RYDER INDUSTRIES LTD v. TIMELY ELECTRONICS CO LTD

HCA 2358/2007 & HCA 109/2009
(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2358 OF 2007

____________

____________

________________________

DECISION ON COSTS AND INTEREST

_________________________

Background

1.  These consolidated actions relate to a claim by the Plaintiff against its former business associate for sums due and arising of a written agreement between the parties.  Judgment was given on 11 July 2013.  The primary matters in dispute were the subject matter of HCA 2358/2007 (“the Main Action”).  HCA 109 of 2009 (“the Guarantee Action”) concerned a guarantee given by the Defendant in that action in regard to the liabilities of the Defendant in the Main Action.  The two actions were consolidated by an order of the Registrar made on 26 January 2011.

2.  Although the Plaintiff in each action is Ryder Industries Ltd, at the time relevant to the disputes between the parties the Plaintiff was known as Saitek Ltd and this judgment will follow the convention adopted by the parties, and the Plaintiff will be referred to as “Saitek”.  The Defendant in the Main Action will be referred to as “Timely”, and the Defendant in the Guarantee Action, Mr Chan Siu Woo, as “Mr Chan”; collectively “the Defendants”.

3.  The judgment dealt with costs on an Order Nisi basis.  The judgment also gave the parties liberty to apply in regard to matters of interest.  By a letter dated 23 July 2013 the legal representatives of Saitek have made applications in regard to both of those matters.  That correspondence also addresses two other matters, namely the question of whether a certificate for two counsel should be granted, and an application for “payment out” to Saitek of certain monies held in Court.  As explained briefly below, neither application is dealt with in this Decision.

4.  So far as the application for a certificate for two counsel is concerned, this is a matter which has already been addressed.  An application for such a certificate was made orally by counsel at the trial, and this was considered (and rejected) in the judgment.  The Claimant submits that this forms part and parcel of the costs matters reserved by the order nisi.  I do not agree.  There is neither jurisdiction nor justification for that decision to be revisited.

5.  So far as the payment out of monies held in Court is concerned this is an application which should properly abide the outcome of an application currently on foot elsewhere for a stay of execution of the judgment pending appeal.  This is plainly the pragmatic course.  Moreover I agree, in this instance, with the submission of the Defendants to the effect that the application ought properly to have been made by summons.  It does not fall within the compass of matters reserved for decision by the liberty to apply provisions in the judgment.

Interest

6.  The principal sum awarded to Saitek by the judgment was $6,502,555.15.  Pursuant to paragraph 91 of the judgment interest was to accrue on that sum, in accordance with a contractual agreement of the parties, at a rate of 1% above BLR from 1 September 2007 to the date of judgment.  The parties were given liberty to apply in the event that the relevant calculation could not be agreed.

7.  The parties have been able to agree the quantum of that interest at the stated rate of 1% above BLR calculated to the date of judgment (11 July 2013), and this amounts to HK$2,345,887.95.

Sanctioned Offer?

8.  However Saitek seeks enhanced interest for a part of the period pursuant to Order 22 rule 24(2), based upon what are said to have been Sanctioned Offers made by Saitek in each action on 26 April 2013.  In summary, offers were made by Saitek in correspondence to settle the claims and counterclaims in both actions by a payment by Timely of a sum of HK$6,000,000.  This was less than the amount of Saitek’s principle claims.  Neither offer was accepted and subsequently Timely and Mr Chan have been held liable for a greater sum than the offered amount. 

9.  Saitek therefore seeks the enhanced rate of interest for the period after the latest date on which the Defendants could have accepted the offer without leave (i.e. 25 May 2013, being 28 days from 26 April 2013) until the date of payment. Saitek accordingly seeks a variation of the Judgment and requests orders to the effect that interest should accrue on the principal sum of HK$6,502,555.15 at 1% above BLR (as presently ordered), but only from 1 September 2007 to 24 May 2013, and that thereafter interest should accrue at a rate of not more than 10% above judgment rate from 25 May 2013 through to the date of judgment and thereafter until payment.

10.  The Defendants do not accept that there is any such entitlement because, they submit, neither of the letters dated 26 April 2013 qualifies as a Sanctioned Offer under Order 22 rules 4 and 5.

