ETRATECH ASIA PACIFIC LTD (formerly AUDIO MECHANICAL CORPORATION LTD) v. LEADER PRINTED CIRCUIT BOARDS LTD

HCA 112/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 112 OF 2009

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D E C I S I O N

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1.  Order 22, rule 20(1) of the Rules of the High Court[1] provides :

“Where a defendant’s sanctioned offer or sanctioned payment to settle the whole claim is accepted without requiring the leave of the Court, the plaintiff is entitled to his costs of the proceedings up to the date of serving notice of acceptance, unless the Court otherwise orders (‘the Otherwise Proviso’).”

2.  The applications now before the court raise the important question as to how the court will exercise the costs discretion under the Otherwise Proviso.  They arose in this way.

A. BACKGROUND

A1. The main proceedings

3.  The plaintiff is a supplier of electronic products.  The defendant was at the material times a manufacturer and/or supplier of printed circuit boards.  Upon the plaintiff’s approval of production samples of the printed circuit boards provided by the defendant, the plaintiff entered into a series of agreements as evidenced by various purchase orders between October 2005 and February 2008 for the sale of 126,972 units of printed circuits boards by the defendant to the plaintiff.  The defendant delivered the printed circuit boards between 18 October 2005 and 11 March 2008.  The plaintiff paid for them in full in March 2008.

4.  It was the plaintiff’s case that the defendant knew, at the time of the contract, that the printed circuit boards were to be installed in a lock assembly for onward sale to Sargent & Greenleaf (“S&G”) in the USA as a component/parts of gun safes.

5.  Since about December 2007, S&G had complained that the lock assembly of the gun safes (in which the said printed circuit boards were installed) failed to function owing to electrostatic discharge.  The plaintiff alleged that the printed circuit boards supplied by the defendant failed to meet the requisite standard, namely the electronic or electrical products containing the printed circuit boards should not lose function or degrade in performance or lose data when discharge voltage with up to 8,000 volts or air discharge voltage with up to 15,000 volts was applied to them (the “ESD Standard”).  While the production samples manufactured by the defendant met and satisfied the ESD Standard, the printed circuit boards subsequently supplied by the defendant failed to do so.  The defendant was in breach of the conditions and warranties of the sale contracts.  As a result thereof, it had suffered substantial loss in paying substantial compensation to S&G, incurring costs and expenses in defending and/or settling the claims with S&G and in modifying the defective printed circuit boards so as to render them to meet the ESD Standard.

6.  On 14 January 2009, the plaintiff commenced the present action against the defendant, seeking loss and damages, essentially representing the compensations paid to S&G, which accumulated from US$232,625.00 when the Writ was issued in January 2009 to US$448,321.00 in January 2012.

7.  On 29 March 2012, the defendant served a notice of sanctioned payment of the sum of HK$100,000.00.  The sanctioned payment was accepted by the plaintiff on 26 April 2012.

8.  In serving the notice of sanctioned payment, the defendant also enclosed a letter dated 29 March 2012 alleging that the costs should be on the District Court scale and the costs should be subject to the court’s jurisdiction to order otherwise in that the claim was grossly exaggerated.  By a reply letter dated 17 April 2012, the plaintiff disputed that costs should be on the District Court scale or that the claim was grossly exaggerated.

A2. The costs applications

9.  By summons dated 1 June 2012, the defendant applied for an order under the Otherwise Proviso that each party pays its own costs of the action or alternatively the defendant do pay the plaintiff 25% (or such percentage as the court deems fit) of its costs, to be taxed, if not agreed on the High Court or District Court scale, on the grounds that the plaintiff had signed statements of truth in respect of the pleadings and witness statements which are untrue or, without any honest belief in their truth and that the defendant had wasted costs in defending a grossly inflated claim. 

10.  In response, the plaintiff took out a summons dated 1 August 2012, seeking an order that notwithstanding that the sanctioned payment accepted by the plaintiff was less than HK$1 million, the defendant do pay the plaintiff costs of this action to be taxed on the High Court scale, if not agreed.

