XCHRX HACHETTE FILIPACCHI PRESSE v. KADOR LIMITED

1994 No. A45

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. This has been a curious appeal which has dealt with the question as to what is the proper order for costs to be made on the facts of this case when the Plaintiff seeks leave to discontinue the action.

2. On 1st December 1994, Master Woolley gave the Plaintiffs leave to discontinue under Order 21, Rule 3 on terms that there be no order as to costs. The Plaintiff had claimed summary judgment which was rejected by Rogers J. He ordered the costs to be in cause and both sides agree that when considering the costs of the Order 14 summons on a discontinuance, the courts should treat the matter as if the judge had reserved the costs of the Order 14 summons to the court considering the discontinuance. The Master, in making no order for costs, made no separate order on the Order 14 summons.

3. The Defendants appeal and seek the costs of this action. Alternatively, they seek just the Order 14 costs. The Plaintiffs cross appeal and they seek the whole of the costs of the action alternatively the whole of the costs excluding the Order 14 costs. If the Plaintiffs succeed in this appeal, they will recover their costs of the action despite having been given leave to discontinue the action. There is apparently no case in the books where this has happened before but Mr. Clifford Smith for the Plaintiff submits that on the very special facts of this case such an order is a proper and just order to make.

4. This action was commenced by writ issued on 4th January 1994. The Plaintiff's claim was for passing off and trade mark infringement.

5. A defence was filed on 26th March 1994 which does not seek to deny liability for passing off or trade mark infringement but relies instead upon an alleged settlement agreement which is said to have come into existence by an exchange of correspondence consisting of nine letters, of which five are dated after the issue of the writ.

6. The Defendants contend that the matter was settled as a result of an exchange of correspondence between Baker & McKenzie for the Plaintiff and McKenna & Co. for the Defendant culminating in a letter dated 28th January 1994. The terms of the alleged settlement were said to be found in the draft deed of undertaking attached to a letter from the Plaintiff's solicitors dated 4th October 1993 with certain clauses deleted. According to the defence, the settlement agreement was reached on the basis that clauses 1, 5, 6 and 8 of the draft deed were deleted. Thus it was being contended that the agreement consisted only of clauses 2, 3, 4 and 7.

7. On 20th June 1994, the Plaintiff's Order 14 summons was heard by Rogers J. At that stage, the defence was still in its original form. The Defendant's summons to amend the defence was not issued until 7th July 1994, that is after the learned judge had given judgment on the Order 14 summons.

8. At the Order 14 hearing, the Defendant contended, as reflected in their then current defence, that a settlement agreement had been reached but that neither clauses 5 nor 6 formed part of that agreement.

9. On 20th June 1994, Rogers J. noted that the Defendant was not seeking to argue the substantive issues, held that there was arguably a compromise which did include the whole of clause 5 and gave leave to defend without condition. He ordered that the costs of the Order 14 application should be in cause.

10. After the Order 14 hearing and judgment, the Defendant applied to amend its defence to plead alternatively that the alleged settlement agreement included clause 5 of the draft deed and in the further alternative that it included both clauses 5 and 6.

11. Leave to amend was duly given and the amended defence now alleges three versions of the alleged settlement agreement. Firstly the one set out in paragraph 3 which encompasses clauses 2, 3, 4 and 7 of the draft. Secondly, the one set out in paragraph 3A which is an agreement which encompasses clauses 2, 3, 4, 5 and 7 of the draft. And thirdly by paragraph 3B, an agreement which encompasses clauses 2, 3, 4, 5, 6 and 7 of the draft.

12. By paragraph 4 of the amended defence, the Defendant offered to execute a deed in any of the forms set out above at the Plaintiff's election. The amended defence was served on 25th July 1994. The Plaintiff promptly responded by letter on 26th July 1994 and elected the version set out in paragraph 3B of the amended defence which, as I have noted, includes both clauses 5 and 6.

13. One day after the election, the Plaintiff issued the summons to discontinue which was itself issued two days after the amended defence had been served.

14. The Plaintiff contends that the effect of paragraph 3B of the amended defence is that the Plaintiff obtained substantively the relief sought in the writ. The Defendant is now prepared to give an undertaking in terms of clause 5 of the draft deed which corresponds to the 4th prayer in the writ.

In its original defence and in the Order 14 hearing, the Defendant had contended that clause 5 did not form part of the agreement.

15. Clause 5 is important because it provided that within seven days the Defendant will by its director make and serve a statutory declaration on Baker & McKenzie setting forth in full:-

(a) the names and addresses of all persons, firms and companies:-

(I) from whom it has ordered;

(ii) by whom it has been supplied with;

(iii) to whom it has supplied;

(iv) from whom it has received orders for;

any of the infringing items, promotional materials, packaging or other infringing materials; and

(b) the date, quantity and consideration for each such order or acquisition;

and that it will annexe to the said statutory declaration copies of all relevant documents in its possession, power, custody or control, including purchase orders, invoices, receipts, delivery notes, catalogues, shipping documents and otherwise;

16. Mr. Smith makes the point that prior to the amended defence, the Defendant had refused to accept that clause 5 formed part of the compromise agreement.