11.  The primary reason for this is that the offers made to Timely were conditional.  Both letters were in similar terms, with the letter served on Timely in the Main Action for example, providing that “This offer shall be conditional upon Mr. Chan’s acceptance of the Sanctioned Offer to Chan in accordance with Order 22 rule 16”.  The letter in the Guarantee Action reflected a similar provision.  On behalf of Timely and Mr Chan it is submitted that the conditions had to be satisfied “before the offer is valid” meaning that because neither Defendant ever accepted the conditional offer made to them “neither letter has ever taken effect as an offer, [to the other defendant] less still a sanctioned offer in the statutory form”.

12.  It is submitted that in order for an offer to qualify as a sanctioned offer, the prescribed form of the offer as set out in Order 22 rule 5 must strictly be complied with: see paragraph 22/5/A of the White Book 2013. The Defendants submit accordingly that a Sanctioned Offer should be an “immediately valid offer”, not an offer subject to a condition precedent.

13.  The Defendants submit that any difficulty arising out of the form of the offers is of Saitek’s own making since a Sanctioned Offer not subject to any condition on acceptance could have been made in each Action without any risk to Saitek.  That is so; the offers made seem not to have fully recognised the fact that the two actions had been consolidated, and were in effect no longer separate actions.

14.  Saitek does not accept that the correct approach to the RHC is to look for “strict compliance”, but says that, in any event, offers with conditions are not precluded by the terms of O22 rules 4 and 5. Although O22 rule 5 sets out the minimum requirements as to form and content of any offer which is to be treated as a “Sanctioned Offer” under the rules, it does not purport to constrain what may be considered to be an offer for the purposes of the Sanctioned Offer procedure provided those minimum requirements have been met.  In contract an offer may be made with conditions as to acceptance and, says Saitek, there is nothing in the RHC which mandates a different position for a Sanctioned Offer.

15.  The underlying objective of the sanctioned offer procedure is of course the encouragement of the settlement of actions without recourse to adjudication of the matter by the court.  To that end rules have been devised so as to codify a process by which a plaintiff may make an offer of settlement of a claim through a mechanism which is not dissimilar to the mechanism for the making of payments into court by defendants.  The rules set out certain requirements for any such offer of settlement to qualify as a sanctioned offer, but that does not of course preclude offers other than Sanctioned Offers being made by plaintiffs.  The position may be paraphrased by saying that if an offer meets the requirements of the rules, then the “code” applies including the costs and interest consequences specified in the rules, as appropriate, as and when the offer is accepted, rejected, beaten at trial or otherwise.

16.  If an offer is made which does not meet the prescription for a Sanctioned Offer then it may perhaps be a matter which may be taken into account by the court in the exercise of its general discretion as to costs as and when this arises.  But, as Order 22 rule 4 makes clear, in order to carry the specified consequences the offer has to be a “Sanctioned Offer”.

17.  As a matter of contract law the Defendant’s proposition that a conditional offer cannot be an offer until the condition is satisfied is plainly incorrect; an offer is not precluded from being an offer simply because its acceptance is subject to a condition.  This not a matter of contract law however, and I understand the submission to be premised on the understanding paraphrased above, that the relevant rules of court curtail which offers attract the status of a “Sanctioned Offer”.

18.  There has been not inconsiderable litigation in England which has considered the equivalent provisions of Part 36 of the Civil Procedure Rules. The trend of that litigation has been to approach Part 36 offers in a manner distinct from common law concepts of offer and acceptance.  This can be seen from the Court of Appeal’s judgment in Susan Gibbon v Manchester City Council [2010] EWCA 726 in which Moore-Bick LJ said this:

“4. It can be seen from Part 36 as a whole, as well as from the extracts cited above, that it contains a carefully structured and highly prescriptive set of rules dealing with formal offers to settle proceedings which have specific consequences in relation to costs in those cases where the offer is not accepted and the offeree fails to do better after a trial. In cases where there has been no Part 36 offer or a Part 36 offer has been bettered the judge has a broad discretion in dealing with costs within the framework provided by Part 44. Rule 44.3(4) provides that when exercising its discretion as to costs the court will have regard to the general rule that the unsuccessful party should pay the costs of the successful party, but will also have regard to the conduct of the parties and any payment into court or admissible offer to settle made by one or other party which falls outside the terms of Part 36. In seeking to settle the proceedings, therefore, parties are not bound to make use of the mechanism provided by Part 36, but if they wish to take advantage of the particular consequences for costs and other matters that flow from making a Part 36 offer, in relation to which the court's discretion is much more confined, they must follow its requirements.

