CHAN CHI WAI also known as CHAN SAU PING AND ANOTHER v. CHAN SAU WAH AND OTHERS

HCA 2522/2016

[2019] HKCFI 1662

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2522 OF 2016

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(By Original Action)

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(By Counterclaim)

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DECISION ON COSTS

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Introduction

1.  On 23 January 2019, I delivered judgment in this action in favour of the plaintiffs and made a costs order nisi that there be no order as to costs.  The un-stated reason for departing from the normal costs order as can be gleaned from paragraph 52 of my judgment is the perceived unfair and unconscionable nature of the plaintiffs’ claim.  The purpose of that paragraph was to explain why the execution of the judgment is stayed. Paragraph 52 reads:

“ 52. I have mentioned the unfairness and unconscionable nature of the plaintiffs’ claim. In short, they are occupying House 14 to the exclusion of the 1^st and 3^rd defendants who are co-owners of that house and entitled to use and occupation of that house. They did so under a flat swapping arrangement agreed upon by the five brothers and that agreement was supported by consideration. The alleged ‘bare licence’ given to the 1^st and 3^rd defendant to occupy House 13 is not a bare licence, but a contractual licence. This ‘bare licence” was conceded by the defendants. Had they not so conceded, they would most probably succeed in their defence. Now, to seek justice, the defendants would have to commence partition proceedings against the plaintiffs to recover their interest in House 14. It is regrettable that the parties have refused my suggestion to have a global settlement of this action and their rights in relation to House 14. Further costs are going to be incurred to bring the partition proceedings so that the parties’ dispute can be fully disposed of. In view of the unfair and unconscionable nature of the plaintiffs’ claim, I shall order a stay of execution of the judgment for eight months for the 1^stand 3^rd defendants to consider commencing partition proceedings and making arrangement for delivering possession of the part of House 13 they occupied to the plaintiffs. The interest rate I am going to award is also tied to this period.”

2.  By summons filed on 1 February 2019, the plaintiffs applied tovary the costs order nisi and sought costs of the action or, alternatively, costs incurred after 10 September 2019 (being the date of a “Without Prejudice Save as to Costs” letter issued by the plaintiffs to the defendants) or such date as the court thinks fit, to be paid by the defendants to the plaintiffs.  The defendants oppose the application.

3.  The general principle of costs is set out in Order 62, rule 3(2) of the Rules of the High Court (“RHC”).  Costs is a matter of discretion for the court.  The starting point is that the successful party should be entitled to costs of the proceedings.  The burden is on the losing party to show why some different costs order should be made: see Hung Fung Enterprises Holdings Ltd v Agricultural Bank of China [1].  The discretion to depart from the general rule should be exercised to achieve a just result having regard to the circumstances of the case: Hong Kong Kam Lan Koon Ltd v Realray Investment Ltd (No 4) [2].  It should be exercised with due circumspection since too ready a departure from the general rule encourages unnecessary arguments: see Kam Leung Sui Kwan, Personal Representative of the Estate of Kam Kwan Sing, deceased v Kam Kwan Lai & Ors [3]. 

4.  Order 62, rule 5(1) RHC lists out the factors which the court will consider when exercising its discretion.  Amongst others, the court will take into account:

(1)   the underlying objectives set out in Order 1A, rule 1;

(2)   any written offer which is expressed to be “without prejudice save as to costs” and which relates to any issue in the proceedings.  But the court may not take the offer into account if, at the time it is made, the party making it could have protected its position as to costs by means of a sanctioned payment or a sanctioned offer made under Order 22;

(3)   the conduct of all the parties; and

(4)   any admissible offer to settle made by a party, which is drawn to the court’s attention.

“Conduct of all the parties” includes conduct before, as well as during, the proceedings: see Order 63, rule 5(2).

The facts

5.  The facts of this case has been outlined in the judgment and will not be repeated save the salient ones relevant for this cost application.  Some of the facts were disclosed in “without prejudice save as to costs correspondences” not available at trial. 

