MISSION MARKETING LTD v. CHAN YUET FOON AND OTHERS

HCMP 258/2014

[2021] HKCFI 360

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 258 OF 2014

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D E C I S I O N

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A. INTRODUCTION

1.  By a written judgment handed down on 25 May 2020 (the “Judgment”)[1], I allowed the Plaintiff’s claim against the Defendants, and dismissed the Defendants’ third-party claim against the Third Party.  As between the Defendants and the Third Party, I made a costs order nisi that the Defendants do pay to the Third Party the costs of the third party proceedings in this action, to be taxed if not agreed (the “Costs Order Nisi”).

2.  By a Summons dated 8 June 2020 taken out by the Third Party (the “Summons”), the Third Party applied for an order that the Costs Order Nisi be varied as follows:-

(1)  The Defendants do pay to the Third Party the costs of the third party proceedings in this action, to be taxed if not agreed, on the party and party basis up to and inclusive of 5 January 2016, and thereafter on the indemnity basis or from such other date or for such alternative period as this Court shall think fit;

(2)  The Defendants do pay interest on the aforesaid costs at the rate of 10% above judgment rate, or at such alternative rate above judgment rate as this Court shall think fit;

(3)  There be a certificate for two counsel for the Third Party;

(4)  The Defendants to pay the Third Party the costs of this application on indemnity basis, to be taxed if not agreed.

3.  In support of the Summons, the Third Party by the Affidavit of Robert George Clark (the “Supporting Affidavit”) produced a bundle of correspondence exchanged between the solicitors acting for the Plaintiff, the Defendants and the Third Party, containing sanctioned offers issued by the Plaintiff and Calderbank offers issued by the Third Party and the Defendants.  No issue has been taken by the Defendants on the admissibility of such correspondence for the purpose of determining the Summons.

4.  As stated in the Supporting Affidavit, the gist of the Third Party’s argument in support of the Summons is that the Defendants had failed to beat the Third Party’s offer contained in the letter dated 22 December 2015 (the “22/12/2015 Letter”).  Indeed, the “cut-off date” set out in paragraph 1 of the Summons (i.e. 5 January 2016) represents the last day on which the offer was open for acceptance.  That said, the Third Party also asks this Court to take into account the subsequent correspondence between the parties in the exercise of its discretion.

B.  MATERIAL FINDINGS IN THE JUDGMENT

5.  The factual background and the issues of this action are set out in Sections B and C of the Judgment.  This Decision should be read in conjunction with the Judgment and the abbreviations used therein are adopted in this Decision.

6.  After analysing and evaluating the evidence adduced by the parties, I found that there were UBWs in the Property[2], and that there was a real risk of enforcement action such that the Defendants could not give good title to the Property[3]. I also found that the Defendants (through the Third Party) failed to satisfactorily answer the Plaintiff’s requisitions in relation to the UBWs[4].  Accordingly, I held that the Plaintiff succeeded in its claims against the Defendants in the main proceedings.

7.  With regard to the third party proceedings, I found that the existence of “cockloft/false ceiling” in the Property, which was one of the UBWs in the Property would render the Defendants incapable of giving good title, irrespective of what the Third Party did or failed to do in the transaction.  Accordingly, I concluded that any loss suffered by the Defendants could not have been caused by the Third Party[5], and that their claims against the Third Party should be dismissed for this reason alone.

8.  Despite my finding that there was no causation between the Defendants’ loss and the Third Party’s alleged wrongdoings, I went on to dismiss the Defendants’ complaints against the Third Party based on the evidence presented before me.

C.  THIRD PARTIES’ CALDERBANK OFFERS

9.  As pointed out by Mr Nigel Kat SC[6] for the Third Party, the Third Party had through its solicitors issued no less than six Calderbank letters up to a few days before the trial, respectively on 16 July 2015, 22 December 2015, 12, August 2016, 4 April 2018, 8 June 2018 and 29 June 2018.