11.  Two principal matters arose from the applications.  The first, as said, relates to the Otherwise Proviso.  The second concerns the scale of costs to be applied to taxation.

A3. Master Kwang’s direction

12.  The applications were first listed before Master Kwang.  He was faced with two unreported decisions by two other masters as to how the Otherwise Proviso should be approached, namely, Cheung Mei Po v Chan Yu Ching, Alexs[2] and Lin Yanjin v Smart Billion Engineering Ltd.[3]  And up to then, there had been no higher authority on the point.  The learned Master considered that some authoritative guidance from a judge on how the Otherwise Proviso should be approached was desirable.  He therefore directed that applications be placed before me, as the Civil Listing Judge, for disposal.

13.  More recently, the Otherwise Proviso was applied by Deputy High Court Judge Burrell in Fung Yim Chun & Anor v Fung Kui Wah.[4] Apparently, the two decisions of the masters were not cited to him.  I think given the present state of authorities, it is an opportune moment for me to say something on how the costs discretion under the Otherwise Proviso is to be exercised.

B. THE OTHERWISE PROVISO

B1. The proper approach

14.  Order 22 is a new, self contained code introduced by the CJR into the Rules of the High Court in April 2009.  Among other things, it introduced the new concept of sanctioned offer and sanctioned payment along the lines of Part 36 of the English Civil Procedure Rules with modifications and supplements.  Although the provisions relating to sanctioned offers and sanctioned payments are derived from the corresponding provisions in Part 36 of CPR, there is one material difference in the provisions relating to acceptance of a sanctioned offer or sanctioned payment by a plaintiff, which is this.

15.  Before April 2007, the then Part 36.13(1) provided where a Part 36 offer or a Part 36 payment was accepted without needing the court’s permission, the claimant would be entitled to his costs of the proceedings up to the date of serving notice of acceptance.  Part 36.13(2) went on to provide that where a Part 36 offer or a Party 36 payment related to part only of the claim and at the time of serving notice of acceptance the claimant abandoned the balance of the claim, the claimant would be entitled to his costs of the proceedings up to the date of serving notice of acceptance, unless the court ordered otherwise.  The new Part 36 came into force in April 2007.  Payment into court no longer plays any role in the Part 36 offer to settle proceedings.  The costs consequences of accepting a Part 36 offer are contained in Parts 36.10(1) and (2), which are substantial reproduction of the old Parts 36.13(1) and (2).

16.  In short, under the CPR, if the whole of the claim is settled by way of a Part 36 offer, the claimant is as of right entitled to costs up to the date of serving notice of acceptance.  The court has no power to make any other costs order.  Where the claim is partially settled with an abandonment of the balance, the claimant is entitled to costs up to the date of serving notice of acceptance unless the court orders otherwise.[5]  The position in our Order 22, rule 20(1) is entirely different. The Otherwise Proviso may be invoked only if the whole claim is settled by acceptance of the sanctioned payment or sanctioned offer.

17.  Given the significant difference, I do not think the otherwise provisions in Part 36 of the CPR or the English case law thereunder is helpful in informing the approach to the Otherwise Proviso in our Order 22.[6]

18.  In my view, Order 22, rule 20(1) plainly envisages that upon acceptance of the sanctioned payment or sanctioned offer, the plaintiff is, as a prima facie rule, entitled to his costs of the proceedings up to the date of serving notice of acceptance.  The prima facie rule may, however, be displaced when the court orders otherwise by applying the Otherwise Proviso.