6.  The plaintiffs were beneficial owners of a plot of land known as Lot 1946RP in DD 449 (“Lot 1946RP”) which their grandmother caused to be transferred to their uncle (“Uncle Kai”) to hold as trustee for them in 1959 (the “1959 Trust”). In 1963, their grandmother also caused to be transferred a half shareinterest in another plot of land known as Lot 1570A in DD 449 (“Lot 1570A”)to Uncle Kai to hold on trust (the “1963 Trust”) for the plaintiffs, the 1^st and 3^rd defendants and their only other brother Chan Sau Fat who is not a party to these proceedings (collectively, the “five brothers”).

7.  In 1979, Uncle Kai transferred Lot 1946RP to the plaintiffs which they used to exchange for House 13 of Sam Tung Uk Resite Village under a government land exchange scheme.  Uncle Kai also exchanged Lot 1570A for House 14 which he later transferred to the five brothers in equal share.  Thus, the plaintiffs became joint legal and beneficial owners of House 13, while the five brothers became joint legal and beneficial owners of House 14.  The 1^st and 2^nd plaintiffs respectively chose to occupythe second and first floors of House 14.  The 1^st and 3^rd defendants and Chan Sau Fat respectively chose to occupy the second, first and ground floors of House 13.

8.  In course of time, dispute arose between the plaintiffs and the defendants.  The plaintiffs took the view that they are living in House 14 by right of their joint ownership.  They also took the view that they are the legal and beneficial owners of House 13 which they allowed the defendants occupy under a bare licence granted by them.  On the other hand, the defendants took the view that the five brothers are joint legal and beneficial owners of House 14 and joint beneficial owners of House 13,though the plaintiffs are its legal owner.  The 1^st and 3^rd defendants wished to have the legal interest in House 13 formally assigned to the five brothers jointly.

9.  On 25 February 2014, the 3^rd defendant’s solicitors, Messrs Leung Tam & Wong Solicitors (“LTW”) wrote to the plaintiffs demanding them to transfer the interest in House 13 to the five brothers jointly.  The basis of their demand was that Lot 1946RP was held by Uncle Kai on trust for the five brothers.  LTW threatened to commence legal action if the plaintiffs failed to response by 4 March 2014.

10.  On 3 March 2014, the plaintiffs’ solicitors, Messrs TC Foo & Co (“TCF”) refuted the 3^rd defendant’s claim and asserted their legal ownership over House 13 on the basis of the land record.  On 6 March 2014,TCF gave advance notice to the 3^rd defendant that the plaintiffs would revoke the licence given to him to occupy House 13 on 31 March 2014 and demanded him to deliver vacant possession of the first floor of House 13 by that day.  The plaintiffs further invited the 3^rd defendant to let them know if he need more time to make accommodation arrangements.  TCF said that it was hoped that the 3^rd defendant would comply with their demand and save litigation and costs.  TCF emphasised that as siblings, it had never been the plaintiffs’ intention to resolve their dispute by litigation.

11.  Then, the 1^st defendant joined the 3^rd defendant.  In LTW’s letter dated 19 March 2014, they persisted with the claim and threatened to seek a vesting order under the Trustee Ordinance in respect of House 13,unless the plaintiffs comply with their demand.

12.  By their letter of 21 March 2014, TCF demanded the 3^rd defendant to deliver up vacant possession of the first floor and gave notice of revocation of the 1^st, 2^nd and 4^th defendants’ licence and demanded them to vacate House 13.  TCF also threatened to commence legal action.

13.  The defendants did not deliver up vacant possession.  The plaintiffs commenced action in the District Court under DCCJ 1503/2014. Soon after close of pleadings and before the exchange of witness statements,the plaintiffs proposed to settle their dispute by mediation.  Unfortunately,the mediation held on 23 March 2015 failed.

