LEUNG TAK KWAN t/a WALLPAPER WAREHOUSE (HK) CO v. GAO MENG FA LTD

DCCJ 2532/2019

[2022] HKDC 260

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2532 OF 2019

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DECISION

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1.  In the judgment handed down on 9 December 2021 (“the Judgment”), this court gave judgment to the plaintiff against the defendant in the sum of HK$1,715,820 with interest.  Costs were there ordered on a nisi basis that the defendant do pay the plaintiff the costs of this action, including all costs reserved, with certificate for one counsel, to be assessed at High Court scale before this action was transferred to this court, and then after at District Court scale, to be taxed if not agreed.

2.  By her summons dated 22 December 2021, the plaintiff seeks to vary the costs order nisi and seeks further orders.  She relies on a sanctioned offer made pursuant to O22 r4 of the Rules of the District Court by her solicitors’ letter dated 13 September 2016 in which she offered that the action be fully and finally settled upon the defendant paying to her HK$1,000,000 (“the Sanctioned Offer”).

3.  Pursuant to O22 r4, the plaintiff now seeks to vary the costs order and seeks further orders, which are slightly rephrased, as follows:-

a.  The defendant do pay the plaintiff the costs of this action including all costs reserved with certificate for one counsel to be assessed at High Court scale before this action was transferred to the District Court on 19 June 2019 and then after at District Court scale, to be taxed if not agreed, which costs be assessed on party and party basis up to 11 October 2016 and thereafter on an indemnity basis;

b.  The defendant do pay the plaintiff interest on the judgment sum of HK$1,715,820 at Prime Lending Rate plus 10% per annum from the date of the Writ to the date of the Judgment and thereafter at judgment rate plus 10% per annum until full payment; and

c.  The defendant do pay the plaintiff interest on the taxed costs at judgment rate plus 10% per annum until full payment.

4.  I have since considered parties’ affirmation evidence and written submissions.  This is my decision.  In this decision I will continue to use the abbreviations in the Judgment.

5.  In Chan’s affirmation filed on 14 January 2022 on behalf of the defendant, the defendant indicated that it did not dispute that the Sanctioned Offer was validly made, that it had not accepted it and that the plaintiff has obtained a judgment more advantageous than the proposals contained in the Sanctioned Offer.  The defendant therefore does not dispute that O22 r24 is triggered.  Under O22 r24(5), the court shall make the orders referred to in O22 r24(2)  and (3)  unless it considers it unjust to do so.  The defendant now contends that it is unjust to order them, and even if they are to be ordered, they should not be ordered in terms as stringent as are now sought by the plaintiff.

O22 r24

6.  O22 r24 provides:-

“24. Costs and other consequences where plaintiff does better than he proposed in his sanctioned offer (O. 22, r. 24)

(1)  This rule applies where—

(a)  a defendant is held liable for more than the proposals contained in a plaintiff’s sanctioned offer; or

(b)  the judgment against a defendant is more advantageous to the plaintiff than the proposals contained in a plaintiff’s sanctioned offer.

(2)  The Court may order interest on the whole or part of any sum of money (excluding interest)  awarded to the plaintiff at a rate not exceeding 10% above judgment rate for some or all of the period after the latest date on which the defendant could have accepted the offer without requiring the leave of the Court.

(3)  The Court may also order that the plaintiff is entitled to—

(a)  his costs on the indemnity basis after the latest date on which the defendant could have accepted the offer without requiring the leave of the Court; and

(b)  interest on those costs at a rate not exceeding 10% above judgment rate.

(4)  Where this rule applies, the Court shall make the orders referred to in paragraphs (2)  and (3)  unless it considers it unjust to do so.

(5)  In considering whether it would be unjust to make the orders referred to in paragraphs (2)  and (3), the Court shall take into account all the circumstances of the case including—

(a)  the terms of any sanctioned offer;

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

(c)  the information available to the parties at the time when the 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 offer to be made or evaluated.”

Unjust to order the consequences ?

7.  The defendant’s main contention is that the Sanctioned Offer was made at a very early stage of the entire proceedings, namely, shortly after the close of pleadings; and at the time, the defendant was unable to make any informed decision whether to accept the Sanctioned Offer or not.

8.  In Qvist Henrik v Clatronic Far East Limited and Another[1], Recorder Stewart Wong SC dealt with a similar contention in that case where the sanctioned offer was made before the filing of the Statement of Claim. There, the learned Recorder made these observations at §§21-22, which are in my view very pertinent:-

“21. While I do accept that a defendant should not be required to make a decision whether to accept or to reject a sanctioned offer without a careful review of the case with proper information (and this is made clear by Order 22, rule 24(5)(b)  to (d)), it is a question of fact in each case as to whether a defendant is able to do so when the sanctioned offer is made, depending on the nature and complexity of the case and the issues involved. Further, on receiving a sanctioned offer which a defendant considers he is unable to evaluate properly because of insufficient information or evidence, he should seek further information if possible. A balance must be struck between fairness to the defendant in that he should not be required to make a decision whether to accept a sanctioned offer without proper information to assess the merits of the case, and the spirit behind the sanctioned offer regime of encouraging settlement of actions as early as possible. The principle that a defendant ought to be allowed to make a decision with proper information must be applied with circumspection because it is always open to a defendant to say that the proper assessment cannot be made with only the pleadings, without full discovery and the exchange of witness statements. That is, on this argument, it can be said that no sanctioned offer ought to be made or accepted until quite an advanced stage of the proceedings are reached, which would be quite contrary to the whole intent behind the sanctioned offer regime.

22.  A defendant ought to make reasonable efforts to settle the matter as early as possible, and a defendant who does not react to an early sanctioned offer at all but simply sits on his hands without attempting to seek any further information required will need to convince the Court that he has not been acting unreasonably.”

