GTE DIRECTORIES (HK) LTD v. MO YUNG KWOK WAH t/a SUN HING CO

HEAD    NOTE

                'Damages' and 'Costs' - contract contains a term that on breach by the defendant he shall pay all costs, charges and expenses including legal charges on a solicitor and own client basis incurred by the plaintiff in recovering payment. Plaintiff claims 'damages' representing costs incurred on an indemnity basis. Not permissible. 'Costs' and 'damages' distinguished - principles to be applied. Notwithstanding a provision in the contract for costs on a full indemnity basis, costs are at the court's discretion and cannot be subject to control by a party to the litigation.

IN TIE DISTRICT COURT OF HONG KONG

HOLDEN AT KOWLOON

CIVIL JURISDICTION

Action No. 25444 of 1984

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BETWEEN

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DECISION

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1. The Plaintiff's claim against the defendant is for a liquidated sum and for damages. Judgment was obtained in default of defence. Subsequently, on the plaintiff's own application, the judgment was set aside as it was realized that in the District Court a default judgment cannot be entered on a mixed claim: see United Merchants Finance Ltd. v. Ngai Chor Yin (Civil Appeal Nos. 127 and 174 of 1984). An application was then made to fix a date for trial.

2. At the hearing, Mr. S. Kelly, on behalf of the plaintiff, submitted that as the defendant is absent and did not file a defence, he must be taken thereby to admit the plaintiff's claim in its entirety for which reason the plaintiff need not prove its case for the purpose of obtaining judgment. I do not accept this argument. If the plaintiff is not at liberty to enter judgment in default of defence, he is required to prove his case limited to the allegations in the particulars of claim. This has always been the accepted practice. It is so fundamental that I need say no more except to comment that it would be absurd if the Rules Committee intended that time should be wasted by merely requiring the Judge to observe the physical presence of the plaintiff or his solicitor at the trial, so that it may be recorded for the purpose of entering judgment.

3. The facts pleaded are: The Hong Kong Telephone Co. Ltd. agreed to publish advertising items in its Business Telephone Directory for a fee of $5,916. The contract for advertisement contains a clause which states that:

"In the event of non-payment of charges the Subscriber (defendant) shall pay to the Telephone Company all costs, charges and expenses including legal charges on a solicitor and own client basis incurred by the company in recovering payment."

4. The defendant failed to make payment of the advertising fee. The plaintiff (who are the assignees of the contract) claimed the advertising fee in sum of $5,916 (which the plaintiff later managed to recover from the defendant) and further claimed under the clause I have referred to:

"Damages representing the plaintiff's costs to be assessed on an indemnity basis."

5. On these set of facts it is submitted that because the parties had so contracted, I have no option but to award "damages" in the form of 'costs on a solicitor and own client basis' which in the words of Sir Robert Meggary, V.- C. is

"not only the most stringent order that can be made, but also an order which, by virtue of Rule 29(2), is capable of being severely penal in its effect. Those who seeks such an order should realize that they are asking that the other side should pay not only all their costs which are not unreasonable, but also all their other costs however unreasonable or extravagant they are, so long as their clients approved them." (F. M. I. records v. Ian Wallace Ltd.(1982) 3 W. L. R. 245, 259).

6. The question that arises is whether "costs can be claimed by way of 'damages'.

7. 'Costs' signifies the sum of money which the court orders one party to pay another party in respect of the expenses involved in the litigation whilst "damages" represents the pecuniary recompense suffered by a party apart from the expenses incurred in the litigation between them. In a personal injury case, the cost of medical treatment is part of the damages but the cost of medical examination for the purpose of litigation forms part of the costs. I have not known the twains to meet.

8. Although Mr. Kelly tells me it is currently the practice for petitioners in similar situations to claim damages in the way he has done, I am not aware of any case in which the point has been previously raised. It is of interest to note that the author of MeGregor on Damages (14th edition) regards the contention put forward by the plaintiff as untenable. At page 378, para. 521 it is put in this way:

"In a Civil Action, the successful party will generally recover costs against the other party: These will be costs taxed as between party and party. Occasionally, the successful party may be denied costs, for costs are in the court's discretion. Clearly it would make nonsense of the rules of the court as to the award of costs and taxation of costs if the successful party could recover as damages, either the costs withheld by the court or any further costs he has incurred beyond the party and party costs, whether in the same action or in a further action brought solely for this purpose. This has naturally never been allowed, and it is hardly surprising that there are practically no authorities on the point."

9. Except where specifically provided by statute or by rule of court, the costs of proceedings are in the court's discretion (13 Halsbury, 4th edition, para. 1108). I take this to mean that parties are not at liberty by contract to remove or fetter the court's discretion by claiming costs as damages. 'The award of costs beyond the costs of a suit, by way of penalty or additional damages, or the award of costs on a more liberal scale by way of damages is not permissible. Similarly, an award should not be made by way of damages in order to compensate the difference between party and party costs and more liberal costs ':

12 Halsbury para. 1108 ibid

However, where as a result of the defendant's wrong, the plaintiff has incurred costs in other proceedings the plaintiff may, subject to the rules of remoteness, recover those costs from  the defendant as damages: see 12 Halsbury para. 1120. This stands on a different footing; it relates to an expense which the party has had to incur elsewhere and being a loss not arising from the litigation in question can be claimed as damages. There is no diviation in principle.

