LEE PO NIN v. KWOK LIN HING

HCA 305/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 305 OF 2010

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D E C I S I O N

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THE APPLICATION

1.  By way of a Summons filed on 18 November 2016 (“the Summons”), the defendant applied to enforce against the third party in respect of the settlement agreement they had entered into as per the terms contained in the Schedule annexed to the consent order filed on 29 November 2013 (“the Tomlin Order”).

BACKGROUND

2.  In this action, the plaintiff claimed against the defendant for the delivery of vacant possession of the premises known as 2^nd floor and roof of a small house erected on Lot No. 585 on Demarcation District No.21 (“the suit property”) and the defendant counterclaimed against the plaintiff for the specific performance of the agreement for sale of the suit property.

3.  The defendant took out the third party proceedings against the third party for their professional negligence and breach of contract as solicitors for the defendant in handling the purchase and/or conveyancing of the suit property.

4.  The hearing of the trial of the action including the third party proceedings was fixed in December 2013.

5.  Since October 2013, the defendant and the third party had been engaging in negotiation for settlement of the third party proceedings.  Eventually, they managed to reach a settlement before trial on 12 November 2013, which terms were subsequently incorporated into the Schedule annexed to the Tomlin Order (“the Schedule”).  By that time, the main action had yet been settled.

THE COURT’S JURISDICTION IN HEARING THIS APPLICATION

6.  Mr Kenny Lin, counsel representing the defendant at this hearing, submits that para 1 of the Tomlin Order allows the enforcement of the terms of the settlement agreement within the original action by way of summary procedure.  He cited E F Phillips & Sons Ltd v Clarke [1970] Ch 322 and Luk Por v Chau Kim Hung (HCA 10369 of 1997, 8 October 2003) in support.  Mr. Simon Tang, solicitor representing the third party at this hearing, also agreed that this court do have jurisdiction to summarily determine whether there was indeed such a breach of clause 3 of the Schedule (“the said clause 3”) as contended by the defendant on the affidavit evidence before this court.

THE PARTIES’ RESPECTIVE CONTENTIONS

7.  The said clause 3 provides that:-

“3. The Third Party do indemnify the Defendant’s liability to pay any adverse costs order (including those of taxation) made against the Defendant in this action up to and including 12^th November 2013, provided that the taxation of such costs or any part thereof can be dispensed with if the Third Party shall agree to the amount of such costs.” (emphasis added)

8.  The defendant essentially contends that the third party is liable under the said clause 3 to indemnify the defendant’s liability to pay the plaintiff’s costs in the main action up to and including 12 November 2013 notwithstanding the adverse costs order ordering the defendant to pay the plaintiff’s costs of the action was made after that date.

9.  And, the relevant adverse costs order was subsequently made by Seagroatt DHCJ at the first day of the trial hearing on 2 December 2013 when the defendant and plaintiff came to a settlement of the main action on that date[1].

10.  The plaintiff’s bill of costs then proceeded to taxation, and the relevant Allocatur issued on 11 August 2015 (“the Allocatur”)[2] apportioned the plaintiff’s costs of action into two parts – one is in relation to work done up to and inclusive of 12 November 2013, and the other is for those after 12 November 2013.

11.  Under the Allocatur, the defendant’s liability to pay the plaintiff’s costs of the main action up to and including 12 November 2013 (inclusive the taxing fee) was taxed at HK$480,750.30.

12.  The defendant contends that the third party refused to pay up such sum of HK$480,750.30 despite their repeated demands, and therefore has been in breach of the said clause 3.

13.  The third party did not quarrel with the quantum of such figure.  However, according to Mr Tang’s submission, the said clause 3 covers only two individual adverse costs orders which had been made before 12 November 2013, rather than the defendant’s liability to pay the plaintiff’s costs of the main action to the extent up to 12 November 2013.

14.  Before 12 November 2013, it is undisputed that there had been only 2 adverse orders made against the defendant in the main action (“the 2 prior costs orders”) – one of them was assessed at HK$1,600 and another one concerned certain amendment to pleadings made on 2 September 2013[3] which could not involve any substantial costs.

15.  Under the normal course of things, it appears that these two prior costs order have been taxed and included as part of the sum of HK$480,750.30.  In any event, at the outset of the hearing, Mr Lin confirmed with this court that the defendant was not separately pursuing against the third party in respect of the 2 prior costs orders.  There is no evidence of any separate demand for payment upon the third party ever made by the defendant solely with respect to these two costs orders.

