PENNY'S BAY INVESTMENT CO LTD v. DIRECTOR OF LANDS

LDMR 23/1999

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

APPLICATION UNDER FORESHORE

AND SEA-BED (RECLAMATIONS) ORDINANCE

APPLICATION NO. LDMR 23 OF 1999

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AND

LDMR 1/2005

IN THE LANDS TRIBUNAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

APPLICATION UNDER FORESHORE

AND SEA-BED (RECLAMATIONS) ORDINANCE

APPLICATION NO. LDMR 1 OF 2005

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(Heard together)

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DECISION ON COSTS

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1.  On 25 May 2007, I handed down my determination on preliminary issues.  Since then, parties made submissions on future conduct of the proceedings and the question of costs at the hearings on 2  August  and 22 October 2007.  Directions were given for the filing of amended pleadings.  The outstanding question is costs.

2.  There are three sets of costs:

(a)	Costs of the hearings on the preliminary issues, including the application for such issues to be determined as preliminary issues;
(b)	Costs of the amended pleadings and other directions for the future conduct of the proceedings;
(c)	Costs of the arguments on the question of costs.

Section 12(3) of the Foreshores and Sea-bed (Reclamations) Ordinance

3.  The arguments on costs brought up an important point on principle in respect of costs in compensation cases.  The issue is whether costs of the proceedings in the Tribunal fall within the scope of Section  12(3) of the Foreshores and Sea-bed (Reclamations) Ordinance. That section provides:

“	Where any costs or remuneration are reasonably incurred or paid by a claimant in employing persons to act in a professional capacity in connection with the claim under subsection (1), such claim may include a claim for such costs or remuneration.”

4.  Similar provision can be found in Section 8(4) of the Lands Resumption Ordinance.  However, Section 10(2)(e)(ii) of the Lands Resumption Ordinance expressly provides that the Tribunal shall determine the compensation on the basis of, inter alias, the amount of any costs or remuneration referred to in those above-mentioned section.  This has led the Tribunal in some previous cases to the conclusion that compensation includes such costs as a matter of law and the Tribunal proceeded to assess the costs and remuneration by reference to the test of reasonableness, see Li Po Chun Estates Ltd v Director of Lands  CLR No.5 of 1996, 28 August 1997; Chan Kwong Man v The Secretary for Transport LDMR 36 of 2000, 15 August 2003; Chan Lok Tsun Tso v The Secretary for the Environment, Transport and Works LDMR 2 of 2004, 27  August  2004. 

5.  The approach for assessing compensation under the Lands Resumption Ordinance is applicable to compensation cases in other context: see Section 27 and Item 1 of Part II of the schedule to the Roads (Works, Use and Compensation) Ordinance, Section 32 and Item 1 of Part  II of the schedule to the Railways Ordinance and Section 18 and Item  1 of Part I of the First Schedule to the Mass Transit Railway (Land Resumption and Related Provisions) Ordinance.  However, in those statutes, there are express provisions suggesting that the costs of the proceedings in the Tribunal are to be dealt with by the way of an order on costs rather than an item for compensation.  Thus, Section 30(3) of the Roads (Works, Use and Compensation) Ordinance provides that unless there is special reason making it proper not to do so, the Tribunal shall order the claimant to bear his own costs and to pay the costs of the Secretary in so far as the costs are incurred after the making of an offer by the Secretary if the offer was not accepted and exceeds the amount of compensation later assessed by the Tribunal.  It follows that a claimant cannot assert that he is immune from costs liability because the combined effect of Sections 8(4) and 10(2)(e)(ii) of the Lands Resumption Ordinance is to give him costs of the proceedings as an item of compensation.  Similar provisions can be found at Section 35(3) of the Railways Ordinance and Section 23(3) of the Mass Transit Railway (Land Resumption and Related Provisions) Ordinance.

6.  Further, in Director of Buildings and Lands v Shun Fung Ironworks Ltd [1995] 2 AC 111, though there was no reference to Sections 8(4) and 10(2)(e)(ii), the Privy Council plainly proceeded on the basis that costs of the proceedings in the Tribunal is subject to the general discretion of the Tribunal.  The claimant in that case was ordered to pay the costs of the government incurred after a Calderbank offer on common fund basis. 

7.  There is no provision similar to Section 10(2)(e)(ii) under the Foreshores and Sea-bed (Reclamations) Ordinance.  Thus, a decision on this issue may or may not have impact in other cases as well.  The Claimant contends that legal costs of the proceedings in the Tribunal in compensation cases are covered by Section 12(3).  The Respondent submits otherwise.