10.  The Third Party’s application is principally founded upon the 22/12/2015 Letter in which, the Third Party made a “without prejudice save to costs” offer pursuant to O.16 r.10 of the Rules of the High Court (“RHC”) to “pay the sum of HK$100,000 together with your clients’ costs of the third party proceedings on the District Court scale up to the expiry of this offer, to be taxed on the District Court scale if not agreed, in full and final settlement of the third party proceedings in this action”.  It was stated in the 22/12/2015 Letter that the said offer was open for acceptance for 14 days, such that it would automatically lapse after 5 January 2016.  It was further stated in the letter that “if [the Defendants] refuse to accept this offer and fail to do better after trial, our client will produce a copy of this letter before the court and seek indemnity costs against your clients for the entire period after the expiry of this offer”.

11.  It appears to be not in dispute that the Defendants completely ignored the offer contained in the 22/12/2015 Letter.

12.  Then, on 11 August 2016, the Plaintiff made a “sanctioned offer” under RHC O.22 r.2 to the Defendants to settle the Plaintiff’s claims in the main proceedings on the basis that the Defendants were to pay the Plaintiff the sum of HK$1,800,000, which would be inclusive of interests, costs and disbursements.

13.  On the following day (i.e. 12 August 2016), the Third Party through its solicitors issued another Calderbank letter (the “12/8/2016 Letter”) offering to pay to the Defendants the sum of HK$350,000 as well as to bear the Defendants’ costs of the third party proceedings and the main proceedings up to 4 December 2015 in full and final settlement of the third party proceedings.

14.  On the same day (i.e. 12 August 2016), the Defendants through their solicitors wrote to the Third Party and asked whether the Third Party would accept the Plaintiff’s “sanctioned offer” dated 11 August 2016.   In response, the Third Party’s solicitors by their 1^st letter of 18 August 2016 (the “18/8/2016 Letter”) pointed out that the Plaintiff’s “sanctioned offer” was made to the Defendants in the main proceedings, and that the Third Party was not in any position to accept the same.  Additionally, the Third Party in 18/8/2016 Letter expressly stated that:-

“ We urge your clients to accept the sanctioned offer. Your clients will not be able to do any better after trial unless the court finds that there were no illegal structures at the subject premises. But, two out of the three experts to be called have given evidence saying that at least the cockloft was an illegal structure. So, we cannot see how the court can come to the conclusion that there were no illegal structures at the premises and that your clients had a good title to give at completion. Your client will need to return the deposits because of their defective title irrespective of our client’s conduct of the subject transaction.” (emphasis added)

15.  On 5 September 2016, the Defendants’ solicitors wrote to the Third Party (the “5/9/2016 Letter”).  In the 5/9/2016 Letter, the Defendants stated that the Third Party, who acted as the Defendants’ solicitors in the transaction, shouldered the responsibility to prove or show title and/or to resolve requisitions, and that had the Third Party acted diligently and prudently, the Defendants “would have been entitled to resolve requisition shortly after 4 December 2012”.  Based on the Defendants’ assessment of their loss, the Defendants made a Calderbank offer to settle the third party proceedings if the Third Party was to pay them HK$6,000,000 and also their taxed costs of the main proceedings and the third party proceedings.

16.  On 4 April 2018, the Third Party through their solicitors made sent another Calderbank letter to the Defendants to offer “drop hands” settlement in relation to the third party proceedings. 

17.  On 9 April 2018, the Defendants replied and rejected the Third Party’s latest Calderbank offer.  Instead, the Defendants made a Calderbank offer to settle the third party proceedings on the basis that the Third Party was to indemnify the Defendants of the Plaintiff’s claims in the main proceedings and to pay their taxed costs of the main proceedings and the third party proceedings.

18.  On 17 May 2018, the Plaintiff made another “sanctioned offer” under RHC O.22 r.2 to the Defendants.  Notwithstanding that further costs had been incurred by the Plaintiff, the Plaintiff offered to settle the main proceedings on the same terms as its “sanctioned offer” dated 11 August 2016, i.e. the Defendants were to pay the Plaintiff the sum of HK$1,800,000, which would be inclusive of interests, costs and disbursements.

19.  Before the expiry of the Plaintiff’s second “sanctioned offer”, the Third Party on 8 June 2018 made a fresh Calderbank offer to settle the third party proceedings on the basis it would pay a sum of HK$350,000 to the Defendants and to bear their taxed costs of the main proceedings and the third party proceedings up to 8 September 2016, being the expiry date of the Plaintiff’s previous “sanctioned offer” made on 11 August 2016.

