CEP LTD v. 無錫市佳誠太陽能科技有限公司

CACV 97/2014 AND CACV 165/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS. 97 AND 165 OF 2014

(ON APPEAL FROM HCCL NO. 12 OF 2012)

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(Heard together)

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J U D G M E N T

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Hon Lam VP:

1.  I have read the judgment of Kwan JA in draft and I agree with it. In addition, I wish to highlight the unsatisfactory position regarding the latter part of Order 62 Rule 5(1)(d) which, in my view, unduly fetters the court’s discretion on costs. A similar provision in the English rules had been removed a long time age, see Choy Bing Wing v Hong Kong Shanghai Hotels (No 2) [1998] 4 HKC 555 and Wealthy Plus v Lai Man Hon [2001] 4 HKC 691. In my view, the regime in Order 22 should be permissive rather than mandatory. It would be most unfortunate if a Calderbank offer cannot be taken into account because those advising a litigant took a wrong view on the applicability of Order 22 (which as Kwan JA explained was not the case here). This would be against the spirit of the underlying objectives in Order 1A. The exclusionary rule also seems to be inconsistent with Order 22 Rule 2(4). The Rules Committees of the Rules of the High Court and the Rules of the District Court (which has a similar provision) should consider whether we should amend Order 62 Rule 5(1)(d) by deleting the exclusionary rule from it.

Hon Kwan JA:

2.  There are several matters relating to costs before this court.

3.  The first is an application of the defendant to vary the costs order nisi in our judgment of 12 March 2015 in which we dismissed the plaintiff’s appeal in CACV 97/2014 against the judgment of Recorder Jat, SC of 4 April 2014 (“the Trial Judgment”) and ordered the plaintiff to pay the defendant’s costs in the appeal.  By a summons dated 26 March 2015, the defendant seeks an order that the defendant shall have its costs of the appeal on an indemnity basis, with enhanced interest on such costs at the rate of 2.5% above judgment rate until payment.  The defendant also seeks costs of its summons to be paid by the plaintiff and on an indemnity basis.

4.  The second and third matters relate to an appeal of the plaintiff and the cross-appeal of the defendant in CACV 165/2014 against the judgment on costs of the judge handed down on 18 June 2014 (“the Costs Judgment”; [2014] 4 HKLRD 44).  By the Costs Judgment, the judge varied his order nisi (giving the defendant the costs of the action on dismissing the plaintiff’s claim) as follows: (1) the plaintiff shall pay 70% of the defendant’s costs of the action, to be taxed if not agreed, on a party and party basis up to 15 November 2012, and thereafter on an indemnity basis; and (2) interest on such costs at half of 5% above judgment rate from 16 November 2012 until 4 April 2014, and thereafter at judgment rate.  The judge ordered that the amount of $1,015 (equivalent to €100) paid into court by the defendant in a sanctioned payment on 18 October 2012 be paid out to the defendant’s solicitors.  He made no order as to costs of the plaintiff’s application to vary his order nisi and the defendant’s application to vary his order nisi.

5.  In its appeal, the plaintiff seeks to set aside and vary the Costs Judgment to the extent that the costs to be paid by the plaintiff to the defendant, ordered to be 70% of the defendant’s costs, shall be taxed on a party and party basis throughout.  It also seeks an order that the defendant shall pay the plaintiff the costs of both parties’ applications to vary the costs order nisi before the judge.

6.  In its cross-appeal, the defendant seeks to set aside and vary the Costs Judgment to the extent that the plaintiff shall pay 100% of the defendant’s costs on a party and party basis and an indemnity basis for the periods as ordered by the judge.  It also seeks the costs of the applications below from the plaintiff.

7.  I will deal with the issues before us in the order as submitted by Mr Chain for the plaintiff:

(1) whether the judge was in error in ordering that the plaintiff should pay only 70% of the defendant’s costs;

(2) whether the defendant can rely on its sanctioned payment to justify indemnity costs and enhanced interest on costs for the trial; and

(3) whether the defendant should have enhanced costs for the appeal.

Awarding 70% of the costs to the defendant

8.  The judge exercised his discretion to deprive the defendant, which was the successful party, of part of its costs, taking the view that its litigation conduct unnecessarily prolonged the case and the trial and had resulted in the increase of costs.  In §22 of the Costs Judgment, the judge gave “a few (not exhaustive) examples of the defendant unreasonably contending the indisputable”:

(1) what had happened at the meeting between Mr Cicero and Mr Li at the Intersolar fair;

(2) what had happened at the 22 June meeting between Ms Hernandez and Mr Li, and the fact that Ms Hernandez was not even cross-examined added to the futility of requiring her to come to court to testify;

(3) the fact that the defendant (essentially Mr Li) repeatedly attempted to increase the contract price, which was clear from contemporaneous documents;

(4) the events surrounding the 25 June factory visit, including whether copies of the unamended letters of credit were provided to Mr Zhang;

(5) whether the 007 letter of credit was transferred to the defendant.

