DE CHANG FULFILMENT LTD v. MANLEY TOYS LTD AND ANOTHER

HCA 1161/2009 & HCA 1159/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NOS 1161 OF 2009 AND 1159 OF 2009

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(by Consolidated Action)

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R U L I N G O N C O S T S

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1. I handed down my judgment in these consolidated actions on 13 May 2013 and made an order nisi as to costs. I have since directed that applications to vary the costs order nisi be dealt with on paper.

2. Initially there was only an application by the defendants to vary my costs order nisi by seeking an order to the following effect:

“The 1st and 2nd defendant do pay the plaintiff the costs of this action save the costs of and occasioned by the plaintiff’s three Notices of Non-Admission respectively filed on 2 August 2011, 27 September 2011 and 14 October 2011 which are to be paid by the plaintiff to the 1st and 2nd defendants, to be taxed of not agreed.”

3. In the plaintiff’s written submissions in response to the defendants’ application to vary the costs order nisi, it made its own application to vary the costs order nisi by seeking an order that:

(1) The plaintiff should get its costs of the action up to 30 November 2011 on a party and party basis to be taxed if not agreed and

(2) The plaintiff should get its costs of the action after 30 November 2011 on an indemnity basis to be taxed if not agreed. 

The plaintiff asked that its application be treated as an application to vary the costs order nisi to the above effect and, if necessary, for an extension of time.

4. The plaintiff is out of time in making its application to vary the costs order nisi and an extension of time is needed.  In the absence of opposition from the defendants and, in any event, in the exercise of my discretion in view of the shortness of the delay and the absence of prejudice to the defendants, I grant the extension of time sought (and insofar as any formal summons may be thought to be necessary for making an application to vary a costs order nisi, I dispense with the need for it).

5. This is my Ruling on the parties’ respective applications to vary the costs order nisi.  The parties are familiar with the issues and nature of the arguments which they had put before me.  So as not to overburden this Ruling with details, I will not devote too much space to rehearse the detailed background such as the nature and timing of the various Notices of Non-Admission, and what sort of documents they covered by reference to which List of documents filed by the defendants.  I will only make references to such matters (and do so succinctly) where they are relevant to a point in my reasoning.

The Defendants’ application

6. The basis of the defendants’ application is simple:  under Order 62 rule 3(6) if a party gives notice of non-admission of any documents pursuant to Order 27 rule 5 (which the three Notices of Non-Admission were), the costs of proving that document should be paid by him unless the Court otherwise directs.  The documents have all been proved at trial; there is no reason for the court to order otherwise; and therefore the plaintiff should pay the costs of proving the documents covered by the three Notices.

7. In response, the plaintiff essentially made the following points:-

(1) As to categories H, I, J, K and L of the 1^st Notice of Non-Admission (this Notice covered the defendants’ 1^st List of Documents and adopted the categorization used in that List), for reasons set out in paragraph 21 of the plaintiff’s written submissions dated 24 June 2013 the non-admission was no longer pursued. 

(2) Having perused the defendants’ witness statements dealing with authenticity, the plaintiff indicated that it would not require the witnesses to be cross examined, thereby saving time and costs.

(3) At the PTR on 28 October 2011, Suffiad J had already considered the 1^st Notice of Non-Admission (which was served out of time) and ordered that categories A and B (under the 1^st Notice of Non-Admission) should be proved at trial if the defendants wanted to rely on them and also that the non-admission in respect of categories E, F and G should stand.  The plaintiff argued that if the non-admission had been unreasonable, then one would have expected the defendants to have persuaded Suffiad J to direct that the Notice of Non-Admission should not apply. 

(4) Some of the non-admitted documents related to issues/claims raised by the defendants which had since been abandoned or struck out.

(5) In any event it had been reasonable for the plaintiff not to admit authenticity because some of the documents contained certain features such as documents having been changed over time, different versions having been disclosed over time, etc. 

