $1.9 million; 19 February 2010, $1.1 million; 22 February 2010, $300,000; 24 March 2010, $300,000; and 14 April 2010, $200,000, the developer paid into court a total sum of $3.8 million by way of sanctioned payments.  It is important to note that the first four sanctioned payments were, in terms, confined to the architects’ claim, and were not in respect of the counterclaim.  If accepted by the architects, they would still have to face the counterclaim.

6.  It was not until the fifth sanctioned payment made on 14 April 2010, that the payment was in respect of both the claim and counter claim, and, if accepted by the architects, would resolve the whole of the action and counterclaim. 

7.  On 11 May 2010, the architects accepted that sum, it representing the amount claimed by the architects plus interest.  The proceedings were consequently wholly brought to an end in terms in which the architects are entitled to say they were entirely successful in both the claim and in resisting the counterclaim.  The developer received nothing under the counterclaim.

8.  In accordance with O 22 rr 20(1) and 20(3), the architects are entitled costs of the proceedings including the costs attributable to the counterclaim up to the date of notice of acceptance of the sanctioned payment.

9.  On 12 May 2010, the architects took out an application pursuant to O 62 r 28 RHC for an order that the developer pay the architects’ costs of the action and the counterclaim on a full indemnity basis. Mr Fung for the architects says that indemnity costs are justified because:

(i)     the developer’s counterclaim was vexatious and litigated in bad faith;

(ii)    the developer conducted its case in a deceptive and misleading manner; and

(iii)   the developer forced the architects to incur disproportionate costs in defending serious allegations of professional negligence over a period of seven years, only to have the developer abandon its case close to readiness for trial.

10.  That situation was exacerbated, Mr Fung says, when on 21 July 2010, only two working days before the day set to argue that costs summons, the developer has filed an affirmation in opposition with accompanying exhibits totalling over 80 pages.  This action followed an earlier attempt by the developer’s solicitors to have the hearing of the application for costs deferred until October 2010, on the basis that was the earliest date their counsel was available.  That application had been rejected.

11.  Mr Li accepts that the court has jurisdiction to order costs to be taxed on an indemnity basis after the acceptance of the sanctioned payment but submits that it is not appropriate in the present proceedings to order indemnity costs.

12.  Practical completion of the building had taken place in March 1999.  The defects liability period expired one year later, in March 2000.  The settlement of final accounts between the developer and the main contractor took place in November 2001, and was recorded in a formal settlement agreement dated 13 November 2001.  The architects were not a party to, nor were they informed of, the settlement agreement.

13.  The architects claim was a simple claim for outstanding professional fees.  The defence, originally filed on 4 April 2002, simply alleged that payment was not yet due to the architects, because according to the terms of the letters of appointment of the architects the sum due would only be payable upon the expiration of the Defect Liabilities Period and Settlement of the final account”.  That was demonstrably false, because, first the defects liability is period had expired, and second, the settlement of final accounts had taken place in November 2001.

14.  It was the case for the developer that at the time the defence was filed the developer’s accounting manager, who apparently gave instructions in respect of the action was not aware of the settlement agreement.

15.  Although the architects were unaware of the fact or terms of the final settlement, the defects liability period having plainly expired, the architects considered that it was highly unlikely in 2003, that final accounts had not been settled between the developer and the main contractor.  Consequently on 2 July 2003, more than 18 months after the settlement agreement, the architects took out an application for summary judgment.

16.  Still, the developer did not disclose the settlement agreement.  The response of the developer to the application for summary judgment was to abandon its original defence and to counterclaim alleging professional negligence on the part of the architects in design and supervision work.  In its amended defence and counterclaim the developer simply adopted particulars from a separate action, HCA 2622/2002, involving a claim by the then management company of the building against the developer for some 350 items of outstanding defects.  In simple terms, as Mr Fung put it, the developer was simply trying to pass the blame for the outstanding defects to the architects, and action they had not considered undertaking even by way of third-party proceedings in that action.

17.  The evidence established that about the time of the application for summary judgment a new person employed by the developer reviewed the documents discovered the settlement agreement and send it to counsel for consideration. The counterclaim, described in the previous paragraph, was prepared by counsel but the advice given, if any, in respect of the relevance of the settlement agreement has not been disclosed to me.

18.  The settlement agreement of 13 November 2001, recently discovered, makes it clear that the developer had already recovered from the main contractor for the outstanding defects.  Mr. Fung was perfectly entitled to say that by pursuing its counterclaim against the architects for the same outstanding defects, the developer positioned itself to potentially obtain a large financial windfall through double recovery, at the same time keeping secret the fact of the recovery that it had made, by resisting discovery of the settlement agreement.

19.  There was a period, between about December 2005 and July 2009, when the architects took no steps at all in the proceedings.  Not surprisingly, while the proceedings were not being pressed by the architects, the developer was content to let them lie.  Finally, a Notice of Intention to Proceed was filed by the architects on 20 July 2009, and a further request for further and better particulars and for specific discovery of the settlement agreement was filed by the architects on 26 November 2009.

20.  When faced with the requirement to make out its case by way of further and better particulars, the response of the developer was to fail to respond to the request and consequently some 230 alleged items of defect, totalling in value $6,082,294.10 were struck out.

21.  The settlement agreement of 13 November 2001 was finally disclosed on 17 February 2010, but only following an order made by me, following vigourous resistance on the part of the developer, on 26 January 2010.

