ICI SWIRE PAINTS LTD v. TECHI MOTOR ENGINEERING & TRADING CO

cacv 171/2004

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 171 of 2004

(on appeal from HCA NO. 7251 of 1995)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  This is an appeal from a judgment and order of Yam J given on 31 July 2003.  The part of the order that is relevant to this appeal is that the costs were awarded to the plaintiff up to and including the first day of the trial whereas the costs of the counterclaim were awarded to the plaintiff by counterclaim (who for convenience will be referred to as “the defendant”).  Those costs included not only the costs of the remaining 5 days of the trial before Yam J but also the costs of the assessment of damages before Master Yuen.  At the conclusion of the hearing of this appeal, the appeal was dismissed with reasons to be given in writing.

2.  The history of the matter is that this action was brought by the plaintiff for the sum of $3,548,007.80 in respect of goods which had been sold to the defendant.  The defendant on the other hand counterclaimed for breach of contract, it was said that the sales agreement between the plaintiff and the defendant had been wrongfully terminated.  The matter came to trial on 10 November 1998.  On the first day of trial the defendant conceded that the amount claimed by the plaintiff was due to it but maintained that he had a counterclaim for wrongful termination of the sales agreement under which the goods had been sold.  The counterclaim was in effect a claim for loss of profits which would have been made in the period from June 1994 to the end of that year in respect of the resale of the products on the market in the Mainland. 

3.  The plaintiff resisted the defendant’s claim in respect of wrongful termination and there was a five-day hearing.  The judge held that the plaintiff had wrongfully terminated the agreement.  The matter was then remitted to the master to assess the amount of damages.  The master assessed those damages at $2,938,743.04.  That assessment was appealed to this court and on 6 July 2004 this court upheld the assessment despite arguments by both the plaintiff and the defendant.  In the meantime, however, the matter had gone back to Yam J to make the final order and in particular the order in respect of costs.

4.  In his judgment on costs the judge referred to the fact that it had been agreed by both sides that the defendant’s counterclaim amounted to an equitable set-off.  When he commenced the passage in the judgment referring to costs, the judge referred to the fact that he considered that there would not have been any litigation at all had the plaintiff not acted in breach of contract.  He also considered that the defendant had been unable to pay the plaintiff because the plaintiff had “… deliberately and wrongfully ‘turned off the tap’…”.  In paragraphs 7 and 8 of his judgment the judge said:

“	7.	Thus this case falls squarely within the class of cases mentioned in N.V. Amsterdamsche Lucifersfabrieken v. H & H Trading Agencies Ltd [1940] 1 All ER 589.  In substance only the counterclaim of the defendant was being litigated in the trial and in the assessment of damages.
	8.	In N.V. Amsterdamsche, the claim was admitted in pleading and the defendant counterclaimed for about £72 and succeeded for £55, a sum which was less than the claim of the plaintiff.  The court nevertheless held that the plaintiff was entitled to costs of setting down and obtaining leave to proceed, but the defendant’s costs of the counterclaim should be taxed on the basis that he was successful on the only matter litigated.”

5.  On this appeal Mr Kat, who appeared on behalf of the plaintiff, contended that the judge had been wrong first of all by putting the blame for the need for these proceedings upon the plaintiff, on the basis that that was an irrelevant matter as regards awarding costs.  Secondly, his main contention on this appeal was that because it had been agreed that this was a situation where there was an equitable set-off, the decision in the case of N.V. Amsterdamsche Lucifersfabrieken v H & H Trading Agencies Ltd was not pertinent as that related to a counterclaim and not an equitable set-off.  The importance of the distinction was, as Mr Kat sought to argue, the fact that the plaintiff had thereby been kept out of the amount which the defendant had conceded was owing in respect of the goods on the basis that there was a set-off.

6.  A large number of cases were cited to this court in an endeavour to show that the proper order where there was an equitable set-off was that the winning party, in other words the party which ultimately received some payment, was the party entitled to an order for costs.

7.  That may be the general rule and would be appropriate in a number of cases.  However in every case the question of costs is a matter of discretion and this court is very reluctant to interfere with the exercise of discretion by a judge unless it is satisfied that the judge had erred either in fact or in principle or had clearly come to the wrong decision. 

8.  In my view the order for costs which was made by Yam J was an order that was properly open to him.  He was entitled to look at the matter on the basis of what was the real issue, or lis, between the parties.  As a matter of fact the five days of trial in front of Yam J following the defendant’s concession on the first day of trial was entirely taken up by the defendant establishing that he was entitled to compensation by reason of the plaintiff’s breach of contract.  That claim was hotly contested.  On this appeal Mr Kat did not substantially resist the matter on that basis although he did not go to the full extent of conceding that the defendant was clearly entitled to those costs. 