8. The plaintiff also went through the drafting history of the equivalent rule in the English Rules of Supreme Court which were in place before the CPR came into force in1999 and compared the wording with the relevant rule in Hong Kong, namely RHC Order 62 rule 3(6).  I hope I may be forgiven if I do not go through or rehearse all those submissions here, because I have no difficulty in accepting the proposition that:

(1) Even if a disputed document is proved to be authentic at trial, the Court still has a discretion not to order costs to be paid by the party serving the Notice of Non admission. 

(2) The discretion is broad and in exercising this discretion the Court can have regard to a wide range of matters. 

9. However, one has to start somewhere,and the language of RHC Order 62 rule 3(6) lays down the starting point by using the word “shall”. The starting point is therefore that the proving party is entitled to his costs and the burden is on the party serving the Notice to persuade the Court to exercise its discretion otherwise. 

10. Lest it be thought that I am fettering any direction, I am not.  It is merely a starting point.  Time and time again it is repeated in the courts that “costs are in the discretion of the court” as if the court has to “feel its way around” from scratch every time it exercises a direction.  But it is also worth repeating that there are often starting points for how discretions are to be exercised: sometimes these starting points are based on written law and sometimes the starting points are based on judge-made law.  In the present case the starting point is laid down in Order 62 rule 3 (6) itself. 

11. The plaintiff has put forward six factors in paragraph 40 of its written submissions dated 24 June 2013 as a non-exhaustive list:-

(1)  whether the non-admitting party acted reasonably in serving the notice of non-admission judged with reference to the facts, knowledge and information available to the non-admitting party at that time.

(2)  whether the conduct of the non-admitting party after the service of the notice of non-admission was reasonable, and in particular, compatible with the underlying purpose and intent of the rule.

(3)  the existence of any relevant court orders or other relevant matters in respect of the documents whose authenticity was not admitted.

(4)  whether the conduct of the proving party in respect of the documents was reasonable in all the circumstances.

(5)  the overall success or failure of the parties.

(6)  whether, in all the circumstances, the justice of the case requires the burden of the costs incurred in proving the non-admitted documents to fall on the plaintiff.

12. The defendant did not take issue with (1) to (4) and (6) but took issue with factor (5).  It is not necessary for me to decide whether factor (5) (overall success or failure of the parties) can never be relevant.  It suffices for me to say that on the facts of this case, even if factor (5) is relevant, it is one to which I attach no weight.  The costs regime governing Notice of Non- admission presupposes that a separate costs order can be made which goes against the costs order governing the “cause”.  Otherwise there is no need to separately stipulate a starting point: the rule could just as well say “costs in the cause”.  Further, the spirit of the regime must be to encourage reasonable litigation conduct.  It is a familiar phenomenon in litigation that parties who “win” eventually at trial may not have always behaved reasonably in interlocutory steps.  If weight is readily given to the ultimate success in the litigation that would subvert the rationale of the rules.  I do not rule out the possibility that in a suitable case, the overall success or failure can be a weighty factor but on the facts of this case, I am unable to see any ground why I should attach weight to this factor.  The minimal time taken at trial may well be a matter relevant to taxation, but plainly costs had been incurred in the pre-trial stages and I cannot ignore those. 

13. Having disposed of factor (5), I now come to consider the various points relied on by the plaintiff to persuade me to depart from the starting point in the exercise of my discretion.

14. I do not place much weight on the Order made by Suffiad J at the PTR on 28 October 2011.  I do not believe that the order of Suffiad J was intended, or had the effect of, pre-emptively deciding or influencing the incidence of costs of proving the documents.  One has to consider the context of that order.  The plaintiff was out of time in filing the 1^st Notice of Admission.  It therefore required an order of the court in order to escape from the consequences of the “deemed admission”.  On the face of the Order of Suffiad J, it is not clear whether it is intended to operate as (i) an order extending time for a Notice of Non-admission under Order 27 rule 4(2) to be served or (ii) to operate as an order “otherwise” under Order 27 rule 4(1).  Given that a Notice of Non-admission has actually been served (albeit out of time) one would have thought that the more natural interpretation would be that it was an order extending time. 