9.  The judge expressed the view in §23 of the Costs Judgment that the defendant “ought to have taken a more realistic view on the facts, and should have focused on the interpretation of the Sales Contract and the legal consequences flowing from the objective facts”.  Taking a broad view of the matter, he decided to award the defendant 70% of its costs of the action.

10.  In the grounds set out in the respondent’s notice, the defendant took issue with the finding that its conduct had unnecessarily prolonged the case and contended it did not raise any unnecessary issues and was “merely responding to the issues raised by the plaintiff”.  It was contended that the defendant was entitled to test the plaintiff’s evidence “in the usual way” and asserted that its cross-examination of the plaintiff’s witnesses on the 25 June factory visit (Mr Mingoli and Mr Cicero) was “moderate, restrained and effective”.  It was said that the judge ought to have found that the defendant was not obliged to cross-examine Ms Hernandez about what happened at the 22 June meeting.

11.  Prolix submissions were made by Mr Thomson in support of the above grounds.

12.  Firstly, Mr Thomson drew attention to the fact that of the five issues at trial (three on liability and two on quantum), the defendant succeeded on four of them at trial and on the remaining issue on appeal.  In view of the defendant’s complete or near complete success, it would be unjust to deprive the defendant of part of its costs.

13.  This is just another way of saying that there should be no departure from the usual rule that costs should follow the event.  The judge had taken this as a starting point, but decided it would be just and fair to deprive the defendant of part of its costs on account of the defendant “unreasonably contending the indisputable” in a number of instances and had thereby unnecessarily prolonged the trial.  There is no error in principle.

14.  Next, Mr Thomson contended the criticism that the defendant had unnecessarily disputed a number of factual issues was unfair.  He complained that the judge did not specify the time by which each of the five examples mentioned of the defendant’s conduct had unnecessarily prolonged the trial, whether individually or together.  He contended the trial was “relatively short” and made a bare assertion that the time taken by the five instances was “minimal”.  He also asserted that the Costs Judgment (given on 18 June 2014) was made “well after the trial” (which took place in December 2013), so the Trial Judgment (given on 4 April 2014) was not fresh in the judge’s mind.

15.  The fact that the judge did not specify the time by which each of the five examples had unnecessarily prolonged the trial is irrelevant.  It is also pertinent to bear in mind the judge had said in §22 of the Costs Judgment that he gave only “a few (not exhaustive) examples of the defendant unreasonably contending the indisputable”.  The trial had lasted five days.  The judge was in the best position to assess whether and to what extent the instances of the defendant “unreasonably contending the indisputable” had unnecessarily prolonged the trial.  Obviously, the judge did not regard the time spent in that regard as minimal.  Nor do I accept counsel’s contention that having thoroughly reviewed the evidence and delivered the Trial Judgment in April 2014, the way the trial went would not have been fresh in the judge’s mind when he prepared and delivered the Costs Judgment two months later.

16.  Mr Thomson took issue with Mr Chain’s submission (which the judge appeared to have accepted) that the defendant should be deprived of some of its costs as the plaintiff had succeeded on every single disputed primary fact but was unsuccessful because of the inferences drawn or the contractual interpretation from the primary facts.  He submitted this is irrelevant, and to deprive the defendant of some of its costs was to “reward failure”.

17.  I do not agree with his contention.  If the primary facts should not have been disputed, and if time at trial was unnecessarily taken because they were unnecessarily disputed, there is no reason why the trial judge should not have exercised his discretion in depriving a party of some of his costs, even if that party should ultimately win on an inference drawn from the primary facts.

18.  Mr Thomson mentioned a number of instances to support his contention that it was the plaintiff who was “disputing the indisputable” and had thereby prolonged the trial.  I do not propose to recite those instances.  Suffice it to say the plaintiff lost the action on account of the issues of fact and law it raised unsuccessfully, and was therefore held liable to pay the defendant’s costs.  That did not detract from the fact that the defendant had disputed matters it should not have done, and which had unnecessarily prolonged the trial.  The judge was clearly entitled to take the view in §23 of the Costs Judgment that the defendant “ought to have taken a more realistic view on the facts, and should have focused on the interpretation of the Sales Contract and the legal consequences flowing from the objective facts”.

