張淑嫺 v. CHIK WAI YIN

DCCJ 3428/2010

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3428 OF 2010

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D E C I S I O N

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Background

1.  On 3 October 2012, I handed down judgment in this action by which Madam Chik was ordered to pay a sum of $8,671 to Madam Cheung with interest at HSBC prime rate plus 1% per annum from 23 August 2010 (the date on which Madam Cheung commenced SCTC 39413/2010 at the Small Claims Tribunal to recover her rental deposit from Madam Chik) to the date of judgment, and thereafter at judgment rate until full payment.  I also dismissed Madam Chik’s counterclaim (save for her claim for mesne profits in the sum of $4,129, which I took into account in computing the final sum payable by Madam Chik to Madam Cheung).  I further made a costs order nisi that Madam Cheung shall have the costs of the action, to be taxed if not agreed, with certificate for counsel.

2.  Madam Cheung now applies to vary the costs order nisi so as to provide for her costs in the action to be taxed on an indemnity basis, and she also seeks interest on her costs and enhanced interest on the judgment sum, on the ground that she has done better after trial than her sanctioned offer made to Madam Chik on 24 January 2011.

3.  In her sanctioned offer, Madam Cheung proposed that both parties do withdraw their claims against each other, and each party shall bear her own costs in the action.  The last day on which such offer could be accepted without leave of the court was 21 February 2011.

4.  Madam Chik did not accept Madam Cheung’s offer.  Instead, on 16 September 2011, Madam Chik made a sanctioned offer which asked for a sum of $85,000 plus her costs on a party and party basis from Madam Cheung in full and final settlement of the whole action.

5.  Madam Cheung rejected Madam Chik’s offer on 12 October 2011, but at the same time she made an improved offer to Madam Chik by offering to pay a sum of $18,000 (inclusive of interest and costs) to settle her counterclaim.  Such improved offer was not accepted.

6.  I pause to note that Madam Cheung’s improved offer, as fairly pointed out by her counsel Mr Gary Lam, was not a valid sanctioned offer to attract the consequences under O.22 of the Rules of the District Court, since an offer to settle a counterclaim by payment of money must be made by way of a sanctioned payment: see O.22, r.3(2).

7.  That said, the fact that a second or third increased offer is made in the course of the proceedings does not constitute a withdrawal of the earlier unaccepted offer which remains subsisting.  The offeror can still rely on the earliest subsisting sanctioned offer, which is not beaten by the offeree after trial, to invoke the court’s jurisdiction to award costs on an indemnity basis and interest at enhanced rates: Rai v Pacific Construction (HK) Co Ltd [2011] 3 HKLRD 469 at para 26 (p 486) per Bharwaney J. 

8.  It is abundantly clear that Madam Cheung did better after trial than her sanctioned offer made on 24 January 2011. O.22, r.24 is triggered, under which the court may order:

(1) enhanced interest on the whole or part of the judgment sum up to 10% above judgment rate;

(2) costs on an indemnity basis after the last day on which the sanctioned offer could be accepted without leave of the court (here, 21 February 2011); and

(3) interest on costs up to 10% above judgment rate.

9.  Where the jurisdiction under O.22, r.24 is triggered, the court

Enhanced interest on judgment sum

10.  Mr Kay Chan, counsel for Madam Chik, in his usual fairness did not seriously argue that I should not award enhanced interest on the judgment sum.  He urged me to impose no more than 3% above judgment rate (making the actual rate at 11%) as the enhanced interest rate.  Mr Lam, on the other hand, asked for the full uplift of 10% above judgment rate.

11.  It is now over 3 years since the implementation of the Civil Justice Reform that the power has been made available to award enhanced interest under the new O.22, and it may be the right time to distill the guiding principles as to how the court should exercise its discretion in deciding the level of enhanced interest to be awarded.

12.  The power to award enhanced interest on the judgment sum is compensatory and not penal in nature.  It is conferred to enable the court to redress the element of perceived unfairness, otherwise inherent in the legal process, which arises from the fact that damages, costs (even costs on an indemnity basis) and statutory interest will not compensate the successful claimant for the inconvenience (including disruption in business or daily life), anxiety and distress of having to resort to and pursue proceedings which he had sought to avoid by an offer to settle on less advantageous terms than what he obtained after trial: McPhilemy v Times Newspapers Ltd (No 2) [2002] 1 WLR 934 at pp 943F to 944B per Chadwick LJ.