8.  Though the phrase “costs or remuneration … incurred or paid by a claimant in employing persons to act in a professional capacity in connection with the claim” is wide enough to encompass legal costs incurred in pursuit of proceedings in the Tribunal, I am of the view that the legislature did not intend to curtail the general discretion of the Tribunal over costs for proceedings under the Foreshores and Sea-bed (Reclamations) Ordinance by virtue of Section 12(3).

9.  Section 12(3) should not be construed on its own.  It refers to the costs and remuneration in connection with a claim under Section 12(1). That is a claim to be delivered to the Director of Lands.  It provides that the claim may include such costs and remuneration. 

10.  The claim will then be considered by the Director who can admit or reject the whole claim or admit a specified part and reject the remainder, see Section 13(1).  If the claim delivered to the Director includes a claim for reasonable costs and remuneration in connection with the claim, the Director can consider and admit that part of the claim as well.  However, a claimant must comply with Section 12(1) before he can expect the Director to give proper consideration to this part of his claim.  Hence, a claimant must state the sum of money which he is willing to accept and give such particulars to substantiate the claim for costs and remuneration instead of a general unspecified claim for costs and remuneration.

11.  It follows that the cost and remuneration that could be included in the claim must be the cost and remuneration incurred prior to the consideration of the claim to the Director, not the costs incurred thereafter.

12.  It is only when the Director rejects the claim in whole or in part or when the parties do not agree as to the amount of compensation, the matter can be referred to the Lands Tribunal for determination.  Section  13(4)(b) provides that the Lands Tribunal shall determine “the amount of compensation payable by the Government to the claimant in respect of any interest, right or easement of the claimant in or over any foreshore or sea-bed injuriously affected by the reclamation in full and final settlement of claim”.  That sub-section does not provide for the costs of the proceedings in the Tribunal.

13.  Instead, costs of the proceedings in the Tribunal are governed by Section 12 of the Lands Tribunal Ordinance.  That section empowers the Tribunal to award costs to and against any party to any proceedings.  Further, Section 12(2) provides that Order 62 of the Rules of the High  Court shall apply to the award, taxation and recovery of costs in the Tribunal.  The procedure for taxation of costs under Order 62 is quite different from the procedure for assessment of compensation by the Tribunal.  Costs is taxed by the Registrar whilst compensation is assessed by a presiding officer with a member.  The procedural steps that have to be taken prior to the hearing are also different.

14.  Section 13 of the Lands Tribunal Ordinance is also relevant.  It is quite plain from this section that costs of the proceedings (dealt with under sub-section (d) of the section) are treated separately from the compensation determined by the Tribunal (under sub-section (a) of that section).

15.  Though Section 12(1) of the Lands Tribunal Ordinance explicitly provides that it is subject to the provisions of the ordinance giving the Tribunal jurisdiction in any matter, I do not read Section 12(3) of the Foreshores and Sea-bed (Reclamations) Ordinance as dictating how the Tribunal should exercise its general discretion as to costs of the proceedings.  As analysed above, that section only gives the power to the Director to award reasonable costs and remuneration when a claim is delivered to him for his consideration.

16.  In my view, on proper construction of Section 12(3), the costs and remuneration referred therein should be confined to cost and remuneration incurred prior to the delivery of a claim to the Direction and should not be extended to costs incurred in the proceedings before the Tribunal.

17.  In any event, as discussed below, Section 12(3) is broadly in line with the general approach of the Tribunal as to costs in compensation cases.

The approach of the Tribunal on costs in compensation cases

18.  There is not much disagreement between the parties as regards the approach under the common law.  Mr Yim fairly accepted that costs in respect of compensation cases should not be dealt with in the same manner as ordinary hostile litigation.  The special context in which such claim arises has to be borne in mind.

19.  In Emslie & Simpson Ltd v Aberdeen District Council (No. 2) [1995] RVR 159, Lord Hope made the following observations regarding costs in compulsory acquisition cases:

“

It seems to me that the underlying principle in these cases is that the acquiring authority is liable to pay compensation to the owner or occupier of the lands taken.  The expenses of determining the amount of disputed compensation may be seen to be part of the reasonably and necessary expense which is attributable to the taking of the lands compulsorily by the acquiring authority.  The principle which applied to litigation … is that the costs of litigation should fall on him who caused it.  The cost of determining the amount of the disputed compensation would seem, according to this principle, to fall on the acquiring authority without those resort to the use of compulsory powers there would have been no need for the owner or occupier to be compensated.  That seems to me to be the proper starting point for an examination of the question of expenses in these cases.”