20.  On 29 June 2018 (i.e. less than two months before the commencement of the trial), the Third Party by yet another Calderbank letter made a “final offer” to settle the third party proceedings by paying to the Defendants a sum of HK$450,000 and to bear their taxed costs of the main proceedings and the third party proceedings up to the date of acceptance of this “final offer”, which was available for acceptance up to 6 July 2018.

21.  None of the above offers was accepted by the Defendants, which resulted in a full-blown trial before me in August 2018.

D.  DISCUSSIONS

22.  For the purpose of disposing of the Summons, there are essentially three issues before me:-

(1)  Should the Third Party’s costs of the third party proceedings be taxed on indemnity basis?

(2)  Should there interest on costs be awarded?

(3)  Should certificate for two counsel be granted?  

D1.  Indemnity Costs?

23.  There is no dispute between the parties that the Calderbank letters issued by the Third Party are not “sanctioned offer” within the meaning of O.22, but can be taken into account by this Court pursuant to RHC O.16 r.10 in the exercise of its discretion on costs.

24.  There is also no dispute between the parties that the exercise of discretion on costs should be guided by RHC O.62 r.5. O.62 r.5(1) provides, as far as material, that:-

“ The Court in exercising its discretion as to costs shall, to such extent, if any, as may be appropriate in the circumstances, take into account –

(aa) the underlying objectives set out in Order 1A, rule 1;

(a) any such offer of contribution as is mentioned in O.16 r.10, which is brought to its attention in pursuance of a reserved right to do so;

…

(d) any written offer which is expressed to be “without prejudice save as to costs” and which relates to any issue in the proceedings …;

(e) the conduct of all the parties;

(f) whether a party has succeeded on part of his case, even if he has not been wholly successful; and

(g) any admissible offer to settle made by a party, which is drawn to the Court’s attention.”

25.  As far as the principles for awarding costs on indemnity basis are concerned, both parties refer to the decision of Town Planning Board v. Society for Protection of the Harbour Ltd (No. 2) (2004) 7 HKCFAR 114, in which the Court of Final Appeal held that to award indemnity costs, the successful party should show that the case had “special or unusual features” which make the award of indemnity costs “appropriate”.

26.  Whilst it appears to be not in dispute that the Third Party’s Calderbank offers do not have the effect of a “sanctioned offer” under RHC O.22, Mr Kat SC (on behalf of the Third Party) draws the attention of this Court to the decision of Anthony Chan J in Bright Gold Ltd v. Mega Well Development Ltd [2019] 3 HKLRD 868 and submits that this Court can take into account those Calderbank offers in determining whether an indemnity costs order would achieve a fairer result to the payee.

27.  In Bright Gold (supra), after concluding that the Court was entitled to take into consideration the Calderbank offers made by a law firm which was named as the second defendant to the counterclaim, the learned Judge held (at §§12-16) that:-

“12. It follows that this court’s discretionary power to award indemnity costs can be triggered. Such a costs order should not be regarded as a penalty but a means of achieving a fairer result for the payee: see Grant Williams v Jeffries Hong Kong Ltd, HCA 320/2011, unrep, 12 July 2013, §5 citing Petrograde Inc v Texaco Ltd [2002] 1 WLR 947, §§63-64; and TPB v Society for Protection of Harbour Ltd (No 2) (2004) 7 HKCFAR 114, §§16-17.

13. It is reasonably well-established that the failure to beat a favourable settlement offer can attract an award of indemnity costs: see Sam Sien San v Sam Mo Yee [2019] HKCFI 1188, §24; and Euro Search (Hong Kong) Ltd v Snow Lake Capital (HK) Ltd [2018] HKCFI 2292, §10.

14. In this case, it would have been advisable for Mega Well to accept certainly the 2^nd Offer. Given the merits analysis set out under the 1^st Offer, it was unreasonable for Mega Well to have failed to engage in any negotiation with WKLL to put an end to this part of its case (see Codent Ltd v Lyson Ltd [2007] 2 Costs LR 185, §§29-30; and LCC v LMWA [2019] 2 HKLRD 529, §§51-52).

