LEE YUK SHING v. DIANOOR INTERNATIONAL LTD (In Liquidation)

HCMP 2483/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2483 OF 2011

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DECISION ON COSTS

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Introduction

1.  On 2 July 2015, I delivered judgment in this action in favour of the Plaintiff (the “Judgment”) and invited the parties to address me on the question of costs, including the scale of costs and whether third parties should be ordered to pay if the Defendant in liquidation cannot. This is provoked by my feeling of affront at the Liquidators’ conduct of this litigation on behalf of the Defendant.  There can be no question that costs should follow the event.  My major concern then was whether the Plaintiff would be left with an empty costs order by reason of the Defendant’s financial status.  Having now been assured that funds are available to meet the Defendant’s costs liability, the focus of this hearing is shifted to the question of whether costs should be awarded on indemnity or party and party basis.

2.  The Defendant was represented by Mr Sheppard at trial, but is now represented by Mr Ashley Burns.  The Plaintiff continues to be represented by Mr Brian Wong. 

The law

3.  Counsel have no dispute that the principles applicable to indemnity costs are well settled by the Court of Appeal decision in Choy Yee Chun v Bond Star Development Ltd [1]. In that case, Stock J (as he then was) adopted the following principles as set out by Godfrey J (as he then was) in Overseas Trust Bank Ltd v Coopers & Lybrand (a firm) and Others and Peat, Marwick, Mitchell & Co (a firm) and Another [2]:

“… In my opinion, in order to justify a taxation on the indemnity basis, the successful party has to show, either that the case is one of a type already recognised in the practice of the court as warranting a taxation on that basis (such as, for example, the contempt cases to which I have already referred) or that there is some feature in the case even more special or unusual than one which would justify a taxation on the common fund basis. A case in which the successful party has demonstrated that the proceedings were initiated or prosecuted by the unsuccessful party in a manner which constitutes that party's proceedings an abuse of the process of the court might well be a candidate for an award of taxation of costs on an indemnity basis. A taxation of the successful party's costs on an indemnity basis could properly be ordered, in my opinion, where the proceedings were scandalous or vexatious, or had been initiated or prosecuted maliciously, or for an ulterior motive, or in an oppressive manner. Any proceedings instituted or prosecuted in such circumstances as to constitute an affront to the court could properly be the subject of a direction for the taxation of the successful party's costs on the indemnity basis.”

His Lordship then went on to hold that the same principles apply equally to costs against an unsuccessful defendant.  He said[3]:

“ There has been a suggestion by counsel for the appellant that somehow the principles apply to a party who has instituted proceedings, but not to a party in response. In my judgment, the principles apply equally to those who not only institute proceedings but who defend them. If a plaintiff has been forced to institute proceedings by a defendant whose conduct has been not only hostile in the normal litigious sense, but oppressive and with base ulterior motive, and if the pursuit of a defence constitutes conduct which is part of an oppressive game plan, then invocation of the power to award costs on an indemnity basis may well be justified. Of course there will in most litigation be evidence which a court rejects, and it is far from rare that a court will find that evidence has been deliberately untruthful. Such a finding will not necessarily in itself warrant an order for costs upon either of the bases alternative to party and party taxation. But there will be cases - and it is true that they will be the exception and not the rule - where the conduct of a party in a case is of a more venal kind, where the conduct of the litigation has in some sense been wicked, and in such a situation the exceptional power can quite properly be applied.”

4.  Thus, the threshold which a party seeking indemnity costs has to prove against his opponent is a very high one.  He has to show some special or unusual feature in the case, such as that the action involves an abuse of process of the court, the proceedings were scandalous or vexatious, or had been initiated or prosecuted maliciously or for an ulterior motive, or in an oppressive manner.  The common theme in these examples is that the proceedings are instituted or prosecuted in such circumstances and in such manner as to constitute an affront to the court. 

5.  The thrust of Mr Burn’s argument is that a defendant is entitled to put the plaintiff to strict proof and that failure in proving a defence pleaded is not a justification for indemnity costs.  I fully acknowledge and have repeatedly said so in my Judgment that a defendant is entitled to put the plaintiff to strict prove the case against him.  However, this liberty is not without limit.  Where the challenges were unnecessary or went beyond what was reasonable in the circumstances and thereby unnecessarily prolonging the trial of the action, they may, not necessarily will, have some bearing on the scale of costs which the unsuccessful party may be liable for.  Such conduct may be indicative of bad faith, ulterior motive, abuse of the process of the court, or oppression as to constitute an affront to the court. 

