GOLDEN EAGLE INTERNATIONAL (GROUP) LTD v. GR INVESTMENT HOLDINGS LTD

HCA 2032/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2032 OF 2007

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JUDGMENT ON COSTS AND INTEREST

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1.  Pursuant to the direction in my judgment of 30 April 2010, parties have agreed on the judgment sum to be entered in favour of the Plaintiff. The agreed sum is RMB 12,608,435.51.

2.  That figure is higher than a sanctioned offer by the Plaintiff to the Defendant contained in a letter dated 4 January 2010.  By a letter of that date, solicitors for the Plaintiff proposed to settle the claim and counterclaim on condition that the Defendant pays an additional sum of RMB 10 million to the Plaintiff.  That offer was not taken up by the Defendant.

3.  Hence, subject to the contention of Mr Chan regarding the wordings of the offer, the court’s discretion under Order 22 Rule 24 is triggered.  Under that rule, the court may order,

(a)     interest on the whole or part of the sum awarded at an enhanced interest rate (up to 10% above judgment rate) for some or all of the period after the latest date on which the sanctioned offer could have been accepted without leave, see Rule 24(2);

(b)    costs on indemnity basis after the latest date on which the sanctioned offer could have been accepted without leave, see Rule 24(3)(a);

(c)     interest on those costs at a rate up to 10% above judgment rate. 

4.  Further, Order 22 Rule 24(4) provides that the court shall make those orders unless it considers it unjust to do so.  Whether it is unjust shall be determined with reference to all the circumstances of the case including the matters specified under Rule 24(5).

5.  Mr Chan submitted that the offer of the Plaintiff was ambiguous.  The relevant paragraph in the letter was in the following terms,

“The Defendant do pay the Plaintiff an additional sum of RMB 10,000,000.00 (apart from the previous partial settlement of the fees and commissions of RMB 3,000,000.00 by your client) within 14 days from the date of order to be made. In other words, the Defendant shall pay a total sum of RMB 13,000,000.00 to the Plaintiff in settlement of the above Action.”

6.  Mr Chan said it was not clear whether the Plaintiff was asking for an additional amount of RMB 10 million or RMB 13 million.

7.  I agree that a sanctioned offer must be couched in clear terms.  But I am of the view that offer of 4 January 2010 was clear enough.  Whilst the wordings could have been improved and the last sentence was in fact otiose, the first sentence made it very clear that under the proposed term the Defendant was to pay a further sum of RMB 10 million to settle the whole action.  The RMB 13 million was referring to the addition of that RMB 10 million to the RMB 3 million already paid in the past.

8.  Thus, I shall exercise my powers under Rule 24 unless I consider it unjust to do so.  Apart from the ambiguity point, Mr Chan did not refer to other matters to contend it would be unjust to make such orders.  Counsel however did address the court on how the powers should be exercised in terms of the relevant interest rates.  I shall deal with the interest rates later.  Having rejected the ambiguity point, having considered the circumstances of the case, including the specific matters set out in Rule 24(5), I do not find it unjust to make those orders.

9.  I therefore turn to how the powers should be exercised.  First, I will deal with enhanced interest for the judgment sum.  The sanctioned offer could have been accepted by the Defendant without leave within 28 days, see Order 22 Rule 6(7).  Thus, the Defendant had up to 1 February 2010 to accept the offer.  Thus, we are talking about enhanced interest between 1 February 2010 and date of judgment.

10.  In England, it has been explained in several cases that these powers under Order 22 Rule 24 are not meant to be penal in nature.  Rather, they aim at achieving a fairer result for the winning party.  Though our rules set the maxima of the interest to be awarded by reference to 10 % above the judgment rate instead of the base rate, I do not see any material distinction in terms of the rationale behind the rules.  In the context of enhanced interest, Chadwick LJ identified its purpose as follows in McPhilemy v Times Newspapers (No 2) [2001] 4 All ER 861 at para. 21,

“I conclude, therefore, that the power to award interest … at an enhanced rate … is conferred in order to enable the court, in a case to which r 36.21 applies, to redress the element of perceived unfairness, otherwise inherent in the legal process, which arises from the fact that damages, costs (even costs on an indemnity basis) and statutory interest will not compensate the successful claimant for the inconvenience, anxiety and distress of having to resort to and pursue proceedings which he had sought to avoid by an offer to settle on terms which (as events turned out) were less advantageous to him than the judgment which he achieved.”