19.  The prima facie rule is important.  In ordinary civil litigations, costs are incurred in a recoverable inter-parties sense from the moment the proceedings commenced and continue to be incurred as the litigation progresses.  Every litigant, who needs to incur costs in order to pursue or defend a claim, definitely regard them as very real and present expenses.  Further, litigation is inescapably chancy.  The prospect of paying costs to the other side after losing one’s case in addition to his own costs must very much exercise a party’s mind.  Costs thus factor heavily in the negotiations and considerations of settlement.  Sometimes, it may even make or break the settlement.  But uncertainty as to costs is a notoriously difficult subject.  It may easily frustrate an otherwise meaningful settlement negotiation and even become an irremovable obstacle to the settlement itself. What the prima facie rule does is to create certainty as to the costs consequences upon acceptance of the sanctioned payment or sanctioned offer.  A party knows the exact extent of his exposure or entitlement to costs, as the case may be.  Thus he will not be inhibited in proposing or accepting an otherwise reasonable offer to settle, as the case may be, because of uncertainty as to the costs consequences.  This surely facilities the principal objective of sanctioned payments and sanctioned offers, which is to encourage the parties to take positive settlement seriously and avoid unproductive and expensive prolongations of the litigation, resulting in more early settlements : Montrio Limited & Anor v Tse Ping Shun David.[7]

20.  By virtue of the Otherwise Proviso, the court retains the discretion to depart from the prima facie rule where necessary.  But the discretion should only be exercised in exceptional circumstances that clearly warrant a different costs order.  Otherwise, the certainty as to costs consequences created by the prima facie rule, one of the very important features underpinning the effectiveness of sanctioned payments and sanctioned offers, will be greatly diminished.

21.  While it is impossible and indeed imprudent to exhaustively state the exceptional circumstances that justify the departure from the prima facie rule, which by definition must be rare, the burden rests squarely on the party seeking to invoke the Otherwise Proviso to establish such circumstances.  The court will not lightly displace the prima facie rule until and unless that the applicant has discharged the burden to its satisfaction.

22.  This requirement to demonstrate exceptional circumstances has been referred to and applied in all the three cases referred to in Part A3 above.[8]  I hope by my analysis, the jurisprudential basis for such a requirement is now established.

23.  Further, when applying the Otherwise Proviso, the court is in effect depriving the plaintiff his costs or even ordering him to pay the defendant costs.  The plaintiff will be significantly disadvantaged. In my view, fairness dictates that the plaintiff, who is considering whether to accept the sanctioned payment or sanctioned offer, should be given a prior warning that the defendant will apply to invoke the Otherwise Proviso and how it is to be invoked.  The plaintiff can then make an informed decision whether to accept the payment or offer with the full knowledge that upon acceptance, the prima facie rule on his entitlement as to costs may be displaced.  Further, if a defendant is allowed to invoke the Otherwise Proviso without giving the prior warning, a plaintiff who has accepted the payment or offer on the faith that he would be entitled to recover his costs up to the date of serving notice of acceptance would never know if at the next moment the defendant would apply for a different costs order.  The certainty as to costs created by the prima facie rule will be gone.  Faced with the uncertainty as to costs, the plaintiff would be greatly handicapped in deciding if he should accept the payment or offer in the first place.  It would render the operation of sanctioned payments and sanctioned offers ineffectual.

24.  This requirement of a prior warning did not feature in the judgment of Deputy Judge Burrell in Fung Yim Chun & Anor v Fung Kui Wah.  The simple reason is that the plaintiff had been clearly forewarned in the solicitors’ correspondence of the application under the Otherwise Proviso.

25.  Master KK Pang and Master Ng differed on this point.  Master Pang considered the requirement unnecessary.[9]  Master Ng disagreed.[10]  Both referred to the pre-CPR English case of Glenlion Construction Limited v Beqverfoam (Moreton) Limited[11] on how the court exercised its discretion to make an otherwise costs order after a plaintiff had accepted a payment into court under the old Order 62, rule 10(2) of the then English Rules of the Supreme Court in support of their conclusion.  For present purposes, I need not go into detail of how the learned Masters dealt with that authority.  It is not necessary because it is a case decided on the pre-CPR provisions.  We are now in the post-CJR era. We should look at the current provisions, that is, Order 22 rule 21(1), to see how the court should approach the Otherwise Proviso.  And as I have demonstrated above, on a proper understanding of Order 22, rule 21(1) with a view to achieving its intended effect to encourage settlements, the requirement of a prior warning is indeed a pre-requisite for applying the Otherwise Proviso.  In any event, if necessary, I prefer the reasoning of Master Ng when she concluded that on the authority of Glenlion Construction Limited v Beqverfoam (Moreton) Limited, a prior warning is required.