6.  The same consideration applies to a defendant’s failure to prove a pleaded defence.  It is the right of a defendant to plead any defence.  A finding that a party has been deliberately untruthful or that a defence is wholly devoid of merit by itself does not warrant an order for indemnity costs.  Failure to make good a defence has the usual consequence of costs on a party and party basis, but not indemnity basis.  However, such failure must not be viewed in isolation.  Where the conduct leading to such failure when viewed against the factual circumstances is indicative of bad faith, ulterior motive, abuse of the process of the court, or oppression as to constitute an affront to the court, indemnity costs must follow.

7.  In my view, a defendant’s right to put a plaintiff to strict proof and to plead any defence is not a complete answer to a claim for indemnity costs.  It is not the exercise of these rights, but how the rights were exercised which is determinative of the scale of costs.  This is what I understand to mean the conduct of the litigation in the context of indemnity costs.  The conduct is not to be looked at in isolation.  All the conduct of the party including the surrounding circumstances and his knowledge has to be considered as a whole. 

8.  Mr Burns argues that the conduct of the unsuccessful party should not be adjudged with hindsight.  I also agree with that submission, subject to one important qualification as to what is hindsight.  There is a distinction between hindsight gained as result of the litigation and hindsight gained as result of pre-litigation conduct.  The unsuccessful party’s conduct should not be adjudged against the former, which is hindsight in the true sense of the word.  Hindsight gained as result of pre-litigation conduct is not truly hindsight.  It is foresight.  It is knowledge of the surrounding circumstances.  The unsuccessful party’s conduct should be considered in the light of the surrounding circumstances known to that party at the material time.  That includes knowledge gained as result of pre-litigation conduct and omissions. 

9.  The question is what impact does the unsuccessful party’s conduct in the litigation, when considered in combination and against the background circumstances, has on the court.  Has the conduct of the unsuccessful party the effect of turning the case into a more venal kind?  Did the conduct provoke a feeling of affront to the court’s sense of justice?  In the context of the present case, what the Liquidators did or what they failed to do before litigation commenced are part of the surrounding circumstances against which their conduct of the litigation has to be measured. 

10.  Lastly, sentiment is best felt than described. The trial court has the benefit of observing the parties during the course of trial.  It is singularly in the best position to capture this feeling and to exercise its discretion as to costs which best serves the justice required in the situation.  The judgment of the trial court has to be read as a whole to capture the feeling of the court when deliberating on the various issues.

The action

11.  The action was instituted as result of an interpleader application taken out by Equipnet Asia Pacific Limited (“Equipnet”), which conducted an auction of the Defendant’s goods on behalf of its Liquidators. The Liquidators have conduct of this litigation.

12.  The Plaintiff bought seven lots of goods at the auction described as “rough diamond stones” (the “Stones”) at a total price of $1,050,000 plus a premium, representing commission.  The Stones turned out to be synthetic cubic zirconia and not rough diamond stones as described.  The Defendant and Equipnet are protected by extensive exemption clauses. 

13.  The Plaintiff’s causes of action are: (1) breach of contract; (2) fraudulent misrepresentation; and (3) misrepresentation pursuant to section 3 of the Misrepresentation Ordinance (“negligent misrepresentation”). 

14.  The defence is one of total denial and of putting the Plaintiff to strict proof, even as to his identity as the bidder, purchaser, payment of the purchase price for the Stones and that the Stones were not rough diamond stones.  The defence also denies any representations made by Equipnet as being attributable to the Defendant.

15.  The major issues raised by the pleadings are:

(1)  the identity of the Plaintiff as the contracting party;

(2)  that the Stones were purchased from the Defendant and were not rough diamond stones;

(3)  what is the true construction of the Notice to Bidders and the Conditions of Sale; and

(4)  the Defendant’s and the Liquidators’ knowledge or lack of knowledge of the true nature of the Stones. 

The Plaintiff’s identity

16.  To resist the Plaintiff’s contractual claim, the first line of the Defendant’s defence is to put the Plaintiff to strict proof that he was the bidder and purchaser of the Stones, that he paid the purchase price and suffered loss.  I fully acknowledge that the Defendant is entitled to put the Plaintiff to strict proof of each and every element of his pleaded case and that the Liquidators had an obligation to properly defend the action and protect the Defendant’s interest under the sale.  However, the Liquidators’ conduct of the defence has to be viewed against the surrounding circumstances.   

17.  The Defendant did not have a positive case against the Plaintiff.  There was no dispute that the Plaintiff presented his business card to register at the auction and was given a bidder number which he used to bid.  It is the Defendant’s own evidence that Equipnet received a bank transfer of the purchase price and issued a buyer invoice to the Plaintiff in the name “Simon Lee, Kalencody Company.”  The Plaintiff’s evidence is supported by and consistent with the Defendant’s own evidence.  Usually, that would have been adequate strict proof.