15. It is consonant with the underlying objectives enshrined in O 1A, r 1 for the court to encourage dispute settlement, and therefore failure to respond constructively to a reasonable Calderbank offer, coupled with the subsequent failure to beat the offer, should weigh heavily against the offeree on costs.

16. Last but not least, Mega Well’s case against WKLL was damaging to their professional reputation. The costs order sought would provide a fairer result to them.” (emphasis added)

28.  The Defendants submit that, whilst this Court can consider the Third Party’s Calderbank offers, there is no principle of law that the Court must always award indemnity costs against a party who has failed to beat an offer after trial.  Referring to a previous decision of mine in Choi Tak Man v. Chan Yuk Lan Didi [2017] 5 HKLRD 619, the Defendants submit that the failure to beat a Calderbank offer after trial is just one of the factors that this Court can take into account in the exercise of its discretion.

29.  I do not think Mr Kat goes so far to argue that a party failing to do better than a Calderbank offer would invariably be liable to pay costs on indemnity basis.  His emphasis is that the “special features” of the case are not simply that the Defendants failed to beat the Calderbank offers (in particular, the one contained in 22/12/2015 Letter), but that they also failed to respond constructively to such offers.  Furthermore, Mr Kat submits that it is also relevant to consider the negative impact of the Defendants’ claims in third party proceedings on the professional reputation of the Third Party, particularly in light of the fact that all the Defendants’ complaints against the Third Party were rejected after trial.

30.  In this case, an issue which is determinative of the parties’ liabilities is whether the “cockloft/false ceiling” was a UBW.  If it was a UBW, then the Defendants would not be able to give good title to the Property irrespective of what the Third Party did or failed to do in the transaction. 

31.  Obviously, the Defendants were at all material times fully aware that this is a very important issue in dispute between the parties.  Indeed, before the agreed date of completion, the Plaintiff had already informed that it had an inspection report prepared by its surveyor to support its case that, amongst other things, the “cockloft/false ceiling” was a UBW.  However, despite the commencement of these proceedings in January 2014[7], the Defendants did not obtain any expert opinion on the issue as to whether the “cockloft/false ceiling” was a UBW.  In July 2014, the “cockloft/false ceiling” was damaged by a fire, which resulted in the demolition of the entire structure[8]. Given that the entire structure had been demolished, it would be impossible for the Defendants to adduce any expert opinion on the issue based on actual inspection.  In these circumstances, it must have been obvious to the Defendants that there would be, to say the least, a real risk that the Court might find that the “cockloft/false ceiling” was a UBW.

32.  The Defendants, however, did not give any constructive response to Calderbank offers put forward by the Third Party. 

33.  In relation to the offer contained in the 22/12/2015 Letter, there is no dispute that the Defendants did not give any written response at all. 

34.  More importantly, shortly after making an improved Calderbank offer by the 12/8/2016 Letter, the Third Party in the 18/8/2016 Letter explained in very clear terms to the Defendants that the critical issue of the case was whether the “cockloft/false ceiling” was a UBW, and that if it was a UBW (as supported by the evidence of two experts), the Defendants would be liable to return the Deposits to the Plaintiff irrespective of the Third Party’s conduct in the transaction. 

35.  In response to that, the Defendants in the 5/9/2016 Letter asserted that the Third Party bore the responsibility to prove or show good title, and that had the Third Party acted diligently and prudently, the Defendants would have resolved the requisition shortly after 4 December 2012 (i.e. the agreed completion date).  On this basis, the Defendants counter-proposed that the Third Party should pay HK$6,000,000, together with costs of the main proceedings and the third party proceedings, in settlement of the third party proceedings.

36.  Thereafter, as summarised in paragraphs 16 to 20 above, the Third Party had made some improved Calderbank offers with a view to settling the third party proceedings. The Defendants rejected all those offers, and counter-offered to the Third Party that the same should be settled by the Third Party indemnifying the Defendants of the Plaintiff’s claims in the main proceedings and to bear their costs of the main proceedings and third party proceedings.  In other words, even shortly before the commencement of the trial, the Defendants still insisted that the Third Party should be the party solely bearing the legal liabilities and costs arising from the Plaintiff’s claims in the main proceedings.