11.  In the agreed draft judgment, apparently without considering the power of the court to order enhanced interest, parties agreed upon interest on the judgment sum from date of writ to date of judgment at judgment rate.  Judgment rate is usually higher than commercial rate.  For pre-judgment period, the usual practice in commercial case (and I regard the present case as a commercial case) is to award 1% above prime, see Hong Kong Civil Procedure 2010 para. 6/L/11.  Parties did not put evidence of prime rates before me.  However, in the course of submissions, Mr Chan told the court that the Hongkong Bank prime rate is 5% whilst the judgment rate is now 8%.  Thus the position agreed between the parties already carried an enhanced element as far as pre-judgment interest on the judgment sum is concerned.

12.  In the circumstances, adopting the rationale of McPhilemy v Times Newspapers (No 2) [2001] 4 All ER 861 (where double compensation by the exercise of this power was disallowed when the jury award of damages in that case had already taken care of such perceived unfairness), I do not think I should order a further enhancement in respect of the pre-judgment interest on the judgment sum.  I will simply adopt the agreed draft of the parties and order pre-judgment interest at the judgment rate.

13.  Next I turn to the basis of taxation of costs.  Chadwick LJ explained the purpose of the power to order costs on indemnity basis in McPhilemy v Times Newspapers (No 2) [2001] 4 All ER 861 at para. 22,

“… The purpose for which the power to order the payment of costs on an indemnity basis is conferred, as it seems to me, is to enable the court, in a case to which r 36.21 applies, to address the element of perceived unfairness which arises from the fact that an award of costs on the standard basis will, almost invariably, lead to the successful claimant recovering less than the costs which he has to pay to his solicitor.”

14.  I see no reason why I should not make such an order against the Defendant in respect of costs incurred by the Plaintiff after 1 February 2010.  The Defendant shall pay the Plaintiff costs incurred after 1 February 2010 on indemnity basis.

15.  The Plaintiff also asks for indemnity basis in respect of costs incurred earlier than 1 February 2010 based on grounds other than Rule 24(3)(a).  I shall deal with that later.

16.  I come to the power to award interest on costs under Rule 24(3)(b).  The purpose of such power was explained by Chadwick LJ at para. 23 of McPhilemy v Times Newspapers (No 2) [2001] 4 All ER 861,

“… It is to redress, in a case to which r 36.21 applies, the element of perceived unfairness which arises from the general rule that interest is not allowed on costs paid before judgment …. So, in the ordinary case, the successful claimant who has made payments to his own solicitor on account of costs in advance of the trial will be out of pocket even if he obtains, at the trial, an order for costs in an indemnity basis. … he will get nothing to compensate him for the costs of money (or the loss of the use of money) which he has had to bear before trial in relation to payments which he has made on account of costs. An order under para. 3(b) of r 36.21 enables the court to achieve a fairer result in that respect.”

17.  In the subsequent case of KR v Bryn Alyn Community (Holdings) Ltd [2003] PIQR P562, Waller LJ referred to this part of the judgment of Chadwick LJ and went on to say at para. 22,

“If an order is made to pay costs on an indemnity basis, it is unlikely to be unjust to make the party pay interest on those costs for the period when litigation is being funded when acceptance of a Pt 36 offer should have led to it not being funded. There may be cases where evidence will demonstrate actual dates when clients had put up funds and from which interest will run. Without such evidence the court can do no more than Chadwick LJ did and make the interest run from the date when the work was done or liability for disbursements was incurred.”

18.  I propose to adopt a similar but modified approach here.  There is no evidence of actual payment of costs by the Defendant.  In principle the Plaintiff should pay the Defendant interest on the costs incurred after 1 February 2010 running from the date when the works were done respectively.  However, it would be a complicated process if each item of work were to carry interest from a different date.  To simplify the process, I shall borrow a well-established approach in working out interest for special damages in personal injuries litigation.  I will order interest at half of the rate I would otherwise order on all the costs incurred after 1 February 2010 with interest starting to run from 1 February 2010 for all the items.  I consider this approach to be appropriate bearing in mind that we are not talking about a substantial period.  The relevant period is between 1 February 2010 and the date of this judgment on costs and interest when the judgment is finalized.