13.  The court may award enhanced interest at a rate of up to 10% above judgment rate, but it should not start from the assumption that the full uplift should normally be awarded or should otherwise be taken as the starting point, since litigation varies greatly in weight and complexity, and the underlying facts in any given case will be different: Earl v Cantor Fitzgerald International (No 2) (2001) LTL (3 May 2001) per Moore-Bick J; Petrotrade Inc v Texaco Ltd [2002] 1 WLR 947 at p 951F per Lord Woolf MR (as he then was).

14.  That said, the level of enhanced interest on the judgment sum should make a material, albeit proportionate, difference to the outcome of the case, or else O.22 would become otiose: Little v George Little Sebire & Co reported in The Times (17 November 1999) where Deputy High Court Judge David Foskett QC noted in the full judgment as follows:

“… since one of the factors mentioned in the overriding objective is the saving of expense, the powers conferred by the rules are likely to be interpreted by the Courts in a way that encourages settlement. Settlement is achieved only if parties focus properly on the strengths and weaknesses of their respective cases. The powers conferred by r 36.21 [our equivalent of O.22] are plainly designed to sharpen that focus. Unless the discretions conferred by the rule are exercised in a way that makes a material, albeit proportionate, difference to the outcome of the case, the rule becomes otiose.”

15.  That explains why generally the uplift should be at a higher rate for small claims, otherwise the additional advantage for the receiving party (and, in turn, the imposing of a material difference or impact to the outcome of the case) would not be achieved.  The size of the claim is thus a relevant factor when considering the amount of the uplift in interest under O.22: see Petrotrade Inc v Texaco Ltd at p 951D-E, followed in Poon Yiu Cheung v World Mastery Technology Ltd, DCCJ 632/2005 (unreported, 30 September 2011) at para 15 per Deputy Judge R Yu, and in Tsang Yuen Mui v蔡嬋貞, DCCJ 1347/2008 (unreported, 15 December 2011) at para 11 per Judge H C Wong.

16.  The conduct of the paying party in the proceedings is also a relevant factor.  If there is cause to criticize the paying party (for example, in unreasonably pursuing the matter to trial where his case was obviously unsustainable either on the facts or in law), whilst this would not justify increasing the rate of enhanced interest to punish that party, it would mean that due to his conduct in the proceedings he had forfeited the opportunity of asking the court to apply a lower rate of the additional interest payable: Petrotrade Inc v Texaco Ltd at p 951C-D. See, for instance, the conduct of the defendants in the defence of the claims (namely the inadequacy in the defence expert valuation report) was considered by the court in deciding whether to make an order under O.22, the rate of enhanced interest to be awarded, and the period to which the orders may relate: Ho Kin Pong & Anor v Tam Kok Hung & Ors, DCCJ 624/2010 (unreported, 27 June 2011) at paras 22 to 24 per Judge Mimmie Chan (as she then was).  See also Maysun Engineering Co Ltd v International Education and Academic Exchanges Foundation Co Ltd [2011] 2 HKLRD 844 at para 17 (p 851) where Judge Mimmie Chan took into account the conduct of the defendant in maintaining its case which was partly abandoned only at trial, and partly rejected by the court after trial, in deciding the enhanced interest rate.

17.  I add that in assessing the conduct of the paying party in the proceedings, the difference between the sanctioned offer and the judgment sum should also be a relevant consideration: the larger the difference (ie the receiving party being more prepared to forgo part of his claim to settle), the more unreasonable it is for the paying party not to take up the offer.

18.  At the same time, it is also necessary for the court to stand back and consider whether, viewed in the round, any given award of enhanced interest would provide a disproportionate benefit to the receiving party or impose a disproportionate burden on the paying party: Earl v Cantor Fitzgerald International (No 2).

19.  For instance, the low interest regime over the relevant period of time is a relevant consideration in determining the appropriate uplift: Chung Mei Industries Ltd v So Kwok Keung, HCA 2604/2005 (unreported, 10 June 2011) at para 5 per Deputy High Court Judge Carlson.  This is to guard against making an award that has the effect of giving the receiving party a windfall in interest that he would otherwise not have been able to achieve under the prevailing economic environment and conditions.

20.  I stress that as with any exercise of discretion, straightjackets are inapposite for the approach that the court should take when dealing with costs, and the above principles are there to guide and are by no means exhaustive.  Ultimately, the court should consider all the circumstances of the case: O.22, r.24(5).

21.  On the facts of the present case, I take the view that 6% above judgment rate is the appropriate rate of enhanced interest:

(1)  The amount of the claim is small.  A higher uplift in the rate of enhanced interest is thus called for so as to make a material difference to the outcome of the case.