14.  By LTW’s letter dated 27 March 2015, the 1^st and 3^rd defendants made a without prejudice offered to surrender their interest in House 14 to the plaintiffs in return for the plaintiffs giving the 1^st defendant HK$3.6 million and the 3^rd defendant HK$4.1 million or alternatively one floor in House 13 or House 14.  In essence, the defendants were each askingfor one floor amongst the six floors in House 13 and House 14, or its money equivalent.  It is the 1^st and 3^rd defendants’ case that each of them had one-fifth interest in House 13 and House 14.  For ease of quantification, I assume the value of the two houses were about the same.  Each of them was, therefore, seeking to exchange his two-fifths interest in House 13 and House 14 for a one-third interest in either House 13 or House 14.  That was a compromise [4].  The compromise was not acceptable to the plaintiffs who stood firm on what they believed to be their legal position.

15.  On 7 September 2017, the defendants put forward a global full and final settlement offer.  They proposed the plaintiffs to discontinue their claim and concede to their counterclaim with no order as to costs.  That was also not acceptable to the plaintiffs.

16.  About a month before trial, the plaintiffs invited the defendants to explore settlement before incurring costs to brief counsel for trial.  They made a “Without Prejudice Save as to Costs” offer of global settlement covering both House 13 and House 14.  They proposed, inter alia, that:

(1)   both the plaintiffs and the defendants shall deliver vacant possession of the respective floors they were occupying in House 13 and House 14;

(2)   House 14 shall be sold in the open market at market price with vacant possession except for the ground floor which shall be sold subject to the existing tenancy of their sister.  The net proceeds of sale shall be divided among the five brothers; and

(3)   the plaintiffs would drop their claim for mesne profits and costs. 

By a letter dated 13 September 2018, the defendants rejected the plaintiffs’ offer as “unfair and unreasonable”.  As the event turned out, the offer was more favourable than what the defendants received after trial.

17.  Then, by a letter dated 4 October 2018, just two weeks before trial, the defendants came up with another proposal.  They offered to jointly pay the plaintiffs HK$500,000 in exchange for the interest of the respective floors in House 13 which they were occupying.  That was not a global settlement.  It only related to House 13.  On the basis of the plaintiffs’ case,the effect of that offer was to buy two-thirds interest in House 13 by their two-fifths interest with a cash supplement of $500,000.  Effectively, the defendants were seeking to top up their interest in House 13 from two-fifths to two-thirds by paying $500,000.  On that basis, House 13 was valued at $1,875,000 only [5].  Even on the basis of the defendants’ case, that was ridiculously low as the market price for such a three-storey house was $9,000,000 in 2013 and $5,400,000 in 2018.  Even in 2015, the defendants offered to sell their one-fifth interest in House 14 for $3.6 million or $4.1 million.  The offer was understandably rejected by the plaintiffs.

18.  In the end, what the plaintiffs obtained in the judgment is more favourable than what they offered to the defendants on 10 September 2018 or what was put forward by the defendants to them on 7 September or 4 October 2018.

The parties’ conduct

19.  Ms Ho, counsel for the plaintiffs, heavily criticised the defendants’ uncompromising or unreasonable response to the plaintiffs’ offer of settlement during the pre-litigation and pre-trial negotiations.  However, the criticisms were launched on the basis of the post-trial outcome.  If the defendants honestly believed in their cause, they were entitled to make the same criticism of the plaintiffs’ uncompromising attitude.  Both parties have dug their heels very deep in the sand and stood very firm on their position.  I give no weight to such criticisms of the defendants’ conduct during the pre-litigation and pre-trial negotiations.

20.  Soon after hearing commenced, this court sensed the unfairness and unconscionable nature of the plaintiffs’ claim as stated in paragraph 52 of the judgment.  I have pointed out the fact that as the plaintiffs were occupying House 14 belonging to all five brothers but to their exclusion (other than themselves), it was unfair for the plaintiffs to seek to exclude the defendants from House 13.  In the course of trial, there were repeated invitations to the parties to discuss a global settlement covering the two houses.  However, the attempts failed.  In the end, the plaintiffs succeeded. For the same reason as above, no adverse inference of misconduct could be drawn against either party.