15. But in my view it does not matter either way.  The order was made at an interlocutory stage for the limited purpose of deciding whether the defendants would be required to prove authenticity.  The threshold was relatively low.  I take into account the fact that Suffiad J was sufficiently persuaded to allow the plaintiff to dispute authenticity but that was all.  The fact that at an interlocutory stage before the facts and evidence are fully ventilated, the plaintiff was allowed to dispute authenticity out of time (and not have the matter decided against it summarily, as in the case of Gotland Enterprises Ltd v Kwok Chi Yau, HCMP 4550 of 2003; 7 June 2013, Anthony Chan J) does not mean that the challenge was regarded as reasonable, or so reasonable that the plaintiff should be exempted from having to pay the costs of proving the documents. 

16. As to the plaintiff’s non-pursuit of a number of the categories of non-admissions at the PTR and the rather restrained stance of the plaintiff at trial in not requiring the cross examination of the authenticity witnesses, likewise I place little weight on them.  The withdrawal of any challenge to categories H, I, J, K and L had no doubt resulted in some savings in costs but I cannot see how it can affect the incidence of costs at least on the facts of this case.  By the time of the withdrawal of the challenge the defendants had already prepared the supplemental witness statement of Wong Wai Chau to deal with the challenge.  I have reviewed that witness statement which ran to 33 pages with 55 paragraphs, together with various annexures.  Costs of those parts of the statement dealing with categories H, I, J, K and L would not have been minimal.

17. Likewise the stance taken by the plaintiff at trial as to the remaining challenges (namely just putting the defendants to proof without cross examination) no doubt had led to some savings in costs and time but again I cannot see how that can affect the incidence of costs.  By that stage, more witness statements had been prepared and filed (and more costs incurred).

18. The plaintiff also says that there are various good reasons why authenticity was being disputed: several versions, changed over time, discrepancies, not received, etc.  However, I do not think these are sufficient reasons to persuade me to exercise my discretion in the plaintiff’s favour:

(1) I deal with the “not received” (or “not sent to the plaintiff”) ground first.  From time to time parties to litigation would disclose documents (correspondence etc) which were not sent to or received by the other side. 

(2) Not all discloseable documents are necessarily “inter partes” documents in the sense that they are documents sent by one party to another or vice versa. 

(3) Thus as a matter of principle, the fact that a document has not previously been sent to (or received by) a party generally does not, of itself, entitle the other side to dispute authenticity with no costs consequences.  Otherwise the Court would be inundated with Notices of non-admission issued with impunity.  (I am here not talking about a document alleged to have been sent by one party to another and which the other party denies – in such a case the “receiving party” would have good grounds to dispute authenticity)

(4) Therefore, for example, the fact that some documents were said to be sent to (or received by) Smart Union (and hence the plaintiff might not have been privy to them) does not of itself entitle the plaintiff to require proof of their authenticity without costs consequence to the plaintiff.

(5) As to the others points namely that various versions had been disclosed, that there were discrepancies, that they had changed over time, etc, these are at most factors that might have required explanations as to their content.  I agree with Anthony Chan J in Gotland at paragraph 15 that a party should accept that the documents disclosed by the other side are genuine unless there is sound reason to believe otherwise.  But having grounds to ask for explanation or clarification is not the same thing as having sound reason to believe that a document is not genuine.  Courts are not so naïve as to think documents can never be “doctored” or fabricated to serve one’s commercial or litigation purposes; but on the other hand courts do not labour under an inborn conspiratorial mindset so as to jump at the slightest inconsistency or discrepancy and shout “forgery” or “fabrication” all the time. A balanced, realistic and common sense approach is always adopted by the court (and, it is hoped, by litigants). 