(2)  Madam Cheung made the sanctioned offer at an early stage of the proceedings.

(3)  In her sanctioned offer, Madam Cheung was prepared to forgo her entire claim in order to settle.

(4)  Had Madam Chik not raised her counterclaim (which failed almost entirely after trial), the matter would have been litigated in the Small Claims Tribunal without the need for parties to engage lawyers at all.

(5)  Madam Chik failed to prove that Madam Cheung as her outgoing tenant had caused any of the alleged defects in the Premises. Indeed, I found that two of the six alleged defects already existed before Madam Cheung moved in.  Madam Chik also wholly failed to adduce any evidence to prove the quantum of repair cost and loss of rental.  Yet she still elected to fight the case to the bitter end.

(6)  I am not prepared to award a full uplift of 10% above judgment rate given the low interest regime nowadays.  I also take into account that in the judgment I ordered pre-judgment interest at 1% above prime (ie about 6%), and an enhanced interest at a rate of 6% above judgment rate (ie about 14%) would already mark an additional 8% of interest compared with my original order.

22.  Madam Chik shall pay interest on the judgment sum of $8,671 as follows:

(1)  from 23 August 2010 up to 21 February 2011: at HSBC prime rate plus 1% per annum;

(2)  from 22 February 2011 up to 3 October 2012 (date of judgment): at 6% above judgment rate per annum; and

(3)  from 4 October 2012 up to full payment: at judgment rate per annum.

23.  The order made in my judgment of 3 October 2012 relating to interest on the judgment sum is varied accordingly. 

Indemnity costs

24.  Mr Chan submitted that it is unjust to order indemnity costs against Madam Chik, for two reasons. 

25.  First, Mr Chan submitted that Madam Chik was not wholly unsuccessful in her counterclaim.  Her claim for arrears of the July rental was conceded by Madam Cheung, while she succeeded in her claim for mesne profits which was resisted by Madam Cheung at trial.

26.  Second, Mr Chan submitted that it was not unreasonable for Madam Chik to have fought through the trial in the District Court, since there were indeed defects in the Premises and she was entitled to test the evidence at trial, even though at the end of the day she failed to prove that it was Madam Cheung who had caused such defects.  It was only with the benefit of hindsight that Madam Cheung now says the whole case could and should be disposed of in the Small Claims Tribunal.

27.  I do not accept Mr Chan’s submissions.

28.  With regard to his first ground, it was not quite correct to say that Madam Cheung had conceded against Madam Chik’s claim for the arrears of July rental.  Throughout the proceedings, Madam Cheung never disputed that the July rental was outstanding, and in her claim for return of the two months’ rental deposit she gave credit for the July rental and sought to recover only one month’s rental deposit from Madam Chik. The arrears of July rental thus never formed a live issue at trial. 

29.  As to the claim for mesne profits, whilst Madam Cheung did contest the claim and failed at trial, the final net sum payable by Madam Chik still exceeded Madam Cheung’s sanctioned offer which proposed that both parties drop their claims against each other.  Overall speaking, Madam Cheung still did better after trial than her sanctioned offer, and I fail to see how Madam Cheung’s failure in resisting one of the many items in Madam Chik’s counterclaim would have altered the position.  It is to be noted that in approaching O.22, r.24, the court should assess who in reality is the unsuccessful party and who has been responsible for the facts that the cost has been incurred which should not have been: Factortame Ltd & Ors v Secretary of State for the Environment, Transport and the Regions [2002] 1 WLR 2438 at p 2448H (para 27) per Waller LJ.  Here, such unsuccessful party plainly is Madam Chik.

30.  As to Mr Chan’s second ground, whilst Madam Chik has the right to fight over her disputes with Madam Cheung at trial, she also has to accept that in so doing, she has to bear the inherent risk of losing her case and having to pay Madam Cheung’s costs and, in the event that she did not accept a sanctioned offer, the further risk of having to pay indemnity costs, interest on costs and enhanced interest.  Her own perception that there was a genuine dispute between the parties, her desire to test the other side’s evidence in a full trial, or her belief in the strength of her own case, do not in my view render it unjust for the court to make the orders under O.22: Power Color Scanning & Lithographics Co Ltd v Kam Kong Food Factory (a firm), DCCJ 3902/2007 (unreported, 9 November 2010) at paras 9 to 10 per Judge Mimmie Chan (as she then was); Rai Pabitdara v Vegetable Marketing Organization, DCPI 2473/2009 (unreported, 6 May 2011) at para 10 per Deputy Judge A Kot; Maxbase Investments Ltd v Chan Chui Ping & Anor, DCCJ 808/2010 (unreported, 15 June 2011) at para 6 per Deputy Judge Wilson Chan; and more recently CLP Power Hong Kong Ltd v Kong Chung Sang, DCCJ 2775/2010 (unreported, 5 September 2012) at paras 17 to 18 per Deputy Judge Grace Chan.