18.  However, that was not how the Liquidators tested the Plaintiff’s case.  What Mr Sheppard, then counsel for the Defendant, did was by skilful cross-examination fish for “inconsistencies” between the Plaintiff’s and his witnesses’ evidence and “possibilities” to suggest that someone else bid and paid for the Stones, not the Plaintiff.  The Defendant had no idea who that “someone else” was.  There was no claim by that “someone else” and that “someone else” was not a party before the court.  Furthermore, Mr Lo, who indisputably paid the purchase price for the Plaintiff, was one of the Plaintiff’s witnesses who testified in court.  Mr Lo made no claim for the purchase price.  I am not in the least suggesting that Mr Sheppard went out of his way with such fishing exercise.  I have carefully checked the defence.  Mr Sheppard was acting in accordance with the defence, in particular, paragraphs 12, 15, 24 and 27.  I assume he was acting according to his instructions and that those instructions came from the Liquidators.

19.  Mr Burns argues that there was sufficient contradiction, uncertainty and confusion in the Plaintiff’s case and in the evidence in support of it to justify the position adopted by the Defendant on this issue.  I respectfully disagree.  Firstly, the so called contradiction, uncertainty and confusion were creation of Mr Sheppard’s fishing exercise.  Secondly, those suggestions have all been dismissed by me in my Judgment.  Thirdly, the Liquidators had constructive or actual knowledge of the facts pleaded by the Plaintiff.  Fourthly, such knowledge was not hindsight after conclusion of the trial, but foresight before litigation commenced.     

20.  As recognised by Mr Burns in his skeleton argument, the issue at the heart of this dispute is the true and proper construction of the Notice to Bidders and the Conditions of Sale.  Though he did not say so, impliedly, he must also be of the view that the challenge of the Plaintiff’s identity and capacity to sue was unnecessary, if not unmeritorious. I would have thought that no reasonable solicitors would have taken on that line of defence in the light of the incontrovertible and undisputed evidence. 

21.  However, as I said, failure to successfully raise a defence as such does not justify indemnity costs.  It is the conduct of the defence in the light of the background circumstances known to the Defendant which is determinative.  What I find offending in the Liquidators’ conduct of the litigation is the width and depth with which the cross-examination was conducted, the “fishing” purpose for which it was conducted and the frustration and anguish it created on the Plaintiff and his uncle who testified.  The testimony of the Plaintiff’s witnesses took less than two days in total.  On a rough estimate, cross-examination on this issue of the Plaintiff’s identity took 70% of their time in the witness box, if not more.  I can see the frustration and anguish in the Plaintiff and his uncle being cross-examined on wholly unrelated matters such as their families, their relationship and the particulars relating to their various companies and unincorporated businesses.

22.  I had to spend 16 paragraphs (paragraphs 34 to 49), equivalent to 10 pages in my 70-page Judgment to deal with this defence.  By way of summary, I dismissed that defence and concluded that the various issues raised under that defence were frivolous and vexatious showing a total lack of good faith on the part of the Liquidators in the conduct of their defence.  I cannot understate the feeling of affront to the court’s sense of justice by the Liquidators’ conduct in this defence.  Such feeling is best felt than described.  I do not find it necessary to quote any of the above mentioned paragraphs in my Judgment.  The Judgment has to be read as a whole to capture the feeling of the court when deliberating on this and the various other issues. In my view, discretion should be exercised to award indemnity costs on this issue to the Plaintiff.

The Stones

23.  Under the excuse of requiring strict proof, the Defendant challenged the Plaintiff’s evidence that the stones he produced in court and which were examined by his expert, Professor Ou Yang, were the Stones sold to him at the auction; and, even if they were, the Defendant required the Plaintiff to prove that the Stones were not rough diamond stones.

24.  Again, I respect the Defendant’s right to test the Plaintiff’s case by cross-examination for the purpose of attacking the exhibit chain so as to satisfy itself that the stones produced in court were the Stones purchased from the Defendant at the auction and which were examined by Professor Ou Yang.  It failed.  I respect the Defendant’s right to contest Professor Ou Yang’s expert evidence and to require her to strict prove the Stones were not rough diamond stones.  But, without challenging Professor Ou Yang’s status as expert and without adducing its owner expert evidence to contradict her expert opinion, what is the utility to be gained by requiring the professor to testify instead of admitting her written report and let the court determine whether it is satisfied with the professor’s evidence?  Why should the Plaintiff be made to incur such unnecessary costs?