19.  Mr Thomson submitted there were no procedural steps available or realistically available to the defendant so as to shorten the process of the trial.  He mentioned Order 14, Order 14A, and trial of a preliminary issue.  Nor did the plaintiff serve on the defendant a notice to admit facts.  The five examples mentioned by the judge were all based on issues raised by the plaintiff and the defendant was only answering the plaintiff’s case.

20.  These contentions are of no relevance, as they do not excuse the defendant’s conduct at trial of unreasonably disputing matters which should not have been disputed.  The judge was entitled to take the view that the defendant’s conduct went beyond merely responding to the plaintiff’s case in a reasonably proportionate manner.

21.  Mr Thomson went through the five examples and made his submissions in some detail.

22.  In respect of the price increase, he sought to justify the defendant’s stance in seeking to raise the price.  He contended that the cross-examination of the plaintiff’s witnesses on this was “measured, effective and not prolix”.  He asserted that the evidence of Mr Li on this, which was rejected by the judge, did not prolong the trial in any meaningful sense.  And there was no finding of mala fides against Mr Li.

23.  As for Ms Hernandez’s evidence, he submitted that it was unfair for the judge to criticise the defendant for not cross-examining this witness about the alleged duress in relation to the signing of the Supplemental Agreement II, as Ms Hernandez was merely confirming Mr Cicero’s hearsay evidence.  He said the judge was wrong in stating that “Ms Hernandez gave evidence at the trial and confirmed her evidence that at the 22 June meeting she was forced to sign the Supplemental Agreement II” (Trial Judgment, §33) and that “her evidence was mainly on 22 June meeting” (Trial Judgment, §71).  The plaintiff had failed on the issue of economic duress.

24.  In respect of the factory visit, counsel submitted it was the plaintiff who had unnecessarily prolonged the trial by calling Mr Mingoli, whose evidence was “undermined” in cross-examination.  Similarly, the evidence of Mr Cicero was “damaged” in cross-examination.

25.  Regarding the transfer of the letter of credit to defendant, he complained that key documents were not produced by the plaintiff before the trial, even though the defendant ultimately lost on this point on account of the further documents produced by the plaintiff at the trial.

26.  It would be futile to suggest that the judge did not have regard to the way the evidence had unfolded before him.  He was in the best position to assess to what extent the examples he specifically mentioned (and other instances he did not specifically mention but were noted by him in §22 of the Costs Judgment) had unnecessarily prolonged the trial and whether a party’s conduct was unreasonable.  I am not persuaded in the specific instances mentioned by the judge, he was in error in stating that the defendant was disputing the undisputable.  That the plaintiff had ultimately failed on a particular issue was beside the point.  I do not think the judge was unfair to criticise the defendant for not cross-examining Ms Hernandez.  This matter was specifically debated before the judge, and he had addressed it fully at §34 of the Trial Judgment.  I reject also the contention there was any inconsistency between the Costs Judgment and the Trial Judgment.

27.  Mr Thomson acknowledged there is a high threshold to challenge the judge’s exercise of discretion in depriving the defendant of 30% of its costs.  He came nowhere near to discharging this burden.  I would therefore dismiss the defendant’s cross-appeal in CACV 165/2014 and uphold the judge’s order that the defendant should only have 70% of its costs at trial.

Whether the defendant should have indemnity costs for the trial with enhanced interest

28.  It is not in dispute that on 18 October 2012, the defendant made a sanctioned payment of $1,015.  In the notice of sanctioned payment given on the same date, it was stated that the sum was a “nominal sum equivalent to EUR 100.00” and was paid into court in settlement of the whole of the plaintiff’s claim.  The plaintiff had 28 days, up to 15 November 2012, to accept the payment but did not do so.  As the plaintiff’s action was dismissed, it had failed to do better than the sanctioned payment.

29.  Under Order 22 rule 23(5), “the Court shall make the orders referred to in paragraphs (2), (3) and (4) unless it considers it unjust to do so”.  Relevant to present purpose, the orders referred to are the indemnity costs and enhanced interest thereon.  I will refer to them as an “enhanced costs order”.

30.  Order 22 rule 23(6) provides that “in considering whether it would be unjust to make the orders referred to in paragraphs (2), (3) and (4), the Court shall take into account all the circumstances of the case including –

(a) the terms of any sanctioned payment or sanctioned offer;

(b) the stage in the proceedings at which any sanctioned payment or sanctioned offer was made;

(c) the information available to the parties at the time when the sanctioned payment or sanctioned offer was made; and

(d) the conduct of the parties with regard to the giving or refusing to give information for the purposes of enabling the payment or offer to be made or evaluated.”