26.  In sum, the prima facie rule in Order 22, rule 21(1) should apply unless (1) the defendant discharges the burden of showing exceptional circumstances that justify a departure; and (b) he has given a prior warning to the plaintiff the he will apply to invoke the Otherwise Proviso upon acceptance of the sanctioned payment or sanctioned offer.

27.  With this approach in mind, I now turn to the defendant’s application.

B2. The present case

B2.1 Exceptional circumstances

28.  On exceptional circumstances, the defendant initially contended that the plaintiff had signed statements of truth in respect of the pleadings and witness statements which are untrue or, without any honest belief in their truth.  However, at the hearing before me, Mr Kwok, SC, for the defendant, did not press on with these grounds.[12]  He just focused his submissions on the defendant’s complaint that the plaintiff had exaggerated its claim.  He cited Order 62, rule 5(2)(c), which mandated the court, in exercising its costs discretion, to have regard to the point whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim.  He argued that the plaintiff had exaggerated the claim, as evidenced by the fact that it eventually accepted the sanctioned payment of HK$100,000, a much lower sum than what was claimed.  He repeatedly described the plaintiff’s claim as a HK$100,000 claim, which is well within the District Court’s jurisdiction.  With respect, I disagree.

29.  The mere fact that the plaintiff had accepted the sanctioned payment of a mere HK$100,000 does not necessarily mean that its original claim was exaggerated.  Properly understood, the plaintiff’s claim for loss and damage was based on the actual compensations paid to S&G paid and increased from time to time.  The compensations paid were well documented. This militates strongly against Mr Kwok’s contention that the plaintiff had inflated the claim.  Further, the plaintiff had every commercial reason to accept the sanctioned payment, which can be found in the undisputable evidence of its responsible officer, Mr Michael Desnoyers, in his 4^th affirmation :

“8. The plaintiff’s decision to settle the case reflected on commercial considerations in light of the escalating legal costs and litigation risks, and the mere fact that the plaintiff accepted a much lesser amount than their claim is no basis for any suggestion that the plaintiff had grossly inflated its claim in the first place. The plaintiff has already incurred a significant amount of legal fees in this action and if the matter was to go for a full trial which was listed for hearing next year with 9 days reserved with senior and junior counsel involved for both sides, the plaintiff would be expected to spend further significant sums of money on the preparation and the trial. The issues involved in this action were complicated both on the facts and law. For example, there was no express contractual provision requiring the PCBs supplied by the defendant to meet or satisfy the ESD Standard or requiring the defendant to notify the plaintiff for the change of materials, and the plaintiff had to reply on implied terms which might not be accepted by the court. Also the burden of proving the PCBs supplied by the defendant rested on the plaintiff and this issue was hotly contested by the parties and their experts. Though we strongly believe that the PCBs supplied by the defendant under the relevant purchase orders were defective, there was no certainty that the court would also see it that way at the trial, the complexity of the issues involved could also be seen by the engagement of the expert witnesses and senior counsel and junior counsel by the parties. Further the plaintiff had to rely on an overseas witness from Sargent & Greenleaf and there was no guarantee that we would be able to secure his attendance at the trial. To illustrate the magnitude of the costs involved, there had been 6 Case Management Conferences where counsel was briefed to attend 5 of them and senior counsel attended the last Case Management Conference, 5 expert reports including 1 joint report were prepared by Dr Leung after many costly ESD tests were undertaken by him, and the documents in support of the plaintiff’s claim extend to over 7,000 pages. The plaintiff had been in negotiations with Sargent & Greenleaf with regard to retrieving additional documentary records in support of the quantum of its claim, and if the action was to be pursued, this exercise would be costly.