25.  But, having gone that far as to require Professor Ou Yang to come to Hong Kong from China to testify, the Defendant eventually abandoned the challenge at a very late stage.  That may be out of respect that the court’s patience was about to be exhausted.  But what underlined the decision to abandon must have been a realisation that the challenge was futile.  That is not hindsight.  The Defendant should have foresight of that eventuality from its not challenging Professor Ou Yang’s expertise status and not calling contrary expert evidence; and, more importantly, for the reasons given in the following paragraphs.

26.  As I said the exercise of these rights are not to be considered in isolation.  That conduct has to be viewed against the background circumstances.  What were the circumstances?  The most glaring one is the Liquidators’ own knowledge that the remaining stone of which the Stones sold to the Plaintiff form part is not rough diamond stone.  This knowledge is like a pin in the eye.  It is hindsight gained after the auction, but not hindsight gained after commencement of litigation.  As result of the Plaintiff’s complaint, the Liquidators had the remaining stone examined by their own expert who confirmed that it was not rough diamond stone.  Yet, with that knowledge forefront in their minds, they demanded strict proof, not only of the exhibit chain, but also Professor Ou Yang’s expert opinion that the Stones are not rough diamond stones.

27.  It might be argued that the Liquidators thought though the remaining stone was not rough diamond stone, there was a possibility that the seven Stones sold to the Plaintiff were.  I should not consider the Liquidators’ conduct without regard to the surrounding circumstances.  The Liquidators could not have lost sight of the surrounding circumstances either. I have analysed those circumstances in paragraphs 107 to 133 (pages 49 to 65) of my Judgment, when considering the Plaintiff’s claim based on deceit or fraudulent representation.  Paragraph 133 is a summary of my finding of the Defendant’s knowledge that the Stones were not rough diamond stones and the recklessness of the Liquidators in assuming that they were. 

28.  The Stones together with the remaining one unsold were not referable to the books and inventory of the Defendant, whereas every other items of the Defendant’s jewelleries were so referable.  Despite that, the Liquidators just assumed that the Stones were rough diamond stones on the basis that they were found inside the Defendant’s vault; labelled as diamonds stones by their untrained clerk and by Mr Laracy, a solicitor, both of whom were unqualified to give such opinion; and even more ridiculously on the lack of mention that the Stones were not rough diamond stones in a gratuitous valuation prepared by a gemmologist of Chow Tai Fook Jewellery Co Ltd (not a certification as to their nature or quality) given on a friendly or casual basis to one of their staff in respect of the whole lot of jewelleries (not just the seven Stones and the one unsold) found in the Defendant’s company.  Mr Middleton impressed me in his evidence that he seriously placed great weight on that silence!  What the Liquidators singularly failed to do was to ask Mr Ziaudeen, who was one of the four senior managers of the Defendant who had access to the vault.  Mr Ziaudeen was resident in Hong Kong and had always been available to the Liquidators.  He also attended the auction.  Mr Ziaudeen must have been able to tell the Liquidators why the Stones were placed inside the vault.  With his experience, he would have been able to tell the Liquidators what those Stones were.  Even if not, he would have been able to alert them the significance of the lack of reference of those Stones in the Defendant’s books. These were simple questions to ask.  No explanation was given why no inquiries were made from Mr Ziaudeen.  Instead, Mr Middleton gave various lame excuses why the Liquidators did not have those stones examined by a gemmologist.  I have dismissed those excuses in paragraphs 113 to 133 of my Judgment.  The Liquidators were simply reckless and just happily assumed that the Stones were rough diamond stones.  

29.  When the Liquidators received the Plaintiff’s complaint about the Stones and before litigation commenced, they had knowledge of their own recklessness and the fact that the remaining stone was not rough diamond stone.  That, as I say, is a pin in their eyes.  They should have much more readily accepted that the Stones were not rough diamond stones than they had assumed they were before the auction. Yet, with knowledge of the inadequacy of their inquiry, their recklessness before putting the Stones in the auction as rough diamond stones, and the fact that the remaining one from the batch of eight stones was not rough diamond stone, they put the Plaintiff to strict proof when they had no evidence that the Stones were genuine and intended to call no expert evidence to contradict Professor Ou Yang’s expert evidence.  Such conduct is appalling.   They were just placing a bet which they ought to have known was hopeless, but for which the Plaintiff was made to incur unnecessary costs. I cannot help wondering if the Liquidators were conducting their litigation in good faith in demanding such a high standard of proof of the Plaintiff that the Stones were not rough diamond stones but requiring so little to satisfy themselves that they were.  Their conduct has well crossed the line of reasonableness and is evident of bad faith, frivolous and vexatious conduct. It is appropriate that I should exercise my discretion to award costs of this issue to the Plaintiff on indemnity basis.