17. Mr. Smith on behalf of the Plaintiffs submits that the change in position effected by the amended defence means that the Plaintiff:-

(a) has no need to pursue the action further; and

(b) has obtained a real and tangible benefit from the proceedings to date.

18. It is for this reason that the Plaintiff has sought to discontinue the action.

19. Mr. Shaw of McKennas for the Defendant contends that the appropriate order is that the Plaintiff should pay the Defendant's costs of the action including the costs of the Order 14 application. He submits that the Defendant has asserted at all times that the case settled in January, while the Plaintiff has repeated its assertion that the case was not settled in January. He then puts his submissions thus:-

"The Defendant's position has been vindicated and the Plaintiff is now trying to bail out of the litigation. This is nothing more and nothing less than a run of the mill commercial litigation case in which the Plaintiff wishes to bail out. Having made its bed, it must lie on it and pay the Defendant's costs."

20. It is common ground between the parties that the costs are in the discretion of the court and this includes the costs of the Order 14 application, which were ordered to be in the cause. The effect of discontinuance is that the costs in the cause are treated as if they were "costs reserved" (Stratford - v- Lindley (1969) 1 WLR 1547).

21. Mr. Smith contends that the court has a wide discretion and if the Plaintiff can show that it has obtained a tangible benefit which would not have been obtained without commencing proceedings, the court may order that the Defendant should bear its own costs (see Barretts -v- Baird (1988) NLJ 357).

22. It was also common ground that the court would normally decline to go into the question as to which party would have won on the merits. (See my own judgment in Inchorov Credit -v- Cheung 1991 No. A1661 judgment delivered 23rd December 1991).

23. In the present case, the court does not have to go into the question of the merits of the substantive action as the Defendant never sought to plead a defence on the merits. The Defendant simply pleaded in its original defence that a settlement had been reached and in its amended defence pleaded a new settlement.

24. It is clear to me that this is a case where the action has been rendered academic by something which has been done by the Defendant and in those circumstances, the court will not be inclined to order costs against the Plaintiff. Unlike in some of the other cases which have been cited, there has been no third party intervention. The Defendant has made the action academic by its own conduct in amending the defence.

25. Mr. Smith goes further and submits that the amendment to the defence was engineered to avoid the prospect of being defeated on the original defence which had alleged that clause 5 formed no part of the settlement agreement. Rogers J. had expressed the view that if there was a settlement then it included clause 5. Soon after that observation from the learned judge, the defence was amended to add in clause 5 and/or clause 6.

26. On the facts of this case, I am quite satisfied that the Master came to the correct result insofar as he ordered that the Plaintiff should not bear the costs of the action. In other words, this is one of those cases covered by the case law cited to me where it is justifiable to give leave to discontinue without making a Plaintiff pay the costs of the action. In this case, the Plaintiff had a justifiable compliant in relation to passing off and infringement. As a result of commencing that action, the Defendant agreed to make an offer which in its final version was acceptable to the Plaintiff and gave them sufficient protection to justify them not proceeding with the action. This could never have been a case where it would have been right to order costs against the Plaintiff.

27. There are, however, two further matters to be considered. Firstly, who should bear the cost of the Order 14 summons and, secondly, whether on the facts of this case, it would be right to make the exceptional order that the Plaintiff should have the costs of the action.

28. As to the Order 14 costs, I cannot believe that the Master's order was correct. The simple fact of the matter was that the Plaintiff went by Order 14 well knowing that the Defendant was going to raise the issue of compromise. The learned judge found that it was arguable that a compromise had been entered into and in those circumstances gave unconditional leave to defend. In my judgment, this was never a case where an Order 14 application should have been issued. There was clearly a contention between the parties as to whether or not there had been a compromise. I agree with the judge that on the documents that I have seen it was arguable as to whether there was a compromise and in those circumstances the Order 14 application was not justified. I therefore cannot see why the Plaintiff should not pay the Defendant's costs of the Order 14 summons. The costs of the Order 14 summons are quite separate from the general issue as to whether the discontinuance should be on terms that there be no order as to costs or that the Plaintiff shall have their costs. The Order 14 application was a free standing application within these proceedings which failed. In the light of what has happened, I think the only proper order to make is that the Defendant shall have the costs of the Order 14 summons.

29. I now turn to the final question which is whether or not the Plaintiff should in fact have the costs of the action excluding the Order 14 costs.

30. Mr. Smith recognises that the court will not normally award costs to a discontinuing Plaintiff but may do so where the Defendant has acted unreasonably. He has referred me to Order 62 Rule 10 and to the notes which appear in the Annual Practice at 62/10 (page 1065) and 62/10/6 (page 1067).

31. Order 62 Rule 10(1) reads as follows:-

"Where it appears to the Court in any proceedings that any thing has been done, or that any omission has been made, unreasonably or improperly by or on behalf of an party, the Court may order that the costs of that party in respect of the act or omission, as the case may be, shall not be allowed and that any costs occasioned by it to any other party shall be paid by him to that other party."