9. The plaintiff has been under great pressure from its Board to settle the matter as expeditiously as possible in light of the costs and time incurred and spent and to be incurred and spent. Prior to the plaintiff’s acceptance of the Sanctioned Payment, the proceedings had already been running for over 3 years and many of the plaintiff’s witnesses have either left the company or about to retire which increase our litigation risks. Further, in the course of seeking discovery from the defendant in early 2012, the plaintiff came to know from the defendant’s solicitors that the defendant had sold its factory in the Mainland China back in September 2009. Naturally this caused further concerns about the potential recoverability of the judgment sum from the defendant when the cost of preparing the action to a full trial continued to surge. I wish to mention that in view of the prolonged proceedings and escalating legal costs, the plaintiff had approached the defendant at different stages of the proceedings with a view to exploring an amicable settlement of the claim (including mediation) but to no avail. Against this backdrop, the Board decided to accept the Sanctioned Payment although this only represented a small portion of the plaintiff’s total claim.

10.    I was advised by the plaintiff’s legal advisors and believe that it was open for the defendant to make a payment into Court (prior to the Civil Justice Reforms) of a Sanctioned Payment (post Civil Justice Reforms) and it chose not to do so until 3 years after commencement of the action when the matter was listed to be tried in the High Court.  And the defendant has all along vigorously defended the claim.  As soon as the defendant made the Sanctioned Payment, the plaintiff took into consideration all the circumstances of the case including the legal advice given by its legal advisers and litigation risks and decided to accept the Sanctioned Payment.  There is no room for the defendant to complain our acceptance of the Sanctioned Payment.  and its being liable to pay our costs when it could have made payment into court as sson as the proceedings began.”

30.  I reject Mr Kwok’s contention and hold that the defendant has not discharged the burden of showing exceptional circumstances to apply the Otherwise Proviso.  Its application must fail on this ground alone.

B2.2 Prior warning

31.  For completeness, I will deal with the requirement for prior warning shortly, although strictly it is academic.

32.  Although the defendant did not accept that a prior warning that it would apply to invoke the Otherwise Proviso is necessary, it had in fact given such a warning to the plaintiff by the letter of 29 March 2012.  I hold that this requirement is met.

B3. Conclusion

33.  The defendant’s application is dismissed.  I make an order nisi that the defendant do pay the plaintiff costs, including any costs reserved, to be taxed if not agreed.

C. SCALE OF COSTS

34.  Under Order 62, rule 9(1), where by or under the Rules of the High Court, costs are paid to any person, that person shall be entitled to his taxed costs.  And “taxed costs” means costs taxed in accordance with Order 62 : see Order 62, rule 1.  So the plaintiff is entitled to his taxed costs upon serving the notice of acceptance of the sanctioned payment.

35.  There are conflicting first instance authorities as to whether, when a High Court claim is disposed of by way of acceptance of a payment into court under the old Order 22, which fell with the District Court jurisdiction, the plaintiff would be automatically entitled to taxed costs on the High Court scale and no other scale;[13] or whether the court had the discretion to order taxation on the District Court scale.[14]

36.  For present purposes, I need not come to a definitive view if the costs under Order 22, rule 20(1) are automatically taxed on the High Court scale or the scale is subject to the court’s discretion.  It does not really matter because assuming that the latter view is correct, the plaintiff has satisfied me that it is entitled to have its costs taxed on the High Court scale.

37.  In my view, given the amount of claim which, as I have found, is not inflated, the complexity of the factual[15] and legal issues involved, this is plainly a High Court case.  It is simply inconceivable that the plaintiff could or should have commenced the action in the District Court.  Although the plaintiff did accept the sanctioned payment of HK$100,000, it had good commercial reasons to do so.  And it had already incurred substantial costs up to the acceptance of the sanctioned payment.  In the circumstances, I do not consider it right to exercise my discretion, assuming that there is one, to order taxation on the District Court scale.

38.  I will therefore allow the plaintiff’s application.  I further make an order nisi that the plaintiff do have its costs against the defendant, including all costs reserved, to be taxed if not agreed.