31.  The question for the judge’s determination is whether it is unjust to make an enhanced costs order, taking into account all relevant circumstances of the case, including the matters set out in Order 22 rule 23(6).  The judge has discretion to decline to apply the default rule in Order 22 rule 23(5), where he considers it unjust to do so.  It is not in dispute that the plaintiff here has the burden of showing why it would be unjust to make an enhanced costs order.  And it is pertinent to bear in mind that the powers under the regime in Order 22 are not meant to be penal in nature, but the aim is to achieve a fairer result for the winning party, and to redress the perceived unfairness from the fact that costs, statutory interest and damages will not fully compensate a successful party in litigation (Golden Eagle International (Group) Ltd v GR Investment Holdings Ltd [2010] 3 HKLRD 273 at §10).

32.  Mr Chain advanced these arguments for the plaintiff.

33.  Firstly, he contended that the judge had misunderstood the plaintiff’s argument it was suggesting that each and every sanctioned payment of a nominal sum necessarily means that it is unjust to make an enhanced costs order.  The plaintiff’s contention was that the sanctioned payment of a nominal sum is just one of the factors the court can take into account.

34.  Next, he submitted that in approaching the question whether a sanctioned offer or payment in a nominal sum is a genuine offer, there is a spectrum and one has to ascertain which end of the spectrum a given situation would fall within.  At one end of the spectrum is where a nominal sum is fully justified, as the party on the receiving end knows or should have known that his case is totally devoid of merits and the paying party has an overwhelmingly strong case.  At the other end of the spectrum is where it is apparent on the materials there is a true and genuine dispute and both parties have good arguable cases on the merits.  In this situation, a nominal sum should not be regarded as a genuine offer, as it would only hinder rather than assist the settlement process, and would be contrary to the purpose of Order 22 to encourage the sensible settlement of claims.

35.  Mr Chain contended that on the materials available as at the time of the sanctioned payment and up to the commencement of trial, the present case should fall within the latter end of the spectrum.  The nature of the dispute was not one that could be said the defendant had an “overwhelmingly meritorious case at first glance”.  There was a genuine dispute between the parties, which ultimately turned on inferential factual conclusions drawn by the judge (which the appeal court declined to interfere with).  And it could be said that a different trial judge might have drawn different inferences and which could have resulted in success for the plaintiff.  The defendant failed to establish any primary fact it contended for and its witness was found to be incredible and evasive.  Taking into account the relative merits of the parties’ case immediately before trial, a sanctioned payment in a nominal sum, which is tantamount to a “total capitulation” offer with no element of compromise, cannot be regarded as a genuine offer to settle and it would be unjust for an enhanced costs order to be made.

36.  Mr Chain submitted that the above proposition is consistent with these cases in a number of common law jurisdictions he had cited to the judge.  He highlighted various dicta as follows:

“22. … The concept of an “offer to settle” is nowhere defined in Part 36 [of the Civil Procedure Rules in England]. … In my judgment the offer must contain some genuine element of concession on the part of the claimant, to which a significant value can be attached in the context of the litigation. … The concept of a settlement must, by its very nature, involve an element of give and take. A so-called “settlement” which was all take and no give would in my view be a contradiction in terms.” (AB v CD [2011] EWHC 602 (Ch) at §22, per Henderson J)

“28. … I am clear that this is one of those cases where it would, indeed, be unjust to make the order sought by the Claimant. … It is clear to me that the offer which was made was not a genuine offer to settle within the meaning of 36.17(5)(e) [of the Civil Procedure Rules in England] because what the Claimant was doing was not to ‘give’ as well as ‘take’. …

29. He was offering to ‘take’ nothing short of what he was claiming in these proceedings. This was not a settlement offer as I see it in any real sense. It was nearer the sort of tactical ploy to which Thomas J referred to in the East West case [East West Corporation v DKBS [2002] All E R (D) 361]. …” (R v London Borough of Greenwich [2015] EWHC 2663 (Admin) at §§28 and 29, per Picken J)

“76. … it is often said, as one of the substantial guiding principles, that a party … who makes an offer that might be characterised as a “nominal offer” (normally a nominal monetary offer) going no further, in substance or effect, than an invitation to the other side to “capitulate” or “walk away and give up”, has not made a “genuine offer” of settlement as there is no real element of “compromise” offered. Alternatively, it is often said that a party receiving such an offer does not act unreasonably in failing to accept such a capitulation proposal especially if that party (the offeree) has incurred significant costs up to the date of the offer.