37.  In my view, the Defendants had not acted reasonably or constructively in response to the Calderbank offers made by the Third Party.  Particularly, I find that the Defendants had failed to engage, whether properly or at all, the points made by the Third Party in relation to the implications of the “cockloft/false ceiling” on the liabilities of the parties.  In this regard, I further observe that:-

(1)  It is difficult to see how the Defendants could lay the blame on the Third Party in respect of the defect in title caused by the “cockloft/false ceiling”.  It was fairly accepted by Mr Jeremy Chan, who represented the Defendants in the trial (but not in this application), that total demolition of the “cockloft/false ceiling” would not have been a viable option[9]. Indeed, as noted at §133(6) of the Judgment, the Defendants’ own audio recording also shows that at the meeting held on 29 November 20113, Mr Victor Chan of the Third Party had duly raised the question as to whether the alleged illegal structures could be cleared by the date of completion, and Mr Herman Chan of the Defendants said clearly that it could not be done.

(2)  Further, as explained in paragraph 31 above, the Defendants must at all material times know that the expert evidence relied upon by them in support of their case that the “cockloft/false ceiling” was not a UBW could not be said to be strong since, unlike the expert called by the Plaintiff (i.e. Mr Kung), the Defendants’ expert (i.e. Mr Law) did not have the benefit of inspecting the actual structure in expressing his opinion on the matter.

(3)  Furthermore, on the question regarding the use of the “cockloft/false ceiling”, I have also found (at paragraph 47 of the Judgment) that the Defendants’ factual witnesses were not candid about their use of the space above the so-called “false ceiling”, which is a matter relevant to my finding that the “cockloft/false ceiling” was a UBW.

38.  Further, I also agree with Mr Kat that weight should be given to the factor that the proceedings against the Third Party had negative impact on its professional reputation and would cause anxiety on the handling solicitor.  In this regard, I consider it relevant to take into account the fact that in rejecting the Defendants’ complaints against the Third Party, I have relied heavily on the Defendants’ own audio recordings of their meetings with the Third Party.  Given that the Defendants were at all material times in possession of those audio recordings, they should be in an informed position to assess the strength of their case against the Third Party.  If the Defendants insisted on pursuing their complaints against the Third Party in these circumstances, it would be “appropriate” for this Court to order indemnity costs if they failed to substantiate those complaints and also failed to do better that the Calderbank offers made by the Third Party.

39.  For the above reasons, and given that the Third Party had made it abundantly clear that it would seek indemnity costs against the Defendants in the Calderbank offers, I find that there are “special or unusual features” which make it “appropriate” to order the Defendants to pay the costs of the third party proceedings on indemnity basis from 5 January 2016, being the last day on which the Calderbank offer contained in the 22/12/2015 Letter was open for acceptance.

40.  For the avoidance of doubt, in exercising my discretion to order indemnity costs, I do not give any weight to Mr Kat’s submission that the third party proceedings were brought and pursued with “improper motive”.  The question of “improper motive” was not alluded to at all in the Supporting Affidavit.  It is, in my view, not open to me to make such factual finding where the issue was not properly raised on affidavit.

41.  Similarly, in the exercise of my discretion, I also attach no weight to the fact that the Defendants had conceded to pay indemnity costs to the Plaintiff in the main proceedings.  It appears that the Plaintiff sought indemnity costs on the basis of its “sanctioned offer”.  Under RHC O.22 r.24(3) & (4), where a plaintiff does better than what he proposed in his “sanctioned offer”, the Court shall make an order for indemnity costs in his favour unless it considers unjust to do so.  Those provisions, however, are not applicable to the present application.  Thus, I do not consider it appropriate for me to place any weight to the Defendants’ concession vis-à-vis the Plaintiff in relation to the costs of the main proceedings.

D2.  Interest on Costs?

42.  In addition to indemnity costs, Mr Kat also asks this Court to order interest on costs.

43.  There is no dispute that, unlike RHC O.22 r.24, there is no express provision in RHC O.16 r.10 (pursuant to which the Calderbank offers were made) empowering the Court to order a party to pay interest on costs.  The Defendants submit that interest on costs is not available under RHC O.16 r.10, and that there is no authority supporting Mr Kat’s contention that this special feature created by RHC O.22 is applicable to settlement offers made under RHC O.16 r.10.