16.  This court is therefore not asked or otherwise required to deal with any question as to whether the third party has failed to comply with the said clause 3 with respect to the 2 prior costs orders individually for the purpose of determination of the Summons.

THE RELEVANT LEGAL PRINCIPLES

17.  In my judgment, the resolution of the Summons essentially turns on the proper construction of the said clause 3.

18.  I agree with Mr Lin’s submission that the starting point for the construction of the said clause 3 is context rather than to search for the natural and ordinary meeting of the words employed.  It is especially so in this case because there is in my view an ambiguity in the wordings used in such clause.

19.  In my judgment, the ambiguity lies in whether the phrase ‘up to and including 12 November 2013’ is actually delineating the extent of liability of the defendant to pay the plaintiff’s costs of the action under any adverse costs order which may be made against the defendant after 12 November 2013 (as the defendant contends), or demarcating the date on or before which any adverse costs order (that had already been made against the defendant in favour of the plaintiff) as would be responsible for by the third party (as the third party contends).

20.  In Fully Profit (Asia) Ltd v Secretary for Justice (2013) 16 HKCFAR 351, Ma CJ at para 15 held that:-

“15. We have been referred to the very well‑known statement of principle regarding the construction of contracts contained in the speech of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society, to which can be added the judgment also of Lord Hoffmann NPJ in Jumbo King Ltd v Faithful Properties Ltd.  What emerges from these cases-and other authorities on contractual interpretation- is the overall importance of context when construing contractual terms.  The statements of principle in Investors Compensation Scheme and in Jumbo King refer time and again to the relevant background against which the relevant contract and contractual terms must be viewed.  It is in my view not particularly helpful in most cases to refer to the “ordinary and natural meaning” of words because, as very often experience tells us, there can be much debate over exactly what is the ordinary or natural meaning of words.  The surer guide to interpretation is context.  Here, I would just add that in the area of statutory and constitutional interpretation, it is context that is key; context is the starting point (together with purpose) rather than looking at what may be the natural and ordinary meaning of words.” (emphasis added)

21.  In order to resolve the ambiguity of language used in the relevant contractual term, the unreasonableness of the results of any particular construction is a relevant consideration in choosing between rival constructions.  In L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235, Lord Reid had the following to say at p.251E:-

“The fact that a particular construction leads to a very unreasonable result must be a relevant consideration. The more unreasonable the result the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they shall make that intention abundantly clear.”

22.  The court in such an exercise is also entitled to look into the negotiation between the parties leading to a settlement as an aid to its interpretation even though the negotiation was conducted on a ‘without prejudice basis’.  In this connection, Mr Lin has helpfully referred me to Oceanbulk Shipping and Trading SA v TMT Asia Ltd [2011] 1 AC 662.  I respectfully agree to Lord Phillips PSC’s observation as neatly put at para 48 of his judgment:-

“…When constructing a contract between two parties, evidence of facts within their common knowledge is admissible where those facts have a bearing on the meaning that should be given to the words of the contract.  This is so even where the knowledge of those facts is conveyed by one party to the other in the course of negotiations that are conducted “without prejudice”.  This principle applies both in the case of a contract that results from the without prejudice negotiations and in the case of any other subsequent contract concluded between the same parties.”

23.  Mr Tang has no quarrel with the above principles.  The difference between the parties lies in their different emphasis on the relevant part of the factual matrix of this case to which these principles apply, and their different interpretations of the wordings used in the said clause 3 against the present context.

24.  In my judgment, the relevant underlying factual matrix which provides the context for the said clause 3 are as follows:-

(1) One of the subject matters for the parties’ negotiation throughout their correspondences was in relation to the indemnity offered by the third party to cover (a) the defendant’s costs in defending the main action and taking the third party proceedings; and (b) the defendant’s potential liability to pay the plaintiff’s costs of the main action.

(2) When the settlement between the defendant and the third party was reached on 12 November 2013, the defendant’s potential liability to pay the plaintiff’s costs of the main action had yet been settled.  By then, there still in theory existed a chance that the defendant needed not pay for such costs of the plaintiff if, say, the defendant successfully defended the plaintiff’s claim after trial.

(3) On the question of costs, the defendant and the third party in their entire negotiation had not made any specific reference to the 2 prior cost orders.  Their focus was on the defendant’s reasonable costs of the action, and the plaintiff’s costs of the action which the defendant was potentially responsible for.