5. Part 36 is drafted as a self-contained code. It prescribes in some detail the manner in which an offer may be made and the consequences that flow from accepting or failing to accept it. In some respects those consequences reflect broadly the approach the court might be expected to take in relation to costs; in others they do not; for example, rule 36.14(3) allows the court to award a claimant who has obtained a judgment at least as advantageous as his offer interest on the sum for which he has obtained judgment at an enhanced rate of up to 10% over base rate, costs on the indemnity basis and interest on those costs at an enhanced rate as well.

6. Basic concepts of offer and acceptance clearly underpin Part 36, but that is inevitable given that it contains a voluntary procedure under which either party may take the initiative to bring about a consensual resolution of the dispute. Such concepts are part of the landscape in which everyone conducts their daily life. It does not follow, however, that Part 36 should be understood as incorporating all the rules of law governing the formation of contracts, some of which are quite technical in nature. Indeed, it is not desirable that it should do so. Certainty is as much to be commended in procedural as in substantive law, especially, perhaps, in a procedural code which must be understood and followed by ordinary citizens who wish to conduct their own litigation. In my view, Part 36 was drafted with these considerations in mind and is to be read and understood according to its terms without importing other rules derived from the general law, save where that was clearly intended.”

19.  It is clear from the authorities referred to in the White Book that the minimum requirements as to form prescribed by the rules must be met.  It is not clear that conditions which form part of the offer exclude such an offer from the scheme of Order 22 rules 4 and 5. 

20.  In my judgment the correct approach involves firstly a consideration of whether the minimum requirements for a valid sanctioned offer have been complied with.  If those requirements have been met, then the offer made is ordinarily to be taken as falling within the “scheme” provided for in the rules.  If those requirements have been met, but conditions have been added to the offer, it seems to me that these conditions are to be considered in the context of whether or not the particular offer which has been made has been bettered, not whether it is an offer at all.   I do not accept therefore that the fact that an otherwise compliant (with Order 22) offer contains a condition precludes it from being a valid offer for these purposes.  This appears moreover to be the implication of Order 22 rule 24(5) (a).  The better approach in my judgement is for the condition (where relevant) to be considered as an additional element of the offer which the offeror itself has to “better” at trial in order to be able to claim the specified consequences.

21.  What then of the particular offers that were made by Saitek?  It seems to me, for the reasons given, that the Defendants are not correct to submit that the inclusion of the provision precludes Saitek’s offer from being an offer for the purposes of Order 22, the other requirements of that rule as to form and content of a Sanctioned Offer having been met.

22.  Moreover there is no question but the Saitek has achieved more, and the Defendants achieved less, than would have been the case had the offers been accepted.  In the circumstances of the present case it was inevitable that the outcome of the Main and the Guarantee Actions would go “hand in hand”.  The liability of Timely, the principal debtor in the Main Action, and the liability of Mr Chan as the guarantor were co-extensive.  There was no line of defence in the Guarantee Action which was independent of the defences canvassed in the Main Action.

23.  There is no contention advanced on behalf of the Defendant’s that an award of a higher rate of interest would be unjust and, accordingly the consequences of the Defendant’s non-acceptance of the Sanctioned Offers made by Saitek are as prescribed in Order 22 rule 24(1) and (2).  In principle therefore I accept that Saitek would be entitled to interest at an enhanced rate for the period between the end of the period within which the offer was automatically open for acceptance, and the date of judgment.  That period was one of about 7 weeks.

24.  In determining the rate for enhanced interest, the Defendants invite the court to consider the following circumstances.

(1)   The Sanctioned Offer was only made close to the trial.

(2)   Saitek did not provide any detail as to how the offer of HK$6 million was arrived at.

(3)   The Defendants themselves attempted to reach a compromise with a view to avoiding the trial.  Timely made a sanctioned payment into court of $3,000,000 on 6 February 2003, and Mr Chan made a sanctioned payment of $1 in the Guarantee Action.

(4)   Some element of the illegality defence was established by Timely at trial; and the Court found in favour of the Defendants in respect of the claim by Saitek for machine repair costs, and Saitek abandoned its claim for mesne profit.

25.  Moreover, although these provisions of the rules are intended to encourage the settlement of disputes, the interest and cost consequences of a defendant’s failure to better a Sanctioned Offer are not intended to be penal in nature.  See Golden Eagle International (Group) Ltd v GR Investment Holdings Ltd [2010] 3 HKLRD 273.