31.  Madam Cheung made her sanctioned offer at an early stage of the proceedings, namely less than one week after she had filed her Defence to Counterclaim.  She later made an improved offer to Madam Chik.  This showed that Madam Cheung all along acted very reasonably and sensibly to avoid litigation.  Moreover, had Madam Chik accepted the sanctioned offer, or had she refrained from bringing her counterclaim which almost failed in its entirety after trial, the matter would have been litigated in the Small Claims Tribunal, thus saving much time and, more crucially, legal expenses on both parties.  I see no reason why Madam Cheung should not have her costs on an indemnity basis.  This serves not as a punishment on Madam Chik’s conduct in the proceedings, but aims at achieving a fairer result for Madam Cheung, as far as money can redress, in enabling her to recover as much of her own legal costs as possible, when a normal party and party costs order will invariably lead to her recovering less than the actual costs which she had to pay to her solicitors: McPhilemy v Times Newspapers Ltd (No 2) at p 943F.

32.  Madam Chik shall pay Madam Cheung’s costs incurred in the action after 21 February 2011 (including the costs of this application and the hearing on 19 October 2012) on an indemnity basis, with certificate for counsel.  Madam Cheung’s costs incurred prior to 21 February 2011 will be taxed on a party and party basis, with certificate for counsel.

Interest on costs

33.  The power to order interest on costs under O.22 is conferred to redress the element of perceived unfairness which arises from the general rule that interest is not allowed on costs paid before judgment.  Generally, a successful litigant who has made payments to his own solicitor on account of costs in advance of the trial will be out of pocket even if he obtains, at the trial, an order for costs on an indemnity basis.  He will get interest on his costs from the date of the order (whether he has actually paid them or not), but he will get nothing to compensate him for the cost of money (or the loss of the use of money) which he has had to bear before trial in relation to payments which he has made on account of costs.  An order for payment of interest on costs enables the court to achieve a fairer result in that respect: McPhilemy v Times Newspapers Ltd (No 2) at p 944F-H.

34.  Plainly, in order to seek interest on costs, the applicant must put forward evidence before the court to show that he was actually out of pocket by payment of costs to his solicitors on account ahead of trial: Shih Pik Nog v G2000 (Apparel) Ltd [2011] 4 HKLRD 121 at para 18 (p 130) per Bharwaney J.  Without such evidence, there may be no basis for any order for pre-judgment interest on costs, meaning interest on costs will only run from the date of judgment, and at judgment rate.  Here, I am satisfied with the evidence filed by Madam Cheung that she has paid various sums of money to her solicitors ahead of trial as her costs on account.

35.  Mr Lam urged me to apply the rate of enhanced interest on the judgment sum as also the rate of interest on costs.  I disagree.  There should be a difference between these two rates, since the enhanced interest on the judgment sum compensates also for the general impact of proceedings, and there must not be double compensation for the impact as the provisions of O.22 are not intended to be penal: KR v Byrn Alyn Community (Holdings) Ltd [2003] PIQR P30 at para 22 per Waller LJ.

36.  In Golden Eagle International (Group) Ltd v GR Investment Holdings Ltd [2010] 3 HKLRD 273 at para 19 (p 280), Lam J (as he then was) observed that 4% above prime rate in Hong Kong (equivalent to 1% above judgment rate, ie 9%) is to be adopted as our generous assessment of costs of money.  Lam J further suggested a practical approach by ordering interest on costs at half of the aforesaid rate on all the costs incurred after the last day on which the sanctioned offer can be accepted without leave of the court, with interest starting to run from the same day for all the items of costs (at para 18, p 279).  Such simplified approach does away the need to ascertain the actual dates when the successful party had put up funds on account of costs and from which interest would run at the full rate, since it may be a complicated process if each item of work were to carry interest from a different date.  I see no reason not to follow such an approach.

37.  I therefore allow interest on Madam Cheung’s costs incurred after 21 February 2011 at 4.5% per annum, and such interest shall run from 21 February 2011 up to the date of judgment (3 October 2012).

Conclusion

38.  My orders are set out in paras 22, 32 and 37 in this judgment.  The costs order nisi in my judgment of 3 October 2012 is made absolute.