The general rule

21.  In 2014, the 3^rd defendant started to claim a one-fifth interest in House 13.  The sole basis of his claim was family tradition and Uncle Kai’s oral assertion of undisclosed trust.  The evidence about family tradition, as I have found, was extremely flimsy.  The evidence of undisclosed trust was solely based on Uncle Kai’s testimony, which was wholly un-corroborated.  And when Uncle Kai stepped into the witness box,his evidence was a total disaster.  Even without the hindsight of this court’s judgment, the defendants and their legal team ought to have appreciated the weakness of their case and the risk of an unfavourable costs order.

22.  The reason for my costs order nisi is my concern over the perceived unfair and unconscionable nature of the plaintiffs’ claim.  At the time I made the order, I was unaware of the parties’ without prejudice correspondences.  Having read those correspondences, I am satisfied that they have removed those concerns.  By their without prejudice offer on 10 September 2018, the plaintiffs proposed a global settlement covering the two houses and offered to drop their claim for mesne profit.  Those concerns ceased to be a reason to depart from the general rule.

23.  In view of the weakness of their case, the defendants should have seriously considered the plaintiffs’ offer or should have made a more realistic counter-offer.  They rejected the plaintiffs’ offer of 10 September 2018 which was more favourable to them than the outcome of trial.  The above circumstances support the application of the general rule that costs to follow the event.  Prima facie, the plaintiffs are entitled to costs of this action or at least costs after 10 September 2018. 

The “probate approach”

24.  Ms Wong, counsel for the defendants, argues for a departure from the general rule.  She submits that although the present case is not a strictly probate case, like probate actions, it stemmed from ascertaining and enforcing the wishes of the older generation.  The grandmother has passed away.  The dispute is about facts which the parties have no personal knowledge.  Ms Wong argues that by analogy the present action is concerned with ascertaining the wishes of some older generations who have passed away in order to confirm the present interests which stemmed from those wishes.  She therefore submits, applying the policy reasons behind Spiers v English [6]and Kostic v Chaplin [7], that given the fair circumstances of doubt or suspicion by the defendants who is “chargeable with no other blame than that of having failed in a suit which was justified by good and sufficient grounds for doubt”, it is an appropriate occasion for “deviating from the common rule in other Courts, and of relieving the losing party from costs”. 

25.  The rationale behind this exception to the general rule in probate cases was explained in Kostic v Chaplin as follows [8] :

“ The basis of all rule on this subject should rest upon the degree ofblame to be imputed to the respective parties; and the question ‘whoshall bear the costs?’ will be answered with this other question, ‘whose fault was it that they were incurred?’ If the fault lies at thedoor of the testator, his testamentary papers being surrounded with confusion or uncertainty in law or fact, it is just that the costs of ascertaining his will should be defrayed by his estate. …

But if the testator be not in fault, and those benefited by the will not to blame, to whom is the litigation to be attributed? In the litigation entertained by other Courts, this question is in general easily solved by the presumption that the losing party must needsbe in the wrong, and, if in the wrong, the cause of a needless contest. But other considerations arise in this Court. It is the function of this Court to investigate the execution of a will and the capacity of the maker, and having done so, to ascertain and declare what is the will of the testator. If fair circumstances of doubt or suspicion arise to obscure this question, a judicial enquiry is in a manner forced upon it. Those who are instrumental in bringing about and subserving this enquiry are not wholly in the wrong, even if they do not succeed. And so it comes that this Court has been in the practice on such occasions of deviating from the common rule in other Courts, and of relieving the losing party from costs, if chargeable with no other blame than that of having failed in a suit which was justified by good and sufficient grounds for doubt. …

From these considerations, the court deduces the two following rules for its future guidance: first, if the cause of litigation takes its origin in the fault of the testator or those interested in the residue,the costs may properly be paid out of the estate; secondly, if there be sufficient and reasonable ground, looking to the knowledge and means of knowledge of the opposing party, to question whether the execution of the will or the capacity of the testator, or to put forward a charge of undue influence or fraud, the losing party may properly be relieved from the costs of his successful opponent.”