25.  Against such context, in my judgment, the choice of phrase ‘any adverse costs order made’ under the said clause 3 was so adopted by the parties to reflect their anticipation of a potential costs order to be made against the defendant for paying the plaintiff’s costs of the action after trial if the plaintiff wins their case, or a potential costs order as may otherwise be agreed between the plaintiff and the defendant in dealing with such costs under a subsequent settlement for avoiding such trial.

26.  Such view is borne out by examining more closely at the parties’ without prejudice correspondences negotiating on the question of costs.  From the outset of such negotiation, the third party had in principle agreed to fully pay the plaintiff’s costs of the action.  Such offered costs coverage also accords with the legal principle that the third party would prima facie be liable to indemnify the damages suffered by the defendant as pursued against them under the main action (including reasonable costs of the action as incurred by the plaintiff in bringing the claim against the defendant) if the third party was to be subsequently held liable for their professional negligence at the end of the day.

27.  According to the relevant correspondences leading to the subject settlement as produced for this hearing, the third party’s solicitors wrote their first letter dated 23 October 2013 (addressing to both the plaintiff’s solicitors and the defendants’ solicitors) with a detailed breakdown of their settlement offer made pursuant to Order 16 rule 10 of the Rules of High Court (Cap.4A).   By observing the way such offer was structured in that letter, one can see that the third party originally aimed for a tri-parte settlement.

28.  When dealing with the plaintiff’s costs claimed against the defendant in that letter, the third party’s solicitors made reference to the Costs Budget Plan filed by the plaintiff on 30 December 2011 (pursuant to an earlier order made by Registrar Lung) which estimated a total sum of HK$512,000 to be incurred by the plaintiff up to and including trial of the action.[4]  The figure of HK$512,000 included a sum of HK$280,000 as estimated counsel fee, which the third party’s solicitors assumed (in their letter) that such entire sum of HK$280,000 is for the trial[5]. 

29.  At the end of such letter, the third party offered to pay HK$2,034,504 to the defendant (inclusive of HK$348,000 as the defendant’s costs in defending the plaintiff’s claim and in taking the third party proceedings), and HK$232,000 (i.e. HK$512,000 – HK$280,000) to the plaintiff as their costs of action against the defendant (excluding counsel fee for the trial).[6] According to the third party’s understanding as set out in para 17 of the letter, such costs budget plan would reflect a realistic estimate of ‘the costs (of the plaintiff) incurred and to be incurred for and including the trial.’

30.  After receiving the defendant’s solicitors’ letter of counteroffer dated 25 October 2013[7] and the plaintiff’s letter of 24 October 2013, the third party then changed their settlement strategy to a bi-parte one as between themselves and the defendant, envisaging that the defendant and the plaintiff may proceed further to trial without their involvement.

31.  The third party’s solicitors sent their next offer letter dated 31 October 2013 addressing to the defendant’s solicitors only.  This time, they revised the third party’s offer to HK$2,494,056 plus the defendant’s reasonable costs of this action and ‘to satisfy any adverse costs order made against the defendant in favour of the plaintiff after trial.’[8]  Consistent with my observation made earlier in para 24(2) above, the words ‘any (adverse costs order made) … after trial’ were in my view drafted in such context to signify that the third party’s offered indemnity to satisfy the defendant’s liability to pay the plaintiff’s costs of the action would kick in when the court makes an adverse costs order after trial directing the defendant to pay the plaintiff’s costs of action (normally when the plaintiff wins in their claim).   In such event, such adverse costs order would also naturally cover the 2 prior costs orders.   On the other hand, if the plaintiff lost after trial for whatever reason and no such adverse costs order is made, the offered indemnity for such costs coverage would not arise.

32.  On 5 November 2013, the third party’s solicitor wrote another letter to the defendant’s solicitors (making specific reference at its outset to the without prejudice discussions on 4 November 2013 between their respective handling solicitors – Mr Simon Tang and Mr Bilan Mak) and revised their offer to HK$2,600,000 plus the defendant’s reasonable costs of this action up to the date of acceptance of the offer and to satisfy any adverse costs order made against the defendant in favour of the plaintiff up to the date of acceptance of the offer.[9]

33.  Pausing here, by reading these last two letters written by third party’s solicitors against the above backdrop, it is reasonable to construe that the phrase ‘up to the date of the acceptance of the offer’ was added by the third party to clarify the coverage of their indemnity with respect to both sets of costs (i.e. one set payable by the defendant in defending the plaintiff’s claim and taking the third party proceedings, and another set under any adverse costs order which may be made against the defendant with respect to the plaintiff’s costs of the action) was limited to such extent up to the date of acceptance of the offer only.