77. Where the proceedings … is a “fact-sensitive” case, a respondent party drawn into such case that contends it has the merits on the facts … might well elect to risk-manage its exposure to irrecoverable costs by putting a nominal monetary offer to the claimant, supported by an explanatory letter (setting out the detailed basis for the view on the merits) coupled with an offer to absorb its costs incurred to the date of the offer should the claimant see the strength of the merits of the respondent’s position, failing which the respondent, in ultimately vindicating its position, would seek to recoup from the claimant the otherwise irrecoverable costs of the proceedings, through an indemnity costs order.

78. Such an offer ought not to be characterised, per se, as a non-genuine offer of compromise simply because it fails to offer payment of the claimants costs coupled with some broader larger commercial offer. The so-called capitulation offer may well be entirely appropriate in all the prevailing circumstances and one an applicant ought reasonably accept, and correspondingly not unreasonably fail to accept.

79. What is a respondent confronted with a claim it believes (or knows) to be unmeritorious, to do? Should such a party … offer to pay the applicant’s costs to the date of the offer and say, 10% of the claim so as to elevate the offer into a “genuine” offer of “compromise”, notwithstanding the perceived lack of merits in the claim.

80. The real point, of course, is not whether the offer can be characterised as a capitulation offer or some other like construct, but whether the applicant has unreasonably failed to accept the offer in all the circumstances …” (Julstar Property Ltd v Hart Trading Pty Ltd [2014] FCA 108 at §§76 to 80, per Greenwood J)

“4. In Coady v Dicks [2004] NLSCTD 193, I summarized the law that applies in this jurisdiction [Newfoundland and Labrador] to offers to settle which are merely nominal, contain no element of compromise or require the offeree to capitulate:

1. It is presumed that the offeror will receive solicitor-client costs after the date of its offer to settle if it obtains judgment as or more favourable than its offer to settle.

2. That presumption does not apply to offers to settle which are merely nominal, contain no element of compromise, or require capitulation.

3. The court will determine if offers to settle are merely nominal, contain no element of compromise, or require capitulation.

4. Costs awarded after nominal offers to settle, offers which contain no element of compromise, or require capitulation, are decided by what is fair and just.

5. A simple offer to forego costs to the date of the offer which requires the offeree to concede all other aspects of its claim may be a valid offer to settle if it includes a realistic estimate of the costs to be foregone for the offeree to assess.

6. Solicitor-client costs are the rule not the exception after valid offers to settle, but the court retains an overriding discretion to award costs, of any kind, or at all, regardless of offers to settle.

…

6. In Quinlan Brothers Ltd v Coady, 2012 NLTD (G) 194 at para 13, LeBlanc J stated:

“In line with the direction given in the Winter case, I must go on to consider whether the making of a nominal offer was reasonable in the circumstance. In the Sobeys [2009] NJ No 181 case, Orsborn, CJ characterized such an assessment as whether the Plaintiff here “knew or should have known that its case was totally devoid of merit, thus making almost any offer a ‘reasonable’ one.”…” ” (Hawkins v Village Mall Shopping Centre (2006) Inc [2015] NJ No 329, per C R Thomson J)

“6. … Orsborn J agreed with the decision of the Ontario Court of Appeal in Data General (Canada) Ltd v Molnar System Group (1991) 85 DLR (4^th) 392, that an element of compromise was not an essential element to constitute an offer to settle within the rules but the absence of such an element might be taken into account in deciding whether or not, in any particular case, the interests of justice and fairness required a departure from the presumptive solicitor-client costs consequences of the rule. …” (Singapore Airlines Ltd v Fujitsu Microelectronics (Malaysia) Sdn Bhd [2001] 1 SLR 532 at §6, per Chao Hick Tin JA)

37.  Mr Chain argued that in distinguishing the cases in the common law jurisdictions cited to him, the judge had failed to take a “holistic view of the entire circumstances of the case”.

38.  I do not think the judge had misunderstood Mr Chain’s argument to suggest that a nominal sum would necessarily mean it is unjust to make an enhanced costs order.  The judge was merely addressing counsel’s arguments and the dicta in the cases cited which focused on the nominal sum of the sanctioned offer or payment and whether such an offer to settle could be regarded as genuine for the purpose of the civil procedure rules in those jurisdictions.