(6) It is not an answer to say that had steps been taken by the plaintiff to obtain clarification (such as further and better particulars, further discovery, or interrogatories), similar level of costs would still have to be incurred by the defendants anyway.  It is a question of principle as to which is the proper procedural device to resort to. 

(7) In any event it would appear that for many of the queries and documents, the defendants had either by correspondence and by skeleton arguments provided explanations. 

(8) Even if one were to look at the queries raised in the plaintiff’s previous skeleton arguments before Suffiad J, it is apparent that there are only a limited number of documents on which material queries were raised (lest this be misunderstood - this is not the same as saying that these queries amount to positive reasons to believe that the documents were not genuine).  Yet the plaintiff launched an en bloc challenge to a much wider range of documents.  There was no apparent attempt to be more specific or refined in making the challenges.  This reflects on the indiscriminate approach adopted by the plaintiff.

(9) The plaintiff made various other submissions as to (i) the relevance of the documents under challenge, (ii) the fact that it was the defendant who disclosed and relied on them, (iii) whether the underlying claim had eventually been struck out, and (iv) the lack of reference to the documents at trial.  In my view they do not carry much weight.  If the defendants disclosed irrelevant documents, or pleaded an unmeritorious claim, or produced documents without referring much to them at trial, these may carry their own costs consequences absent a challenge to authenticity.  But that does not mean that a plaintiff can add to the defendants’ costs by serving a Notice of Non-admission.

19. For all the above reasons and in the exercise of my discretion I order that my costs order nisi be varied as prayed by the defendants.  The costs of and occasioned by the defendants’ application to vary should be borne by the plaintiff to be taxed if not agreed.

The Plaintiff’s application

20. I now turn to the plaintiff’s application.  The basis of the application is as follows:

(1) On 21 October 2011 the plaintiff sent a letter “without prejudice save as to costs” to the defendants offering to settle the matter by accepting US$400,000 (all in) (which I take to mean inclusive of interest and costs). 

(2) This was not accepted.  Then on 2 November 2011 the plaintiff made a sanctioned offer to the defendants offering to settle by accepting US$450,000.  But as to costs, the letter did not make any offer, save to say that as the offer was made less than 28 days before commencement of trial (trial was to commence on 14 November 2011) the defendants may only accept the offer if the parties agreed on the liability for costs or the Court granted leave to accept it. 

(3) The sanctioned offer was not accepted either. 

(4) The plaintiff accepted that the letter of 21 October 2011 (without prejudice save as to costs) fell within the exclusionary rule under Order 62 rule 5(1)(d) (which provided, in effect, that the court may take Calderbank offers into account but such offers may not be taken into account if at the time of the offer, the party making it could have protected his position as to costs by means of a sanctioned offer or sanctioned payment) because at the time of that letter (21 October 2011) it was still open to the plaintiff to have made a sanctioned offer which could have been accepted without having to obtain leave of the Court or the agreement of the other side.

(5) The sanctioned offer, because of its timing (less than 28 days prior to commencement of trial), did not attract the costs consequences stipulated by Order 22 rule 24.  However, it could still operate by way of an ordinary Calderbank offer (because it was still marked “without prejudice save as to costs”) and it would not be caught by the exclusionary rule because it was issued within 28 days prior to commencement of trial. Since after trial the plaintiff had done better than the terms of the Calderbank offer, under the court’s residual discretion as to costs (and as specifically provided for by Order 62 rule 5(1)(d)) the Court can still take it into account and order costs to be taxed on a higher scale (such as indemnity basis).  The plaintiff does not seek enhanced interest (as might have been open had a “compliant” sanctioned offer been made within the prescribed timeframe). 