34.  Such intended costs coverage by the third party is also consistent with their earlier stance as expressed in the first offer letter written to the other two parties whereby the third party had effectively offered to pay the plaintiff’s costs of the action before trial at such estimated figure according to the costs budget prepared by the plaintiff.  (see : para 29 above)

35.  On 11 November 2013, the third party’s solicitors gave a further offer to the defendant’s solicitors which was basically the same as the preceding one save that the figure of HK$2.6 million was adjusted upwards to HK$2.76 million and their settlement proposal for both set of costs remains the same.   By way of their letter dated 12 November 2013, the defendant’s solicitors accepted this last offer from the third party.

36.  In light of the aforesaid, it can also be readily observed from the correspondences that the phrases - ‘up to and including …’ and ‘up to the date of ...’ had been consistently used by the third party to describe the extent of either the plaintiff’s costs of the action or the defendant’s costs of the action.

37.  In these circumstances, in my judgment, although the letter of 5 November 2013 and thereafter as issued by the third party solicitors did not expressly refer ‘any adverse costs order made against the defendant in favour of the plaintiff’ as one which may potentially be made after trial or by way of settlement between the plaintiff and the defendant in lieu of trial, that should be reasonably understood in the context in light of the above analysis.

38.  Mr Tang now seeks to argue that the adverse costs order as referred to in their letter of 5 November 2013 are confined to the 2 prior costs orders only.  With respect, such interpretation is unreasonable and does not make good sense from the point of view of settlement between the parties against the relevant context of this case.

39.  First, no specific reference of these two adverse costs orders had ever been made by any party in all these correspondences. In other words, such suggested construction would be made out of context, effectively disregarding how the indemnity coverage for the defendant’s liability to pay the plaintiff’s costs had actually been put forward by the third party’s solicitors to the defendant’s solicitors in their negotiation correspondences as discussed above.

40.  From the point of view of the compensatory principle of indemnifying the damages suffered by the defendant, both set of costs would prima facie go hand-in-hand with each other and be dealt with in a uniform way.  To say the least, the third party never indicated in any of the correspondences that these two sets of costs should be treated differently.  In fact, the third party’s solicitors at para 23 of their letter of 31 October 2013 stated that:-

“23. We take the view that an amicable settlement would be in the commercial interests of all parties and, as costs could be taxed in any event, the issue of costs should not be a stumbling block toward a resolution of this matter.”

41.  The above theme of uniform treatment on costs by the parties as demonstrated from the correspondences leading up to their settlement is also reflected from paras 2 and 3 the Schedule to the Tomlin Order:-

“2. The Third Party do pay to the Defendant on a party and party basis his own costs of the main action (including the claim and the counterclaim) and the Third Party Proceedings, up to and including 12^th November 2013, to be taxed if not agreed.

3. The Third Party do indemnify the Defendant’s liability to pay any adverse costs order (including those of taxation) made against the Defendant in this action up to and including 12^th November 2013, provided that the taxation of such costs or any part thereof can be dispensed with if the Third Party shall agree to the amount of such costs.” (emphasis added)

42.  Second, such interpretation as now contended for by the third party would involve an abrupt change of their intention and stance by applying drastically different treatment for the two sets of costs. And yet, if there were ever any such change, it cannot in my view be clearly and objectively discerned from their subsequent correspondences as from 5 November 2013 onwards whilst the previous uniform treatment as proposed by the third party for these two sets of costs had been plainly expressed in their letters of 23 October 2013 and 31 October 2013. 

43.  Mr. Tang submits that a negotiating party is free to adjust his or her stance for any individual items under negotiation at any time before the settlement is reached.  That is generally speaking correct. However, in this particular case, it would still beg the question as to whether such change of intention or stance (as now contended for by the third party) has actually been made sufficiently clear to the other party in the subsequent correspondences, and can be objectively construed therefrom, or it is only seemingly embedded in ‘ambiguous’ language which cannot in truth withstand a reasonable and proper construction of such correspondences leading to the settlement agreement. 