39.  The judge saw no reason to exclude a nominal offer from the ordinary operation of Order 22.  He did not think a sanctioned payment for a nominal sum is, in itself, unreasonable, and refused to add a gloss on the rule that a valid sanctioned payment must be substantial as opposed to nominal, as it would mean that a defendant who considers its case to be very strong might be deprived of the protection given by Order 22 rule 23 unless it is prepared to make a substantial or more than nominal sanctioned payment.  And he did not find support for that approach in the cases cited by the plaintiff.  He also made the observation that what Greenwood J said in Julstar Property Ltd at the paragraphs quoted would seem to be inconsistent with the approach advocated by Mr Chain.

40.  In Antwerp Diamond Bank NV v Brink’s Incorporated (No 2) [2015] 4 HKLRD 628, the 3^rd defendant successfully resisted the plaintiff’s claim at trial but the judgment was reversed on appeal.  The plaintiff sought a variation of the costs order on the basis of the 3^rd defendant’s failure to accept the plaintiff’s sanctioned offer which was in an amount only slightly lower than the sum awarded by the Court of Appeal.  The court rejected the 3^rd defendant’s argument that the smallness of the discount on the amount claimed (0.27%) rendered it unjust to make an enhanced costs order on the basis that the sanctioned offer was “merely tactical” and “not genuine”.  In §21, the court observed there is no reason why a recipient of a sanctioned offer of a relatively small discount of the claim should not give it serious consideration.  The court endorsed the observation of Norris J in Wharton v Bancroft [2012] WTLR 727 at §22 that “a low offer in a case in which the offeror considers that the offeree’s position has no merit cannot be written off as self evidently ‘merely a tactical step’.”  The court reasoned that the plaintiff in that case could well have genuinely regarded its claim as extremely strong, and there was no reason to suppose it did not, so the offer could not be castigated as merely “tactical”.  Whilst the court would not rule out the possibility there may be cases in which it would be appropriate to regard a purported sanctioned offer as being “not genuine”, so as to render it unjust to make an enhanced costs order under Order 22, it did not regard the case before it as falling within that category (at §22).

41.  The present case is the reverse of the situation in Antwerp Diamond Bank.  Here, the sanctioned payment was made by the defendant, instead of by the plaintiff.  And instead of the plaintiff giving a “miniscule discount” on the amount claimed in the sanctioned offer, the defendant here made a sanctioned payment of a nominal sum.  In either situation, this would appear to reflect the confidence of the offeror of the strength of its case.

42.  There is nothing before us to indicate that the defendant could not genuinely have considered its case as very strong, despite Mr Chain’s assertion that the defendant did not have an “overwhelmingly meritorious case at first glance”.  Contrary to his assertion, that was not the view taken by the defendant’s legal advisers, see the letter of the defendant’s solicitors to the court dated 16 April 2014 in support of their application to vary the costs order nisi in which they set out the grounds for the defendants’ case that even if the plaintiff succeeded on liability, the plaintiff would recover no damages whatever.  It had advanced a plea that no damages were recoverable in view of clause 14 of the Sales Contract (which succeeded before the judge and was left open on appeal).  Regardless of whether the defendant’s solicitors were ultimately correct in their contention, what matters is that at the time of the sanctioned payment and right up to the trial, that was the basis on which the defendant conducted the litigation and the defendant’s contention on clause 14 was found by the judge to have merit.  It was not a case of a party making a bare assertion of the merits of its case but with no backing in substance.  The sanctioned payment of a nominal sum in these circumstances could not be said to be a non-genuine offer.  If it was accepted without requiring the leave of the court, the defendant would have been required to pay the plaintiff’s costs of the proceedings up to the date of the acceptance, unless the court otherwise orders (Order 22 rule 20(1)).

43.  In their letters to the judge in support of their application, the defendant’s solicitors also drew attention to the stage of the proceedings when the sanctioned payment was made.  This was after the close of pleadings, discovery had commenced six months ago, and there was an initial round of the exchange of witness statements.  There was no material change in the defendant’s case up to the commencement of the trial.

44.  The most the plaintiff could say was that it took the view that it had an arguable case on the merits.  But whether the plaintiff could be said to have acted reasonably in not responding to the sanctioned payment on the basis of its perception of the strength of its case is not to the point.  As the judge had said succinctly in §12 of the Costs Judgment:

“The plaintiff also contends that it was not unreasonable to consider that it had a reasonably arguable claim at trial. That might be so, but the plaintiff must face the consequences if it did not accept the sanctioned payment.”