19.  As regards the interest rate, the English authorities adopted 4% above the base rate as a generous assessment of the costs of money.  Mr Ng argued that since our rule 24(3)(b) referred to the judgment rate, the proper award should be 4% above judgment rate.  I cannot accept that submission.  The rule only sets the maxima.  Given the rationale for the exercise of the power and that it is not penal, I should ask what should be the appropriate rate in Hong Kong which can generously reflect the costs of money to the Defendant.  Based on the information from Mr Chan, 4% above prime in Hong Kong is 1% above judgment rate.  I shall adopt this (9%) as our generous assessment of costs of money.  Applying that to my simplified approach, I will order interest on costs incurred after 1 February to the date of this judgment be paid by the Plaintiff to the Defendant at 4.5% and such interest shall run from 1 February 2010.

20.  Mr Ng relied on other grounds for seeking costs on indemnity basis generally.  First Mr Ng referred to the unreasonable refusal of the Defendant to mediate.  The Plaintiff indicated it was willing to mediate at a hearing before master on 15 April 2009.  By a letter dated 4 May 2009, the Defendant’s solicitors wrote to inform the Plaintiff that the Defendant was not willing to mediate.  No reason was given.  At the pre-trial review on 10 December 2009, the court enquired about the reason for refusal and counsel for the Defendant could only say it was for commercial reason that the Defendant would not mediate.  This court did not accept that as good reason for refusing to mediate and asked the Defendant to reconsider. Despite that, the Defendant did not agree to mediate.

21.  At the hearing on costs on 24 May 2010, Mr Chan tried to justify Defendant’s refusal to mediate by reference to various matters identified in Halsey v Milton Keynes General NHS Trust [2004] 1 WLR 3002.  Halsey has been subject to some debate in England, see for example the speech of Sir Anthony Clarke, the then Master of the Rolls on 8 May 2008 at the Civil Mediation Council’s National Conference and the speech of Lord Phillips, the then Lord Chief Justice of England and Wales on 29 March 2008 given in India^[1].  In Hong Kong, whilst we would naturally pay great respect and attention to the judgment of the English Court of Appeal on this topic given the close affinity of our rules and practice, Halsey is not binding.  However, since counsel have not argued fully on the applicability of Halsey in Hong Kong, this is not the right occasion for this court to consider each and every aspect of the judgment of Dyson LJ.

22.  Instead I would turn to the factors pinpointed by Mr Chan to support his client’s refusal to mediate.  In relation to the nature of the dispute, Mr Chan argued that because the parties’ dispute concerned the construction of an agreement which turned on the background knowledge of the parties and the factual matrix of the case, it is not a dispute that could be “easily mediated”.

23.  I am not sure what counsel meant by a dispute that could not be easily mediated.  But I am clearly of the view that the matters referred to by Mr Chan did not render the dispute unsuitable for mediation.  This is a simple contract dispute.  And it is not the kind of dispute which Dyson LJ regarded as one which parties might reasonably require a determination by the court.  His Lordship first alluded to the examples of cases not suitable for mediation given by the Commercial Court Working Party on ADR at para. 17 of his judgment,

“… where the parties wish the court to determine issues of law or construction which may be essential to the future trading relations of the parties, as under an on-going long term contract, or where the issues are generally important for those participating in a particular trade or market.”

Then Dyson LJ went on to say,

“Other examples falling within this category are cases where a party wants the court to resolve a point of law which arises from time to time, and it is considered that a binding precedent would be useful; or cases where injunctive or other relief is essential to protect the position of a party.”

24.  As far as the last example is concerned, whilst I can see in some cases there is a need to have legal proceedings on foot for the purpose of urgent or interlocutory injunctive relief, once such protection is in place there can still be scope for the parties to resolve their difference by mediation.

25.  But it is important to note His Lordship ended that paragraph by saying,

“But in our view, most cases are not by their very nature unsuitable for ADR.”

26.  The dispute in the present case is a one-off dispute that did not raise any point of law the determination of which will provide guidance for the future, whether for the parties or others in the trade.  Nor is it one where injunctive or other protective relief is sought.  I see nothing in the nature of the present dispute which can justify the Defendant’s refusal to mediate.