The construction of the Notice to Bidders and Conditions of Sale

30.  As submitted by Mr Burns, the construction of the Notice to Bidders and Conditions of Sale is the issue at the heart of this dispute.  The Liquidators are entitled to contest the Plaintiff’s claim on the basis of the exclusion clauses.  The construction was well argued by both parties.   The Defendant failed and is only liable to costs on party and party basis.

Deceit

31.  Mr Burns argues that in the light of my finding that the Liquidators had no knowledge that the Stones were not rough diamond stones, my finding of deceit is unsustainable and the Defendant has good prospect of success in the appeal against that finding.  I respectfully disagree with his optimism.  Mr Burns has overlooked the fact that while the sale was a liquidators’ sale, the action is against the Defendant company in liquidation and not against the Liquidators personally. He has also confused the Liquidators’ knowledge with the Defendant’s.  In paragraphs 107 to 112 of my Judgment, I found that the Defendant had actual knowledge that the Stones were not rough diamond stones.  That is the basis of my finding of deceit.  That is a finding of fact.  I have also explained in paragraph 108 that “a company in liquidation cannot hide behind the liquidator’s lack of knowledge and escape liability in any matter where knowledge is a material element to liability”.  In paragraphs 113 to 133, I went on to hold that while the Liquidators did not have actual knowledge that the Stones were not rough diamond stones, they were reckless in assuming that they were and passed that information to Equipnet which caused Equipnet to make the false representation in the advertisement, catalogue and video presentation.  I then found in the further alternative that even if the Defendant had no knowledge of the nature of the Stones, the recklessness of the Liquidators may be attributed to the Defendant which is taken to have reckless knowledge that the Stones are not rough diamond stones. This is also a finding of fact.  These are matters for appeal.

32.  The real point which Mr Burns seeks to make for the purpose of the present purpose is that a finding of deceit does not justify an order for indemnity costs in this action.  His argument is that in defending these very serious claims for deceit and fraudulent misrepresentation it cannot be said that the Defendant was acting unreasonably as to justify an award of indemnity costs.  This is apparently correct, but he misses the point that this finding of recklessness serves another purpose besides proving fraudulent or negligent representation.  The Liquidators’ recklessness is pre-litigation conduct.  As I said, the unsuccessful party’s conduct of the litigation has to be viewed in the light of all the surrounding circumstances.  Part of the surrounding circumstances is the Liquidators’ reckless assumption that the Stones were rough diamond stones: see paragraph 27 above.  It is against such glaring recklessness and omission that the Liquidators’ conduct of the litigation has to be viewed.  Hence, the costs in proving such recklessness as part of the background justify an award of indemnity costs.

Interest of creditors

33.  Lastly, Mr Burns argues that as the Defendant is in insolvent liquidation, the interests of the general body of creditors is paramount.  It would be the creditors who would be penalised and prejudiced by an award of indemnity costs.  Such award is therefore unjust and inappropriate.  With respect, I disagree.  The question of costs is a matter between the litigating parties.  Had the Liquidators addressed their minds to the risk of prejudice to the general body of creditors they should have conducted themselves appropriately.  They should not have used creditor’s funds to pursue such frivolous defences.  Had they proceeded to defend the action by fighting the issue at the heart of this dispute, as Mr Burns identified it, the trial would have taken less time and there would be no question of indemnity costs.  In my view, they are the master of the Defendant’s misfortune.  May be they have to account to the general body of creditors.

Conclusion

34.  The Plaintiff has succeeded in his claim and is entitled to costs of the action.  For the reasons as given above, the construction issue is the only issue which the Liquidators may reasonably argue.  As for the defence based on the other issues, the Liquidators have clearly crossed the line of properly defending the action.  Despite Mr Burns’ argument, the sentiments I expressed in paragraphs 142 to 145 of my Judgment have not in any way changed.  The Liquidators’ conduct of the defence constituted an affront to the court’s sense of justice.  The Plaintiff is therefore entitled to costs on indemnity basis, except for the costs of argument on the construction issue which only shall be taxed on party and party basis.  That is out of my respect for the Defendant’s right to defend the action.  Accordingly, I award the Plaintiff’s costs of this action, including the costs of this hearing, against the Defendant to be taxed on an indemnity basis, except for the costs of argument on the construction issue which shall be taxed on party and party basis.