44.  Gibbs J’s observation on construction of contract as made in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 is also pertinent here. At p 109 he said:-

“It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, “even though the construction adopted is not the most obvious, or the most grammatically accurate”…”  (emphasis added)

45.  By the same token, fairly speaking, I think the defendant’s solicitors in this case would not expect the third party’s solicitors to play a game of words by using or treating the time phrase ‘up to the date of acceptance of the offer’ or ‘up to and including 12 November 2013’ in such way to drastically depart from the context (as discussed above) so as to construe the term ‘any adverse costs order’ as stated in both the without prejudice correspondences and in the said clause 3 to refer to the 2 prior costs orders which in fact had never been specifically referred to by any party thitherto.

46.  Insofar as may be necessary, I think the affidavit evidence of Mr. Bilan Mak Yiu Wah can also be referred to further support the construction as contended for by the defendant.  At para 13 of his affirmation (filed on 18 November 2016), Mr. Mak deposed that:-

“After the said letter[10], I was invited by Mr Simon Tang of Messrs P.C. Woo & Co to meet up at Starbucks at Alexandra House on 4^th November 2013 and during the said meeting, Mr Tang reassured me that the offer of settlement was going to increase, and that his client through the insurer would bear all reasonable legal costs of the Defendant and the Plaintiff up to the settlement. At no time had Mr Tang mentioned in the said meeting or otherwise to me that the Third Party’s indemnity of the Defendant’s liability to pay the Plaintiff’s costs was limited to the costs order actually made before the settlement.” (emphasis added)

47.  This court ascertained from Mr Tang at the outset of the hearing that he did not seek to dispute Mr Mak’s affidavit evidence as quoted in the above passage.  As such, the evidence of Mr Mak on the third party’s stance of their indemnity of costs coverage as conveyed to him by Mr Tang at Starbucks on 4 November 2013 (ie the day immediately before the issuance of the third party’s solicitors’ letter of 5 November 2013) can be treated as undisputed fact between the parties for the purpose of the summary determination of the present Summons.  In any event, I see no evidence has ever been adduced by the third party to refute such evidence of Mr Mak.  I found such evidence as established and accept the same for the purpose of the present summary determination.  However for avoidance of doubts, even without such evidence, I still think it would already be clear enough from the relevant underlying factual matrix of this case as discussed above that the proper and reasonable construction of the said clause 3 should be that as contended for by the defendant.

48.  For completeness sake, I should also mention that in order to reinforce their respective contended constructions, Mr. Lin and Mr. Tang have both made submissions on certain proposed amendments to the draft terms of the Schedule made by either side but rejected by the other before they were finalised.  I do not see such submissions can advance either party’s case too far as the settlement had already been concluded by way of the parties correspondences on 12 November 2013 well before the signing of the Tomlin Order (incorporating the Schedule).  The final version of the terms of the Schedule are also supposed to properly reflect the terms as already agreed by the parties by way of their correspondences.  For avoidance of doubts, any submission made by Mr Tang with respect to those proposed amendments cannot detract my view on the proper construction of the said clause 3 as discussed above, and such submissions of his are also rejected.

CONCLUSION

49.  Due to the above reasons, and having considered all the submissions of Mr Lin and Mr Tang (whether made in their written skeleton submissions or at the oral hearing), I accept the construction of the said clause 3 as contended for by the defendant and reject the third party’s. I therefore hold that the third party is obliged to pay the sum of HK$480,705.30 as certified in the Allocatur pursuant to the said clause 3.

50.  Interest had been accrued on the sum of HK$480,705.30 at judgment rate after the issuance of the Allocatur on 11 August 2015 until the defendant’s solicitors fully paid up such sum and the accrued interest to the plaintiff’s solicitors on 12 January 2016[11].  

51.  This court also hold that the third party has not paid for the aforesaid amounts or any part thereof to the defendant in breach of their indemnity given under the said clause 3 notwithstanding the written demand made by the defendant’s solicitors on 26 August 2015.

52.  In these circumstances, and after fully considering the parties’ submissions on interest, I think it would also be just and appropriate for the third party to pay to the defendant interest accrued on the sum of HK$480,705.30 at judgment rate from 12 August 2015 onwards until 12 January 2016, and thereafter at HSBC best lending rate plus 1% until full payment.

53.  As such, this court order that the third party shall pay the defendant forthwith the sum of HK$480,705.30 together with the interest accrued thereon as mentioned in the preceding paragraph pursuant to the said clause 3.

COSTS

54.  Costs should normally follow the event.  I see no reason for this court to depart from such norm having considered the circumstances of this case. I order that the third party shall pay the defendant’s costs of the Summons with certificate for counsel to be taxed if not agreed.

55.  Lastly, it remains for me to thank Mr Lin and Mr Tang for their assistance rendered to the court.