(Emphasis by the defendants underlined. 
Emphasis by the court in italics.)

26.  The principle is conveniently summarised in the last paragraph of the above quotation.  If the testator or the creator of the trust was at fault or those who benefited from the will or the trust are to blame, the general rule clearly applies.  If they were not, as emphasised by Ms Wong, the deviation from the general rule is justified.  Costs may be paid out of the estate. 

27.  The rationale for the deviation is justified by the special function of the probate court to investigate the execution of a will and the capacity of the maker, and having done so, to ascertain and declare what is the will of the testator.  I think the court of equity has as much the same function in a trust action.  The approach in Kostic v Chaplin, subject to such modification as may be necessary, is applicablein considering the issue of costs in a case involving dispute about a trust.  If the cause of litigation takes its origin in the fault of the settlor or those interested in the trust, the costs may properly be paid out of the trust property or by the beneficiary into whose hands the trust property was put.  If there be sufficient and reasonable ground, lookingto the knowledge and means of knowledge of the opposing party, to question whether the execution of the trust or the capacity of the settlor, or to put forward a charge of undue influence or fraud, the losing party may properlybe relieved from the costs of his successful opponent.  I must emphasise that given the origin of this rule, its scope is very narrow.  It is limited to dispute about due execution of the trust document, capacity of the settlor, undue influence or fraud.

28.  The grandmother was the person who called the shots.  She had control over her own funds and funds of the family.  The two houses originated from the family house which stood on Lot 1570A and Lot 1946RP.  The grandmother redeemed the above lots mortgaged by her son and created trusts over the land for her grandchildren, ie the five brothers.  For reasons unknown, she created the 1959 Trust over Lot 1946RP in favour of the two plaintiffs only and the 1963 Trust over Lot 1570A in favour of all five brothers.   

29.  Arguably, the defendants did not have knowledge of the legal and beneficial ownership of Lot 1946RP and Lot 1570A and the terms of the two trusts until the dispute in this case arose.  They thought they had one-fifth interest in each of the houses as they believed their grandmother would treat her grandsons equally.

30.  By their participation in the government land exchange scheme, the defendants must know that they became legal and beneficial owners of House 14 by reason of the transfer by Uncle Kai (who had exchanged Lot 1570A for House 14) and the 1963 Trust.  The defendants had not participated in the transfer of Lot 1946RP by Uncle Kai and the exchange for House 13 by the plaintiffs under the government land exchange scheme.  They knew they had no legal interest in House 13.

31.  The five brothers, their mother and the grandmother took possession of the two houses.  At the direction of the grandmother, they chosethe flats according to seniority.  As result, the defendants were allocated flats in House 13 in which they had no legal interest.  The above factual background, the fact that the houses originated from the family house and the allocation of the various floors of the houses gave the defendants the impression that all five brothers jointly owned the two houses.  Furthermore, it was reasonable for them to surmise that they had a beneficial interest in House 13 because of their not unreasonable belief that the grandmother would treat her grandsons equally.

32.  No one was concerned about ownership of the houses until the present dispute arose.  Prior to that, the defendants or indeed all the five brothers never asked the grandmother to clarify or confirm their beneficial ownership in House 13 while she was alive.  It seemed for 35 years until 2014 (or may be a few years before but the evidence of their earlier dispute, if any, had not been adduced in these proceedings) the defendants have been acting under the belief that the five brothers were beneficial owners of House 13 and House 14. 

33.  That belief was also shared by the 1^st plaintiff.  He said in evidence that he had no idea about the legal and beneficial ownership of thehouses.  When the dispute arose, he retrieved the documents and studiedthem.  It was only then that he found out that the plaintiffs were the sole legal and beneficial owners of House 13.  The plaintiffs asserted and maintained an uncompromising stance on their ownership of House 13.