9.  The matter that was hotly contested was the costs that had been incurred on the assessment of damages.  On the pleadings as they stood the defendant was claiming something in the excess of $6.5 million.  On 17 December 2001, prior to the assessment of damages, the plaintiff’s solicitors wrote, in a without prejudice letter, conceding that the defendant’s claim amounted to something over $600,000 a plus interest.  In round terms they were prepared to concede a total claim of something in the order of $1,055,086.09.  It was on that basis that the matter went to the assessment, although Mr Kat sought to suggest that the plaintiff might have been prepared to concede a sum in the region of $1.7 million.  In the end, the master assessed the damages to which the defendant was entitled at $2,938,743.04.  This court upheld that.  On that basis the defendant had established its entitlement to the award and since the costs on an assessment or inquiry as to damages are generally speaking dealt with separately from the costs of a trial: see for example Slack v Midland Railway Company 16 Ch. D. 81, the defendant would normally be entitled to costs, except where there were special reasons for ordering otherwise.

10.  Thus the order made by the judge below was in my view open to the judge.  Indeed our attention was drawn to the case of Humber Asphalt Ltd v Squire W. Swift Ltd, the Independent 6 April 1987 (Transcript: Association).  In this respect I consider that the passage on page 3 of that transcript is of interest.  Nicholls LJ said:

“For my part, I am unable to accept this analysis of the position in this case.  The plaintiff’s claim has never been disputed, nor has there been any issue over the plaintiff’s entitlement to the costs of the claim.  A counterclaim is substantially a cross-action.  In this case the counterclaim succeeded in large measure, although not wholly.  Leaving aside the payment into court, to which I shall come in a moment, I do not see why the judge, in the exercise of his discretion, could not properly order the plaintiff to pay the defendant’s costs of the counterclaim.  If, instead of counterclaiming, the defendant had proceeded with its own action for £10,389, an award of costs in its favour when it succeeded to the extent of £7,660 would not in the normal way have been exceptional.

The position regarding costs of a claim and a counterclaim is a much-tilled field, and I note in passing that some of the authorities are mentioned in the note 15/2/7 at page 165 of volume 1 of the Supreme Court Practice for 1985, although we were not in fact referred to any of these authorities.  Of course there will be many cases where ordering costs to follow the event with regard to the claim, and separately with regard to the counterclaim, will not be satisfactory and will not produce a just result.  It is for this reason that judges have a discretion with regard to costs, the circumstances of cases varying so widely.

I recognise also that the commercial consequence of the contest on the counterclaim in the present case was to determine the extent to which the sum, otherwise admittedly due to the plaintiff for its work, fell to be reduced.  But I can see no reason in principle why in the exercise of his discretion the judge should not award costs to the party who was largely, although not wholly, successful in that contest.  It was open to the judge to conclude, as he did at the end of this 11-day trial, that in substance the party who had been successful on the only matter which was tried, namely, the counterclaim, was the defendant and that justice required that the defendant should have its costs of the counterclaim.  The ‘event’, in terms of Order 62, rule 3, sub-rule (2), was the outcome of the counterclaim, and on that the defendant had substantially succeeded.”

11.  In those circumstances I do not consider that there are grounds for disturbing Yam J’s judgment.  Whether that is a decision to which I would have come is irrelevant.  It is an order which was open to the judge to make.  As Mr Kat conceded in the course of argument, if judgment had been entered for the plaintiff on the first day of trial for the sum of $3,548,007.80 but stayed pending determination of the counterclaim, there would have been no doubt about the defendant’s entitlement to costs.  What happened in practice was little different.

12.  Mr Kat also sought to argue that looked at overall, because his client had incurred expenses of approximately $3.5 million and the defendant’s estimated costs were in the region of $2 million it was clearly unjust for his clients to be out of pocket in respect of the costs where they had succeeded in the action in obtaining a net sum in excess of $600,000.  That the plaintiff may feel aggrieved in this respect is one thing.  However, their liability in respect of costs has been occasioned by their stout contest of any claim by the defendant in respect of the plaintiff’s own breach of contract and on the assessment.  It might have been open to apportion part of the costs of the assessment of damages to the plaintiff, but the matter has not been argued on that basis, and in those circumstances it was not open to this court to make any apportionment of those costs.

Hon Le Pichon JA:

13.  I agree.

Hon Tang JA:

14.  I agree.