22.  Mr. Li makes two principal points to the developer’s position.  First, he says that the counterclaim was originally drafted by counsel and the amended defence and counterclaim were settled by counsel, both of whom had been supplied with a copy of the settlement agreement.  Second, he says that the rejoinder filed was drafted by a different senior counsel, and that discovery of documents relating to the other proceedings in which the developer had been involved were refused by Reyes J.

23.  The developer relied also upon an affidavit by its current asset manager who sought to explain a demonstrably false statement made by the developer’s accounting manager in an affidavit filed on 19 July 2003, in opposition to the application for summary judgment.  In affidavit he said:

“…. It is clear that the Final Accounts had not been settled since they had not been agreed by the parties concerned.”

The asset manager purports to explain this plainly false assertion by asserting that the accounting manager was not aware of the existence of the settlement agreement, and focused on another document.  He makes other assertions as to the Accounting Manager’s state of mind in relation to the settlement agreement in an effort to explain the developer’s position in the proceedings.

24.  The asset manager asserts that the asset manager has now left the employ of the developer.  He makes no assertion as to how he is aware of the asset manager’s state of mind.  No weight at all can be placed on these assertions, and Mr. Li was right not to rely directly upon them, although he did not repudiate them.  In any event, it is entirely irrelevant if the asset manager did not know of the settlement agreement.  The developer, as a corporate entity, knew of it, and it is no answer to say that the individual employed by the developer, and instructed to deal with the matter, was not told about the settlement agreement.  The developer must bear the responsibility for having failed to properly inform its own employee of the background to the matter he was required to deal.

25.  It is no answer for the developer to say that it relied upon counsel’s advice when that advice is not put before the court.  Indeed, it is difficult to see how, if counsel had been properly instructed in relation to the circumstances of the proceedings, and the existence of the settlement agreement, it would have been possible to give advice that there was a basis for a counterclaim against the architects, thereby giving rise to recovery in respect of defects for which compensation had already been made.

26.  Mr. Li argues also that in litigation it is perfectly understandable to make an offer, and then subsequently increase that offer if it is not accepted.  The inference is that a series of offers slowly increased over a period of time is a perfectly acceptable commercial practice in the course of litigation.

27.  That is a submission which does not pay proper regard to the underlying objectives of the rules, particularly the objectives of increasing the cost-effectiveness of the procedure in court, in promoting a sense of reasonable portion and procedural economy and the conduct of proceedings and the facilitation of the settlement of disputes.  While commercial bartering may be perfectly acceptable in the marketplace it is not acceptable in the course of litigation.  A party may if he wishes to choose to make a series of offers, but he does so at the risk of increased costs against him if he is unable to explain on a proper commercial basis the rationale behind such offers.

28.  No attempt at all was made in these proceedings by the developer to explain the basis upon which the offers were made and subsequently increased. It is not without significance that the first sanctioned payment in was made three days prior to the argument before me on the discovery issue in which the architects pressed for the settlement agreement.  It is equally not without significance that the second sanctioned payment in was made within one month of the decision requiring disclosure of the settlement agreement.  That timetable bears all the hallmarks of the developer realising that its game was up and that the quite unjustifiable position it had been taking would be exposed upon disclosure of the settlement agreement.

29.  The complaints made by Mr. Fung, set out in paragraphs 9 and 10 above, are made out.  I am satisfied the conduct of the developer in these proceedings has been such that it has deliberately taken advantage of the litigation process, and conducted the litigation in a deceptive and misleading manner, deliberately in order to resist making payment of a perfectly proper some of it was due.  That is disgraceful behaviour which is an abuse of the court process.  It is quite unreasonable behaviour.  Such conduct is intolerable and deserves sanction by way of indemnity costs.

30.  Part of Mr Fung’s argument was that the architects were forced to incur disproportionate costs.  Mr Li said the evidence was not sufficient to establish whether or not the costs were reasonable.

31.  The costs incurred by the architects must be seen in the light of the fact that the counterclaim constituted an allegation of professional negligence.  An allegation of professional negligence is without any doubt at all a very serious allegation against a professional man.  It potentially carries with it an impact that goes far beyond the mere payment of a sum of money to compensate a client for that client’s loss as a result of the alleged negligence.  A professional man’s reputation is put at risk by allegations of professional negligence. 

32.  I am satisfied the architects were perfectly entitled to instruct London counsel to advise on the merits of the allegations made against them, to obtain a comprehensive expert report, and to prepare the witness statements that were prepared.  The allegations of professional negligence, entirely unsubstantiated, and completely abandoned, justified those steps.

33.  An allegation of professional negligence is one which ought not to be made lightly, and without proper evidence to substantiate it.  In the present case there was nothing whatsoever to substantiate an allegation of professional negligence.  The only evidence upon which the developer was able to point to substantiate professional negligence was a building surveyor’s report, prepared over six years ago, and before the developer even raised its counterclaim.  It was embarrassingly short, as Mr. Fung said, and consisted simply of six bullet points, barely taking up half a page.  That was all that was offered in response to the architect’s expert report prepared by an Associate Professor of the Department of Architecture at the University of Hong Kong, which dealt extensively with each of the so-called allegations regarding the design and supervision of the work.

34.  The complete absence of any real evidence to substantiate the allegation of professional negligence goes to further justify indemnity costs.

35.  There will accordingly be an order that the developer must pay the architects costs of and incidental to the proceedings on an indemnity basis.