27.  Mr Chan then submitted that the Defendant reasonably believed that he had a strong case.  Counsel relied on para. 18 of Dyson LJ’s judgment,

“The fact that a party reasonably believes that he has a strong case is relevant to the question whether he has acted reasonably in refusing ADR. If the position were otherwise, there would be considerable scope for a claimant to use the threat of costs sanctions to extract a settlement from the defendant even where the claim is without merit. Courts should be particularly astute to this danger.”

28.  In order to understand the scenario His Lordship was referring to, one must read on.  The rationale was explained further at para. 18,

“Large organizations, especially public bodies, are vulnerable to pressure from claimants who, having weak cases, invite mediation as a tactical ploy. They calculate that such a defendant may at least make a nuisance-value offer to buy off the cost of a mediation and risk of being penalized in costs for refusing a mediation even if ultimately successful.”

29.  As far as the position in Hong Kong is concerned, this scenario is unlikely to occur.  First, the costs sanction is only applicable if a party refuses to mediate.  There is no costs sanction if the parties cannot reach settlement after making a reasonable effort in mediation.  Second, under Practice Direction 31, the parties can avoid costs sanction after they have participated in mediation up to the agreed minimum level of participation.  Third, according to my experience, the costs involved in such participation in Hong Kong would usually not be high enough to encourage such nuisance claim.  Fourth, in Hong Kong the costs of mediation can be included as part of the legal costs and recoverable by the successful party if the mediation were unfruitful, see Chun Wo Construction & Engineering Co Ltd v China Win Engineering, HCCT 37 of 2006, 12 June 2008.

30.  In this judgment I wish to leave open the question whether in the light of the above features in Hong Kong a party can rely on having a strong case as the ground for refusing mediation.  But it is plain to me that the Defendant’s case does not fall within the category of reasonable belief of a strong case identified by Dyson LJ at para. 19 of his judgment,

“Some cases are clear-cut. A good example is where a party would have succeeded in an application for summary judgment … Other cases are more borderline. In truly borderline cases, the fact that a party refused to agree to ADR because he thought that he would win should be given little or no weight by the court when considering whether the refusal to agree to ADR was reasonable. Borderline cases are likely to be suitable for ADR unless there are significant countervailing factors which tip the scales the other way.”

31.  At its highest, the Defendant’s defence in this action can only be regarded as a borderline one.  It is difficult to see how the Defendant could reasonably believe otherwise in the light of the terms of the Agreement and the receipt of 14 June 2000.  I do not regard the amendment of Paragraph 8 of the Amended Reply as having a material impact on the reasonable assessment of the merits of the case.

32.  Mr Chan then pointed to the offer by the Defendant to settle in a letter of 11 December 2009.  The offer was that the Defendant would accept a payment of RMB 949,564 from the Plaintiff as settlement.  This was rejected and the Plaintiff counter-offered by the sanctioned offer of 4 January 2010.

33.  The offer of the Defendant was way off the mark whilst the sanctioned offer of the Plaintiff indicated that the Plaintiff was sensible and realistic in trying to achieve a settlement.  In Halsey, Dyson LJ said at para. 20 that in the overall analysis of the reasonableness of refusal to mediate, the other settlement attempts are in truth no more than an aspect of factor (f), viz. the prospect of success of intended mediation.

34.  Dyson LJ also pointed out that mediation often succeeds where previous attempts to settle have failed.  In Hong Kong, I have highlighted the same point in Supply Chain and Logistics Technology Ltd v NEC Hong Kong Ltd HCA 1939 of 2006, 29 Jan 2009.

35.  At para. 26 of Halsey Dyson LJ made the point that a party cannot rely on his own unreasonable obdurate attitude to justify a refusal of mediation on the ground that it has no prospect of success.

36.  This would exactly be the position here if the correspondence between December 2009 and January 2010 could be taken as the respective attitude of the parties towards settlement.  But as said earlier, one must not assume that the process of mediation would not bring about changes in attitudes.  As Lightman J observed in Hurst v Leeming [2003] 1 Ll Rep 379 at p.381,

“… the mediation process itself can and often does bring about a more sensible and more conciliatory attitude on the part of the parties than might otherwise be expected to prevail before mediation, and may produce a recognition of the strengths and weaknesses by each party of his own case and of that of his opponent, and a willingness to accept the give and take essential to a successful mediation. What appears to be incapable of mediation before the mediation process begins often proves capable of satisfactory resolution later.”