45.  As Lam VP had said in refusing leave to appeal from the judgment on costs in the Antwerp Diamond Bank case (CACV 282/2012, Reasons for Judgment, 30 October 2015, at §4), the terms of the sanctioned offer are not the only factor to be taken into account in the exercise of discretion under Order 22 rule 24(4) (in the present case, rule 23(5)), it depends on the evaluation of the offer against the available information on the claim (in the present case, the defence).

46.  The plaintiff had not sought any information from the defendant for the purpose of responding to the sanctioned payment.  Nor had it been contended that the plaintiff did not have sufficient information to evaluate the offer made in the sanctioned payment.  The plaintiff had just not responded at all to the sanctioned payment.

47.  Mr Chain repeatedly emphasised that looking at the matter objectively, the plaintiff had not acted unreasonably in not accepting the sanctioned payment.  He prayed in aid the references to a party at the receiving end acting reasonably in failing to accept a nominal sum in the various dicta set out above.  But the criterion as provided in Order 22 rule 23(5) is not whether such a party has failed to act reasonably in not accepting the sanctioned offer or payment.  The requirement laid down in that provision is that the court shall make an enhanced costs order “unless it considers it unjust to do so”.

48.  It has not been shown to us that the sanctioned payment of a nominal sum was not a genuine offer.  Nor has it been shown that the judge had failed to take account of any relevant matter in the exercise of his discretion in concluding that it would not be unjust to make an enhanced costs order.  As mentioned earlier, the making of an enhanced costs order is not to penalise the plaintiff.  It is merely to redress the perceived unfairness that the winning party would otherwise be unable to recover substantially his costs and interests.

49.  Lastly, as to the contention of both parties that the judge should have ordered the other party to pay the costs of both their applications to vary the costs order nisi, there is simply no basis to interfere with the judge’s order in the proper exercise of his discretion that there should be no order as to costs in respect of those applications.

50.  I would dismiss the plaintiff’s appeal against the enhanced costs order of the trial.

Whether the defendant should have enhanced costs for the appeal

51.  The plaintiff filed a notice of appeal against the Trial Judgment on 2 May 2014.  There was at the time an extant application by the defendant before the judge for an enhanced costs order on account of the sanctioned payment.  On 8 May 2014, the defendant’s solicitors wrote to the plaintiff’s solicitors making a Calderbank offer that in return for the plaintiff withdrawing its appeal, the defendant would withdraw its application to vary the judge’s costs order nisi and accept payment of its costs of the action on a party and party basis with no order for enhanced interest.

52.  The defendant’s solicitors made a Calderbank offer for the appeal proceedings instead of a sanctioned offer, relying on the judgment of Tang Acting CJHC (now Tang PJ) in Lung Po Kwan v Tang Kam Sheung, CACV 164/2010, 5 May 2011, §11) for the proposition that a sanctioned offer could not have been made.

53.  The plaintiff did not accept the Calderbank offer.  On 12 March 2015, we dismissed the plaintiff’s appeal.  In addition, the defendant was successful on one of the two issues pursued at the hearing under its respondent’s notice.

54.  The defendant seeks to vary our costs order nisi with an order for the costs of the appeal to be taxed on a higher basis (whether indemnity or common fund).  There is no question of enhanced interest on costs as it is accepted that the offer made on 8 May 2014 was not a sanctioned offer.  Apart from that offer, the defendant relies on the sanctioned payment in the court below, praying in aid Ryder Industries Ltd (formerly Saitek Ltd) v Chan Shui Woo [2015] 2 HKC 582 at §34.

55.  The first question we need to consider is whether the defendant can rely on the Calderbank offer, as it is provided in Order 62 rule 5(1)(d) that the court may not take such offer into account if, at the time it is made, “the party making it could have protected his position as to costs by means of a sanctioned payment or a sanctioned offer under Order 22”.

56.  In Lung Po Kwan v Tang Kam Sheung at §11, it was stated tersely that a sanctioned offer could not have been made.  However, it was not expressly stated that this was because the provisions for sanctioned offer or payment in Order 22 do not apply to appeal proceedings.  Mr Chain submitted that a more plausible basis for the view that a sanctioned offer could not have been made could be that the term of the offer was no order as to the costs of the appeal (see §4).  As that was inconsistent with the sanctioned offer regime in Order 22 rule 20(1) (which provides for the consequence that the plaintiff is entitled to his costs up to the date of serving the notice of acceptance, where the sanctioned offer or payment is accepted without leave of the court), it was not possible to make a sanctioned offer or payment in Lung Po Kwan with a term of no order as to costs.  In support of this contention, Mr Chain cited the decision of Lam VP in Leung Lai Kwan v Lo Kai Wing, HCMP 1554/2015, 18 August 2015, at §7.