20.  In the same case, Lord Morison said at para. 25:

“	In most cases … it is perfectly reasonable that … a claimant should put forward his claim on the maximum basis which he can reasonably support and should be entitled to the expenses of doing so if he is successful in the general assertion of his right.”

21.  Along the same line, Potter LJ said the following in Purfleet Farms Ltd v Secretary of State for Transport [2003] 1 P& CR 20 at para.  29:

“

…the proper approach of the Tribunal for the costs of a successful claimant (i.e. a claimant who is awarded more than the amount of an unconditional offer by the respondent) should be that he is entitled to his costs incurred in the proceedings in the absence of some ‘special reason’ to the contrary.  Whether such special reason exists in any given case is a matter for the judgment of the Lands Tribunal.  Plainly it may exist where wasted or unnecessary costs have been incurred for procedural reasons as a result of the conduct of the claimant (e.g. abandoned issues, unnecessary adjournments, or failure to comply with directions of the Tribunal).  However, so far as the nature and substance of the case advanced by the claimant is concerned, special reasons should only be regarded as established where the Tribunal considers that an item of costs incurred or an issue raised was such that it could not on any sensible basis be regarded as part of the reasonable and necessary expenses of determining the amount of the disputed compensation.  This would apply not only to a claim advanced without any statutory basis but to other examples of manifestly unreasonable conduct which may give rise to unnecessary expense in the course of the proceedings.  It means, in my view, that, following the hearing of a compensation reference in the Lands Tribunal in which the claimant has been successful, a special reason for departing from the usual order for costs should only be found to exist in circumstances where the Tribunal can readily identify a situation in which the claimant’s conduct of, or in relation to, the proceedings has led to an obvious and substantial escalation in the costs over and above those costs which it was reasonable for the claimant to incur in vindication of his right to compensation.”

22.  It is also of interest to note how Potter LJ dealt with exaggeration of claim in the overall costs position at Para. 36:

“

…in considering the question of whether or not special reason exists to depart from the usual order, it may usefully “have regard” to … whether or not the claimant has exaggerated his claim.  In considering that last question, however, exaggeration alone is not enough in the event of a large disparity between the sum claimed and the sum awarded.  The matters to which the Tribunal should have regard are (a) the reasons for that disparity, and (b) their effect upon the conduct of the claim.  As to (a), if the reasons are defensible, in the sense that there was a legitimate, albeit unsuccessful, argument put forward in support of the figure concerned, there can be no good reason to regard the claim as exaggerated in the pejorative sense necessary to justify a sanction in costs.  As to (b), if, in any event, the effect on the proceedings in terms of the time spent and the costs incurred in disposing of the issue or argument concerned is relatively insignificant, then again an adverse order is unlikely to be appropriate.”

23.  His Lordship’s comments at paras. 38 and 37 on adverse costs order when an exaggerated claim is based on expert evidence are also pertinent.  At para. 37, the general rule was explained: because valuation is an inexact science and where there is legitimate room for argument and difference of opinion, even if the Tribunal concluded that the comparable relied on is inapt, that should not ordinarily invite a penalty in costs.  The exception was then set out at para. 38:

“

…disallowance of a proportion of the claimant’s costs will usually only be justified where the Tribunal is satisfied that (a)  no competent valuer could reasonably have regarded the comparable as of real relevance or assistance in the valuation exercise; (b) as a result of its introduction and discussion, a significant amount of the Tribunal’s time has been wasted and the proceedings unduly prolonged; (c) no equivalent or near equivalent proportion of the proceedings has been spent dealing with issues unreasonably and unsuccessfully raised by the respondent; (d) the amount or proportion of the costs disallowed is proportionate to the time wasted.”

24.  The principle of equivalence was identified as the underlying rationale of this approach, see Purfleet Farms paras. 22 and 42. Chadwick LJ put it concisely at para. 42:

“

…where there has been no offer or where the amount of the award exceeds the amount of the offer, then (again, prima facie) “the expenses of determining the amount of disputed compensation may be seen to be part of the reasonable and necessary expense which is attributable to the taking of the lands compulsorily by the acquiring authority”  In such a case the refusal to allow the claimant some part of his costs of the reference must be justified by a finding that the costs to be disallowed have not been incurred as part of the reasonable and necessary expense of pursuing the reference.  As Potter LJ has put it, the Tribunal must be able to identify circumstances ‘in which the claimant’s conduct of, or in relation to, the proceedings has led to an obvious and substantial escalation in the costs over and above those costs which it was reasonable for the claimant to incur in vindication of his right to compensation’. Costs attributable to conduct that nature can form no part of “the losses fairly attributed to the taking of his land’ in respect of which the claimant is entitled to compensation.”