37.  I do not regard the wide difference between the parties in the correspondence as indicating that mediation would only be a waste of time and efforts.

38.  Mr Chan’s last point was that the costs of mediation would be disproportionately high.  There is no factual basis for this submission.  According to the estimates of costs submitted by the parties, the costs of the trial (viz. excluding costs incurred up to the Pre-trial review) are as follows,

(a)     $600,000 for the Plaintiff; and

(b)    $700,000 for the Defendant.

39.  The claim and the counterclaim are RMB 12 million odd and RMB 7 million odd respectively.

40.  Parties did not give this court any estimates as to the costs of mediation.  In respect of a case of this nature, even with the engagement of a fairly experienced mediator in Hong Kong, the costs for a reasonable attempt in mediation (say a 2-day session) should not be more than $80,000.  The costs of mediation cannot be regarded as disproportionate.

41.  At para. 28 of the judgment in Halsey, Dyson LJ held that the burden was not on the refusing party to satisfy that mediation had no reasonable prospect of success.  Rather, the burden is placed on the willing party to show that there was a reasonable prospect that mediation would have been successful.  His Lordship also stressed that it was not an unduly onerous burden: the willing party does not have to prove that a mediation would in fact have succeeded.

42.  That approach had been criticized as unduly weakened the costs sanction against unreasonable refusal to mediate[2].  In a speech made in India, Lord Phillips of Worth Matravers agreed with Lightman J that a party who refuses to attempt mediation should have to justify his refusal[3]. 

43.  In Hong Kong, Paragraph 4 of our Practice Direction 31 provides that unreasonable failure of a party to engage in mediation is a conduct to be taken into account when the court exercises its discretion as to costs.  Further, Paragraph 5(2) sets out how a party can avoid such costs sanction.  Other than participating in mediation to the minimum level of participation, the refusing party has to provide a reasonable explanation for not engaging in mediation.

44.  In my view, our Practice Direction 31 supports the more robust approach of Lightman J (endorsed by Lord Phillips) instead of that adopted by Dyson LJ in Halsey.  The burden is on the part of the refusing party to provide a reasonable explanation.  The willing party does not carry any burden to show that mediation has a reasonable prospect of success.  As I understand, Mr Chan did not argue otherwise. 

45.  In the present case, I do not see any reasonable explanation on the part of the Defendant for refusing to mediate.  This is a relevant consideration in assessing whether a higher basis of taxation should be ordered against the Defendant in respect of the costs of the action incurred after 4 May 2009, the date of the refusal.

46.  In my judgment, on account of the Defendant’s unreasonable refusal to mediate, it should be liable to pay costs to the Plaintiff on common fund basis.  But for my earlier decision on the costs after 1 February 2010 under Order 22 Rule 24, the costs sanction would have been applicable to all the costs incurred after 4 May 2009.  As matter stands, the effect of the costs sanction is applicable to costs incurred between 4 May 2009 and 1 February 2010.  For this period, the Defendant shall pay the Plaintiff’s costs to be taxed on common fund basis.

47.  Mr Ng also relied on the belated withdrawal of defence relating to the validity of the Agreement and the authority of the person signing the same as conducts justifying costs on indemnity basis.  I have referred to such withdrawal at paragraph 7 of my main judgment.  Mr Ng also reminded this court of my finding on the untruthfulness of certain parts of Mr Lam’s witness statement on these issues.

48.  Mr Chan said the Plaintiff had also been guilty of last minute changes in its case and referred to the amendments made in the course of the trial.  The court had ordered the Plaintiff to bear the costs of the amendments on the usual party-to-party basis.

49.  Whilst the Plaintiff should recover costs in respect of its earlier preparation to meet the withdrawn lines of defence, I do not regard the withdrawal as sufficient ground for ordering a higher basis for taxation of costs payable to the Plaintiff.

50.  As regards the costs of the hearing on 24 May 2010, I am of the view that Mr Ng was substantially successful (save as to the question of the rate of interest and costs prior to 4 May 2009).  I order the Defendant to pay 80% of the Plaintiff’s costs of that hearing.  I see no reason why the sanction under Order 22 Rule 24 should not be applicable to such costs.  Thus, they would be taxed on indemnity basis and carry interest at 4.5% in the same manner as other costs incurred after 1 February 2010.