32. The relevant part of the notes to Order 62 Rule 10 state:-

"The Court has no jurisdiction, when granting leave to discontinue to a Plaintiff, to order a Defendant to pay the Plaintiff's costs, save where the Defendant was guilty of misconduct within the meaning of O. 62 r. 10(1)."

33. Mr. Smith contends that the Defendant has acted unreasonably. He points out that the Defendant could have signed the consent summons attached to the Plaintiff's letter of 24th February 1994 if paragraph 4 had been limited to the disclosure of the source of supply. The Defendant's letter of 28th February asked for the consent summons to be amended by altering or deleting paragraph 4. Now of course the full disclosure provision of paragraph 4 of that consent summons, which is the same as clause 5 of the draft deed, has now been adopted by the Defendants themselves in its amended defence. If the Defendant is correct in saying that a settlement has been concluded in January 1994 on the terms set out in the amended defence, then it should have signed the consent summons sent to it on 24th February 1994 and the failure to do so was unreasonable and has led to the incurring of further costs in the action.

34. Mr. Smith contends that in a case where the Plaintiff's decision to discontinue has been prompted by an amendment of the defence, it is not unprecedented for a Plaintiff to be awarded the costs of the action. He points to the practice in patent actions for the Plaintiff to be given an election to discontinue and awarded the costs of the action where the Defendant amends its particulars of objection to the patent in questions. He relies on the passage at page 1050 of the Annual Practice which says:-

"In the Patents Court, where Defendants sought to amend and then to re-amend their particulars of objections, a See -v- Scott-Paine Order ([1933] 50 R.P.C. and para 104/7/1) was appropriate giving the Plaintiffs the right to elect to discontinue the action and be paid their costs. In deciding upon such an order the Court should consider what should be the date from which the Plaintiff was entitled to his costs if he elected to discontinue..."

35. The reference to the notes at 104/7/1 is a reference to the following passage:-

"The rule is that the patentee is to be placed in the same position as to discontinuing the action, or disclaiming a portion of his invention as if the new particulars had formed a part of the old particulars. A form which has been consistently followed is that in Baird -v- Moule's Patent Earth Closet Co. (1881) set out in Edison Telephone Co. -v- India Rubber Co. (1881) 17 Ch. D137. Earth Closet orders should date from working days not holidays... The ordinary rule is that the patentee has the costs of and occasioned by amendment of the particulars of objection..., then he has a period (usually 6 weeks) to elect whether or not to discontinue; if he does, he has to pay the Defendant the taxed costs of the action up to the date of the delivery of the original particulars of objection, but the Defendant has to pay to the patentee has taxed costs subsequent to such delivery." (sic.)

36. Mr. Smith relies upon this rule of practice and says that if it were applied by analogy the Plaintiff should get all its costs since the date of the original defence which was dated 26th March 1994. Mr. Smith also relies upon the well established principle that a judge may not award costs to a successful litigant who succeeds at trial on a point which he introduced into his case at a late stage. The successful litigant will sometimes be expected to bear the costs of the action prior to the date when he amended his case to plead the point in which he succeeded at trial. Mr. Smith contends that if the matter went to trial and the Defendant established a settlement on the terms set out in the amended defence the costs of the action prior to the date of amending the defence would not be awarded to the Defendant.

37. I think there is a lot of force in the submissions made by Mr. Smith. If the Defendants had conceded that there was a settlement in the terms now set out in paragraph 3B of their amended defence at the earliest possible stage, I have no reason to believe that the Plaintiffs would not have accepted that offer at a time before the costs of this action escalated. I think the court is entitled to take into account the fact that there never was any issue as to the substantive issues in this case and I have to say that although I do not think the Defendants conduct can be castigated as improper, it has been unreasonable in that the Defendant's position was not as open-handed and straightforward as Mr. Shaw would have me accept. It seems to me that the Plaintiff was perfectly justified in commencing these proceedings and in the end and after a lot of tactical manoeuvres, got virtually what it wanted out of these proceedings. I therefore think that this is one of those rare cases where the Plaintiff should have the costs of the action but that, for the reasons that I have endeavoured to state, those costs should exclude the cost of the unsuccessful Order 14 application. I appreciate that Mr. Smith has argued that if the settlement now alleged in paragraph 3B of the defence was made at an early stage, there would have been no need for the Order 14 application but one has to look at the Order 14 on the basis of the pleadings as they then stood and, as I have said, this was a case where there was clearly an issue and Order 14 was not, in the circumstances, appropriate.

38. It follows therefore that I propose to allow this appeal by ordering that the Plaintiffs shall have the costs of this action but they shall exclude the costs of the Order 14 summons heard by Rogers J. which costs will be paid by the Plaintiffs.

39. Although I do not know how this order will work out in financial terms, it is clear that both parties have had some element of success in this appeal. In those circumstances, the proper order for the costs before me should be no order as to costs and that is the order nisi I propose to make. I also propose to make an order nisi that there be no order as to costs before the Master.