21. Assuming for the sake of argument that the 2 November 2011 letter can be treated as a Calderbank offer and taken into account in the Court’s costs discretion under Order 62 rule 5(1)(d), a difficulty with the letter is that it did not contain any offer on costs.  The plaintiff argued that it was plain that the plaintiff intended to settle on a no order as to costs basis (because of the terms of the earlier Calderbank letter). I am not persuaded that this necessarily followed.  Some time had passed between the two offers and more costs (say, counsel’s brief) could have been incurred in the meantime.  Very often such matters could have led one party to adopt a different costs position.  It is true that the quantum offered was higher than the one in October and it might be said that this had already reflected the additional costs incurred, but one could not tell for sure and the letter did not explain it.  Objectively viewed, it was not entirely plain whether the plaintiff was still prepared to settle on the same terms as to costs.  It would have been easy for the plaintiff to spell this out in the letter but (for reasons not explained) it was not.  The fact that leave of the court (or the other side’s agreement) was required should not prevent the plaintiff from setting out its proposal as to costs in the letter.  It was therefore not an offer that the defendants could have immediately accepted and put an end to the proceedings.

22. It may be said in response that:

(1) even if one takes the most extreme costs position (defendants to pay plaintiff’s costs) the plaintiff had still done better after trial than if the offer had been accepted;

(2) the defendants, if they had genuinely been minded to reasonably explore settlement, could have asked for clarification of the plaintiff’s position as to costs, and yet there was no follow up to clarify; nor was there any explanation by the defendants as to why. 

23. I have taken the above into account.  However:

(1) It is the plaintiff who seeks to protect itself in costs and it was incumbent upon it to prepare an offer that could (and ought) reasonably to have been accepted.  A plaintiff who makes an offer (i) too late so as to be unable to rely on the statutory consequences under Order 22 rule 24 and (ii) frames his offer in an “incomplete” manner does not start off with a strong ground in seeking an exercise of discretion in his favour.

(2) The costs result prayed by the plaintiff (namely that there should be indemnity costs 28 days after the offer) did not sufficiently reflect the above two factors.  I perfectly understand (and have borne in mind and taken into account) the oft-repeated post-CJR sentiment to encourage settlements, but on the other hand plaintiffs should be encouraged to devote reasonable thoughts and input into their settlement offers if they are to obtain the benefit of any enhanced costs order.  Put bluntly the “dice” cannot all be loaded against a losing defendant.  The approach by the plaintiff to settlement (first sending a Calderbank letter at a time when it could have made a sanctioned offer; then sending a sanctioned offer too close to trial and which is said to also operate by way of a Calderbank offer but with no costs provision) had a very “haphazard” feel about it.

(3) The costs order asked for by the plaintiff depended a lot on the fortuity that (i) the case had overran and (ii) a timeslot is not immediately available after the original trial period.  Had a timeslot been available after the initial period allocated, the trial (overran as it did) would still have finished before the expiry of the 28-day period (with, at most, one or two days beyond that for oral closing submissions) and the plaintiff’s present stance (i.e. claiming indemnity costs only for the period after expiry of 28 days) would not even get off the ground.  It can be said that this was because of the diaries of the court and of counsel and one has to take the state of the court’s and counsel’s diaries as one finds them.  But this demonstrates the arbitrariness and fortuitous nature of the plaintiff’s approach. 

24. I am not ruling out a possible exercise of the Court’s discretion to order taxation on a higher scale under the residual discretion even if a sanctioned offer was made less than 28 days prior to commencement of trial.  Had this been a case where (purely by way of possible example) there was a much longer estimated length of trial so that the 28 days expired during the initial allocated timeslot when the trial still had a long way to go, then perhaps the considerations might be somewhat different. Nor am I saying that this is the only possible scenario. But on the facts of the present case I do not see enough materials for me to exercise my discretion to order taxation on a higher scale against the defendants. 

25. I therefore dismiss the plaintiff’s application to vary the costs order nisi with costs to be paid by the plaintiff to be taxed if not agreed.