44.  Mr Kat seeks to counter the Defendants’ argument by placing reliance on section 49 of the High Court Ordinance, Cap. 4 (“HCO”). HCO s.49 provides that:-

“(1) Judgment debts shall carry simple interest—

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

(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.

(2) Interest under this section may be calculated at different rates in respect of different periods.”

45.  Mr Kat argues that the Court has power and a wide discretion to order simple interest on “judgment debts”, and that includes “costs orders”.  He refers to the decision in Hotung v. Ho Yuen Ki & Ors (No. 3) [2009] 2 HKC 378 which supports the proposition that “an order for costs to be taxed is, for the purpose of s.49, a judgment and interest runs from the date of the costs order”.

46.  I accept Mr Kat’s submission that this Court has jurisdiction to order enhanced interest on costs order under HCO s.49. However, such enhanced interest ordered under HCO s.49 only runs from the date of the costs order, but not before.  This is different from an award of enhanced interest on costs under RHC O.22.

47.  As discussed by Lam J (as the learned VP then was) in Golden Eagle International (Group) Ltd v. GR Investment Holdings Ltd [2010] 3 HKLRD 273 (at §16), which was reviewed by HH Judge K W Wong in Carrie Woo v. Lui Mo Dock [2019] HKDC 348 (at §33), the purpose of awarding enhanced interest on costs under RHC O.22 is to redress the element of perceived unfairness which arises from the general rule that interest is not allowed on costs before judgment.  In other words, the award of enhanced interest “created” under RHC O.22 is an exception to the general rule that no interest would be awarded on costs before judgment.

48.  It is not entirely clear to me whether Mr Kat asks this Court to order interest on costs to run from any date before judgment.  However, insofar as Mr Kat seeks to do so, I would hold that this Court has no jurisdiction to order interest on costs to run from any date before judgment.  In my view, this is clear from the plain reading of HCO s.49.

49.  As to whether this Court should order enhanced interest on costs from the date of judgment, I would decline to do so in the exercise of my discretion. 

50.  By reason of the express provisions in RHC O.22, a party receiving a “sanctioned offer” would fully appreciate that if he fails to do better than such offer at trial, he would face the risks of being ordered to pay interest on costs, unless the Court considers unjust to do so.  However, no such provision can be found in RHC O.16 r.10, pursuant to which the Third Party made its Calderbank offers.  Further, in the Calderbank letters issued by the Third Party, the Third Party only stated that if the Defendants failed to beat the offers after trial, it would seek indemnity costs against the Defendants.  At no time did the Third Party warn the Defendants of the possibility that it would seek enhanced interests on costs against them on the basis of those Calderbank offers.  It is in my view neither fair nor correct in principle to adopt the approach under O.22 to award interest on costs in these circumstances. 

51.  I have not lost sight of all those factors submitted by Mr Kat.  They are reflected by my ordering the Defendants to bear indemnity costs from 5 January 2016. I, would, in the exercise of my discretion decline to order enhanced interest on costs.

D3.  Certificate for Two Counsel?

52.  As to whether certificate for two counsel should be granted, I am satisfied that the complexity and technicality of the case justify the engagement of two counsel.  Accordingly, I would grant such certificate.

E.  DISPOSITION

53.  For the reasons explained above, I would make an order that the Costs Order Nisi as between the Defendants and the Third Party be varied as follows:-

(1)  The Defendants do pay to the Third Party the costs of the third party proceedings in this action on party and party basis up to and inclusive of 5 January 2016, and thereafter on indemnity basis.

(2)  There be a certificate for two counsel granted to the Third Party.

54.  As to the costs of the Summons, even though the Third Party has failed to persuade me to order enhanced interest on costs, the Third Party has succeeded in obtaining an indemnity costs order and also a certificate for two counsel. Taking into account the respective success of the parties, I would order the Defendants to bear 75% of the application, to be taxed on indemnity basis if not agreed.

55.  Lastly, I wish to thank Mr Kat and the Defendants’ solicitors for their helpful submissions in this matter.