25.  With respect, bearing in mind the applicability of the principle of equivalence in Hong Kong, I am of the view that the English approach on costs in compulsory acquisition cases is equally applicable in the present context. 

Should there be an adverse costs order against Applicant for the determination of the preliminary issues?

26.  Whilst I have determined the preliminary issues in favour of the Respondent and rejected the Applicant’s submissions on those issues, it does not follow automatically that the Applicant should be ordered to pay the costs of the hearings on the preliminary issues.  In accordance with the approach set out above, it is necessary to consider whether the costs pertaining to the determination of the preliminary issues can be regarded as outside the scope of the reasonable and necessary expense of pursuing the compensation claim arising from the reclamation scheme.

27.  At this stage, it is not known whether the Tribunal would award compensation to the Applicant.  The Respondent’s primary position is that there should not be any further compensation.  The Applicant disagreed. 

28.  The Applicant no doubt acted on the advice of its legal advisers in arguing for the notional contract approach and infringement of Article 105.  Experienced leading counsel argued the case for the Applicant had advanced respectable arguments to support his contention.  Though I come to different conclusions in my judgment, I do not regard the running of those arguments as unreasonable.

29.  An analogy can be adopted with Potter LJ’s observations regarding expert evidence.  Like valuation, the law is not an exact science and there is scope for reasonable disagreement.  Given my view on the reasonableness of the arguments advanced on behalf of the Applicant on the preliminary issues, I do not think it is appropriate to penalize the Applicant on costs solely on account of my rejection of such arguments. 

30.  Mr Yim relied on the fact that the Respondent repeatedly explained to the Applicant as regards the correct approach for assessment of compensation for injurious affection.  I do not think that renders the Applicant’s stance on the preliminary issues unreasonable.  The legal arguments are complex and as I said, there was reasonable scope for disagreement.  This is not a case where the Applicant’s contentions are plainly unmeritorious.

31.  Counsel’s reliance on Roadchef Motorways Ltd v Secretary of State [2006] EW Lands ACQ/45/2005, 13 July 2006 is completely misplaced.  The English Lands Tribunal decided in that case that the proper order for costs on preliminary issues in the special circumstances of that case should be no order as to costs.  I do not need to go into the details of the special circumstances that were alluded to in paragraphs 18 to 19 of that judgment.  Apparently there were changes of position on the part of the claimant in that case.  The President found that in the light of the way in which the claim had been advanced and the disagreements between the parties have arisen, it was impossible to say that the Secretary of State was the cause of the costs of the preliminary issues being incurred.  Suffice to say I am dealing with a completely different scenario and at this stage, I cannot say that the costs of the preliminary issues had been unreasonably incurred.

32.  Thus, I am not prepared to make an adverse costs order regarding the costs of the preliminary issues against the Applicant at this stage.

Costs in the cause or costs reserved?

33.  Parties have put forward two different proposed orders as to costs in the event I decline to make any adverse costs order against the Applicant.  Mr Yim urged this Tribunal to order costs reserved.  Counsel is concerned that an order of costs in the cause would somehow pre-empt the Tribunal from revisiting the costs of the preliminary issues separately from the costs of the proceedings as a whole.

34.  Though Mr Chang had suggested costs in the cause, I understand that he was not seriously contesting that costs of the preliminary issued be reserved.

35.  At this stage, I think it would be better to keep all options open and the Tribunal may, after all the dusts have been settled, wish to consider making a special order on the costs of the preliminary issues in the light of developments between now and the final disposal of the matter.

36.  I will therefore order costs of the preliminary issues be reserved.

Costs of the amended pleadings and direction hearing

37.  I think the usual rule as regards amendment of pleadings should apply and the Applicant should bear the costs of the amendment of the pleadings.

38.  As regards the costs pertaining to directions on future conduct, I again see no reason to depart from the usual practice that the costs should be costs in the cause.

Costs on argument as to costs

39.  The Respondent is unsuccessful in the application for an adverse costs order against the Applicant for the costs on preliminary issues.  But I have reserved costs rather than ordering costs in the cause as advocated by Mr Chang.

40.  Regarding the argument on costs, I will order the costs thereof be Applicant’s costs in the cause.