26.  Keeping those matters in mind, and balancing the relatively late timing of the offer with the encouragement to be given to settlement of disputes even at the last minute, I award Saitek an additional element of interest calculated at 5% above the rate already awarded for this period.  By my calculation this additional element amounts to HK$41,865.77 (HK$6,502,555.15 @5% x 47 days).

27.  The parties have debated whether or not the court has jurisdiction to make any order for enhanced interest run up to the date of payment, overriding in effect the default judgment debt rate.  The Defendants submit that there is no such jurisdiction in reliance on the judgment in McPhilemy v. Times Newspapers Ltd (No.2) [2002] 1 WLR 934 at 945 and paragraphs 28 to 30 of the judgment in the Kai Min Fashion(HK) Limited v. Fond Express Logistics Limited HCCL 20/2011.  The Defendants submit that this must be correct as a matter of principle because any such enhanced interest is there to address the elements of inconvenience and disruption caused by the diversion of senior management from their normal duties, an inconvenience which ends with the judgment.

28.  Saitek submit that the entitlement to make such an award of interest lies with the court, the jurisdiction being conferred by s49 of the High Court Ordinance (Cap.4) which provides:

“49 (1) Judgment debts shall carry simple interest-

(a) at such rate as the Court of First Instance may order; or (Amended 25 of 1998 s2)

(b) in the absence of such order, at such rate as may be determined from time to time by the Chief Justice by order,

on the aggregate amount thereof, or on such part thereof as for the time being remains unsatisfied from the date of the judgment until satisfaction.”

29.  I agree with that submission and accept that I have jurisdiction to make the order.  However, having regard to the factors referred to by the Defendant I do not believe it appropriate for such an order to be made in this case.  The enhanced element of interest will run to the date of judgment only.

Costs

30.  By reason of the Sanctioned Offers and pursuant to Order 22 rule 24(3), Saitek considers that it is entitled to costs on the indemnity basis from 25 May 2013.  The Defendants make no submission that, in the circumstances as I have found them that it would be “unjust” that orders for indemnity costs (or enhanced interest) should be made.  Nor, on the basis that the offers were valid sanctioned offers, do the Defendants make any specific submission as to whether indemnity costs from 25 May should be awarded.

31.  In my judgment there is a clear policy incentive in encouraging the settlement of actions where there is a reasonable offer advanced by one party to the other whether within the mechanism of Sanctioned Offers or otherwise.  This does not mean that indemnity costs should always be visited on a party who decides not to accept an offer which, in hindsight ought to have been accepted.  The imposition or otherwise of costs on an indemnity basis remains a matter of discretion.  In the circumstances of the present case however there is no doubt in my mind that the defendants ought to have accepted the offers that were made to them, and, moreover, not doing so was, it seems to me unreasonable.  Accordingly I accept Saitek’s application for a variation of the costs order nisi, and order that costs be recovered on an indemnity basis for the period after 25 May 2013.

Interest on Costs

32.  Also arising out of the making of the sanctioned offer, Saitek seeks interest on its costs at the enhanced rate, also from 25^th May 2013 pursuant to Order 22 rule 24(3)(b).  Saitek have tabulated the cases in which such an award has been made these including Golden Eagle International (Group) Ltd v GR Investment Holdings Ltd [2010] 3 HKLRD 273 in which Lam J. made such an order and adopted the judgment debt rate as the rate of interest for the pre-award period.  In Kai Min Fashion (HK) Limited v Fond Express Logistics Limited HCCL 20/2011, Mr Recorder Jat Sew-tong, SC also awarded such interest.

33.  For my own part, while I accept that the entitlement in principle arises, in view of the relatively late stage at which the Sanctioned Offers were made, and the uncertainty as to when any relevant costs were in fact incurred, I decline to exercise my discretion to make any award of enhanced interest in respect of Saitek’s costs.

Costs of this Application

34.  Saitek seek the costs of the application to vary the order nisi on an indemnity basis.  I accept that entitlement arises since I have awarded the costs of the trial on the same basis.  In view of the inclusion of certain matters going beyond the order nisi matters in Saitek’s application, and with which I have not dealt, I make the order applicable only to a proportion of Saitek’s costs of the application.  In an attempt to simplify any taxation exercise I direct that Saitek is to have 80% of its costs of these appolications, such costs to be taxed on an indemnity basis if not agreed.