10. I accept that where there is a contract of indemnity, whether expressed or implied, the costs of legal proceedings properly incurred by the person indemnified can in some cases be awarded on a more generous scale. It usually arises where an unsuccessful litigant who has incurred expenses in defending a suit by a plaintiff can claim as against a third party who is liable to indemnify him, the costs he has had to incur on a common fund basis in defending the plaintiff's claim: see also Rules of the Supreme Court (1985) 890 (62/2/99) and the analysis of Devlin L. J. in Berry v. British Transport Commission (1962) 1 QB 306 at 321 which clarify the position. But here again, the claim is for costs and not damages.

11. I decline to set any precedent by which the discretion of the court in regard to costs can be whittled away and effectively removed by allowing what is in reality a matter of costs to be claimed as damages so that the plaintiff is thereby entitled to obtain costs on a solicitor and own client basis on the argument that the damage he has suffered is represented by the legal expenses incurred in prosecuting his claim. I do not accept that the insertion of a clause in the contract to say that a breach by one party would entitle the party to costs on a solicitor and own client basis has the magical effect of transforming 'costs' into 'damages'.

12. If the claim had been for costs, the argument put forward is that as the contract contains a term which provides that on breach the defendant must pay costs on a solicitor and own client basis the plaintiff's right to costs on that basis is enforceable. I am unable to accept that argument. Costs are at the discretion of the court. It cannot be subject to control by a party to the litigation. It is a misnomer to speak of a "right" to costs.  'A party has no right to costs unless and until the court awards them to him and the court has an absolute and unfettered discretion to award or not to award them': Donald Cambell & Co. Ltd. v. Pollak (1927) AC 732 at 811, HL, per Lord Cave L.C.; Jones v. Mckie and Mersey Docks and Harbour Board (1964) 2 All E. R. 842 per Willmer L. J.'; see also Order 62 rule 3. It is for the court to decide, at the end of the day, what order is to be made in regard to costs. As was pointedly remarked by Jessel M. R. in Willmott v. Barber (1881) 17 Ch D 772 at 734:

"The judge has a large discretion as to costs. He may make the defendant to pay the costs of some of the issues in which he failed, although he may have succeeded on the whole action. Or he may say that both parties are wrong, but that he could not apportion the blame in a definite proportion, and therefore would dismiss the claim without costs. Or he might say that the plaintiff should have half the cost of the action or some other aliquot part."

13. The principle as reflected in all these cases would be rendered meaningless if I accede to the proposition that the parties can, in the manner devised, shackle or oust the court's discretion as to costs. Even if the plaintiff's claim were for costs (and not for damages) such a clause in the contract, standing by itself and in the absence of any special circumstances ought not to justify an order for costs other than on a party and party basis. Party and party costs include all such costs as were necessary or proper in enforcing the rights of the party (0.62 r.28) and are designed 'to keep down extravagance in litigation and that is a benefit to all those who have to resort to the law': per Devlin L. J. in Berry v. British Transport Commission (ibid) at p.322.

14. My attention has been drawn to the case of Barnett v. Eccles (1900) 2 Q.B. 423 at 428 where Vaughan Williams L. J. expressed the view (by way of obiter) that where there has been an assessment of the costs of the proceedings by means of taxation no further amount can be recovered in respect of the costs of those proceedings except in the case of some contract or statute which gives an absolute indemnity: (emphasis my own) With the greatest possible humility and utmost respect, I do not, for my part, see how, if a party has been awarded costs in an action which has been taxed, he can subsequently claim an additional sum for costs as against the same party in another action on the ground that he has a contract which entitles him to a full indemnity. His claim would be barred for three reasons. Res Judicata would apply as the basis of the award was a determination in the first action and he would be precluded from raising the same issue in the second action (Furness, Withy & Co. v. J. & E. Hall (1909) 25 TLR 23). 'The costs incurred in excess of the sum allowed on taxation cannot be recovered as damages' (per Omerod L. J. in Berry v. British Transport Commission (1962) 1 Q.B. 306 at 317). Taxed costs are intended to be a full indemnity to the plaintiff ... That is the principle ... whether it be fully carried out is another matter ... (per Alderson B. in Doe v. Filliter 13 M & W 47 at 51). I do not think that the statement by Vaughan Williams L. J. was intended to impugn accepted principles touching upon the court's discretion relating to costs. It appears to me that the learned Lord Justice was merely contemplating the possibility that in some contracts of indemnity - which in the narrow sense is usually referable to a contract by which one party promises to save the other from loss to him by the conduct of another - the circumstances may be such that costs may be awarded on a more liberal basis as instanced in the example stated in R. S. C. (1985) page 890 under the heading: 'Costs, Indemnity as to' (62/2/99).

15. Giving full weight to the line of authorities on the points raised, I hold that it is not appropriate to claim costs by way of damages and that the mere presence of a clause in the contract requiring a party in breach to pay costs on a solicitor and own client basis does not in any way affect, hinder or remove the court's absolute and unfettered discretion as to costs.