57.  As there would appear to be two possible bases for the view taken in Lung Po Kwan that the relevant party could not have protected his position as to the costs of the appeal by a sanctioned offer, I do not propose to regard Lung Po Kwan as binding authority for the proposition that the sanctioned offer or payment regime has no application to appeal proceedings.

58.  That means the question would be left open.  In Ryder Industries Ltd, the appeal court did not decide the question, as there was no attempt to make a separate sanctioned offer for the purpose of the appeal.  There are other decisions of the Court of Appeal in which that question was likewise left undecided, where it was not necessary to determine if the provisions for sanctioned offer and payment would apply to appeals (Dah Sing Insurance Services Ltd v Gill Gurbux Singh, CACV 255/2012, 27 April 2015, at §§45 to 47; Lam Yin Pok Bosco v Dr Chan Yee Shing, CACV 276/2012, 9 July 2015, at §9; Antwerp Diamond Bank, at §§13 and 14).

59.  In the present case, a Calderbank offer was made for the purpose of the appeal, and, unlike Lung Po Kwan, the offer did not include a term with no order as to the costs of the appeal, so we are required to determine if a sanctioned offer could have been made under Order 22 on account of Order 62 rule 5(1)(d).

60.  Mr Thomson submitted that the provisions for sanctioned offer and payment apply only to trials, not to appeal proceedings, as is apparent from the wording of the provisions in Order 22: see rules 5(7) and (8), rule 7(2), rules 15(1) and (2), rules 16(1) and (2), rule 19(2), rule 25(2).  To these provisions, I would add Order 59 rule 12A(1), which provides for non-disclosure to the Court of Appeal of “money paid into court under Order 22, in the proceedings in the court below before judgment”.  It was recognised in Ryder Industries Ltd at §30 that the provisions in Order 22 “on their face” suggest that the statutory scheme for sanctioned offers apply to trials only and that suggestion is bolstered by the absence from Order 22 of an express provision applying the statutory scheme to appeals before the Court of Appeal.  Hong Kong has adopted only limited parts of Part 36 of the English Civil Procedure Rules.

61.  Mr Chain submitted to the contrary.  He relied on the footnoteto §30 in Ryder Industries Ltd in which the appeal court left open the question whether the provisions in Order 22 might apply to a sanctioned offer for the purpose of the appeal “mutatis mutandis”.

62.  In his further submissions, Mr Chain argued that as the sanctioned offer/payment regime introduced by the Civil Justice Reform was along the lines of Part 36 of the English CPR, and there was no mention in the CJR Final Report to exclude CPR Rule 36.4 (which extends the Part 36 regime to appeal proceedings), the new provisions in Order 22 should be read “expansively” to extend to appeal proceedings.

63.  I am not persuaded by Mr Chain’s submissions, as his construction would do violence to the clear wording used in the various provisions mentioned above in Order 22.  If there is any perceived lacuna in the rules of the court, it should be rectified by an amendment to the rules.

64.  In my view, the regime in Order 22 does not extend to appeal proceedings.  The defendant could not have protected its position as to the costs on appeal by means of a sanctioned offer.  The court may therefore take the Calderbank offer into account.

65.  As a result, we have a discretion at large whether it would be appropriate in these circumstances to order the costs of the appeal be taxed on a higher basis.

66.  Mr Chain resisted this on the basis that the grounds pursued on appeal, although rejected by the court, are not patently unmeritorious.

67.  Taking into consideration the Calderbank offer and the sanctioned payment made below, that the plaintiff had failed on all the grounds pursued on appeal, that it had sought to overturn inferences of fact drawn by the judge but was unable to establish that the judge was plainly wrong, it would be proper to exercise our discretion to order costs on a higher basis.  I take on board Mr Chain’s point that the arguments on appeal, although rejected by the court, are not patently unarguable.  I would exercise my discretion to order costs to the defendant on a common fund basis instead of an indemnity basis and vary the costs order nisi to that extent.

Costs of the application, appeal and cross-appeal

68.  Both sides accepted that costs of the application to vary the costs order nisi of this court, the appeal and cross-appeal in CACV 165/2014, should follow the event.

69.  For the application to vary the costs order nisi of this court, I would order the plaintiff to pay the defendant’s costs, also on a common fund basis.

70.  For the appeal and cross-appeal in CACV 165/2014, as each side is successful in the other’s appeal or cross-appeal, I would make no order as to costs.

Hon McWalters JA:

71.  I agree with the judgment of Kwan JA and the observations of Lam VP.