34.  Then, the defendants sought clarification from Uncle Kai who was the trustee under the two trusts and the only surviving member of the earlier generation who could testify on the grandmother’s intention.  Uncle Kai confirmed their belief.  But when he stepped into the witness box, he turned around and gave a wholly different story.

35.  The intention of the grandmother and the documentations are clear and unequivocal.  The 1959 Trust was created in favour of the plaintiffs. The 1963 Trust was created in favour of the five brothers.  There was nothing to call for an inquiry as to the intention and capacity of the grandmother and Uncle Kai or the due execution of the trust documentation.  Even according to the evidence of Uncle Kai under cross-examination, the intention of the grandmother was crystal clear.  The grandmother created the trust provisionally in favour of the plaintiffs, but she never changed her mind.  The defendants may not query the generosity or the prejudice of the grandmother.  No fault could be attributed to the grandmother or the plaintiffs as beneficiaries under the 1959 Trust. 

36.  It may be argued that the grandmother and the five brothers created the confusion in the way the floors of the two houses were allocated. Again, that has nothing to do with the capacity and due execution of the documentations of the two trusts. 

37.  It may be argued that the defendants were utterly without fault relying on the witness statement of Uncle Kai.  That has nothing to do with the capacity of the grandmother and the due execution of the trust documents creating the 1959 Trust.  What Uncle Kai said in his witness statement was that the intention of the grandmother was to create a trust for all five brothers.  That is contradictory to the trust document he executed at the District Lands Office.  The defendants unwittingly relied on his statement without making further inquiries as to the reasons for the inconsistency.  In the end, in the witness box, Uncle Kai turned around and departed from his witness statement.  The defendants only had themselves to blame for failing to properly assess the reliability of Uncle Kai’s evidence before relying on it.  This is the usual risk of litigation, the consequence of which has to be borne by the party relying on that witness.

38.  The circumstances of the creation of the 1959 Trust had not reasonably led to an investigation in regard to the grandmother’s capacity and the due execution of the 1959 Trust.  There was no question of undue influence or fraud.  The plaintiffs are not to blame.  Even if this case were a probate case, it falls clearly outside the dicta of Kostic v Chaplin.  Even if this court is to adopt the approach in Kostic v Chaplin, the plaintiffs were not to blame and there was nothing which reasonably led to an inquiry as to the capacity and due execution of the 1959 Trust.  In the face of the documentation, the defendants’ knowledge about the 1959 Trust and 1963 Trust, there is nothing to raise any suspicion about the grandmother’s capacity and due execution of the 1959 Trust documents.  The defendants only had themselves to blame for failing to properly assess the reliability of Uncle Kai’s evidence before relying on it.  This is the usual risk of litigation,the consequence of which has to be borne by the party relying on his witness. The general rule of costs to follow the event applies.

Conclusion

39.  There is nothing much to be said about the conduct of the parties.  The defendants acted on what they reasonably thought was their case which was supported by Uncle Kai who was the trustee of the 1959 Trust over Lot 1946RP.  As a matter of fact, they lost.  Viewed with retrospect, they ought to have accepted the 10 September 2018 offer. The general rule applies.  The dispute arose out of a familial setting.  While the grandmother and the plaintiffs are not to blame, the factual background,particularly those set out in paragraphs 28 to 34 suggests that the defendants should not be held wholly to blame.  That background is also relevant to the exercise of my discretion as to costs.  Having regard to the factual background and the circumstances under which this case arose, I think it appropriate in the interest of overall fairness that the defendants should be released of their liability to costs up to 10 September 2018.  Accordingly,I set aside my costs order nisi and make an order that the plaintiffs shall have costs after 10 September 2018, such costs are to be taxed if not agreed. I also make an order that the plaintiff shall have costs of this application and the hearing.