9.  In assessing the defendant’s contention, I bear very much in mind the spirit and purpose of the sanctioned payment and offer regime and the need for circumspection as observed by the learned Recorder.

10.  As can be seen from the analyses and discussions set out in the Judgment, this cannot be regarded as a straightforward water flooding case so far as the issue of liability was concerned.  It was common ground that there was no eye-witness who witnessed the incident or saw where the water came from. A number of units were flooded.  The defendant’s unit, Unit 14M, was at the time locked when Lam arrived at the scene and it was unlocked only after the 2 potential sources of supply of water – the salt water supply and the fresh water supply – were turned off.  A number of people from different units were then at the scene, including Lai, Au and Choi.  Law’s investigation that morning as to the source of the water could not be said to be very reliable. Law’s Record was not entirely clear or detailed.

11.  Also, as dealt with in the Judgment, the value of wall papers could diverge greatly.  While at around the time of the Sanctioned Offer, the plaintiff has already engaged a loss adjuster who has prepared his report, the loss adjuster however only adopted as basis for valuation the prices stated in the invoice of the plaintiff’s vendor, one Kee Hing Trading Company, which subsequently was found to be solely owned by the father of the plaintiff.

12.  In the circumstances and having viewed the matter with the above-mentioned circumspection, I am persuaded that at the time of the Sanctioned Offer, there was insufficient proper information available to the defendant such as to reasonably expect it to decide to accept or not to accept the Sanctioned Offer.  I am also persuaded by the defendant that such proper information, in the circumstances of this case, should consist of the witness statements and the liability and quantum expert reports.

13.  I am therefore persuaded that it would be unjust to impose the consequences starting from the time when the defendant could have accepted the Sanctioned Offer without leave.  However, I do not think that therefore the consequences should not be imposed altogether.

14.  After the specified period for acceptance without leave of the court, the Sanctioned Offer was still subsisting and might still have been accepted with leave under O22 r16(2)(b)  which provides:-

“(2)  If—

(a)  a plaintiff’s sanctioned offer is made less than 28 days before the commencement of the trial; or

(b)  the defendant does not accept it within the period specified in paragraph (1),

then the defendant may—

(i)  if the parties agree on the liability for costs, accept the offer without the leave of the Court; and

(ii)  if the parties do not agree on the liability for costs, only accept the offer with the leave of the Court.”

15.  As observed by the learned Recorder in Qvist Henrik, which I respectfully agree, that a defendant who does not react to an early sanctioned offer at all but simply sits on his hands without attempting to seek any further information required will need to convince the court that he has not been acting unreasonably.  Equally and in my judgment, if such a defendant continues to sit on his hands when the further information has become available, he will need to convince the court that he has not acted unreasonably in not accepting the sanctioned offer then, in order to convince the court that the imposition of the consequences under O22 r24 since then is unjust.

16.  Here, the parties’ witness statements were exchanged on 27 April 2017.  P’s Liability Expert R1 and D’s Liability Expert R1 were available in October 2017.  Also and notably, in Liability Experts’ JS1A (dated 31 January 2018), P’s Liability Expert there made the observation that the Unmentioned Repairs had been made (indicating that there might be defects necessitating them)  and also opined that water would flow out continuously if the valve was defective.  Regarding quantum, P’s Quantum Expert Report was available on 12 March 2018.

17.  Therefore and in my view, once the above-mentioned witness statements and expert reports were available, it behoved the defendant to consider the Sanctioned Offer and it ought to have taken steps to accept the Sanctioned Offer, including trying to agree with the plaintiff on the liability for costs, thereby enabling it to accept it without leave under O22 r16(2)(b)(i), or failing such agreement, to apply for leave to accept the Sanctioned Offer.

18.  I would think the defendant ought reasonably to have taken such said steps to accept the Sanctioned Offer within 28 days after P’s Quantum Expert Report was available, which would be 9 April 2018.

19.  The second round of witness statements and liability expert reports were necessitated by the introduction of the defendant’s own plea that the 2015 Flooding and 2018 Flooding were similar and were both caused by the waste water discharge from the Noodle Factory.  This plea was rejected in the Judgment.  The availability or otherwise of the related information relating to this plea therefore should not push back the time when the defendant ought to have accepted the Sanctioned Offer.

20.  It is then contended that the defendant did not accept the Sanctioned Offer “because D had maintained its view that P could have failed to prove [her] case ....”[2]. I do not find it necessary to discuss or comment on the various bases put forth by the defendant in support of such views, because it matters not whether those views were sincerely held or not, the fact of the matter is that this court gave judgment to the plaintiff which is one that is more advantageous to the Sanctioned Offer.  It is trite as is evident that the fact that the defendant held onto its own subjective (which turned out to be erroneous)  belief that its Defence had good merits would not amount to a good reason making the imposition of the consequences unjust.  I therefore do not accept this contention.

21.  In the premises, I find that it is unjust to impose the consequences from as early as 11 October 2016, but do not find it unjust to impose the consequences from 9 April 2018, as above explained.

Costs taxed on an indemnity basis

22.  I will therefore vary the costs order nisi to the extent that the costs of this action be assessed on an indemnity basis as from 9 April 2018.

23.  In this regard, the defendant said that there were a number of delays in the proceedings that were out of the defendant’s control.  They may be of relevance concerning enhanced interest on the judgment sum.  However, as the award of such indemnity costs flows from the non-acceptance of the Sanctioned Offer and is pursuant to O22 r24, such delay in the proceedings is immaterial.

Enhanced interest on judgment sum

24.  The plaintiff now seeks pre-judgment interest at 10% above Prime Lending Rate from the date of Writ to the Judgment and post-judgment interest at 10% above the judgment rate.  The defendant contends that either no enhanced interest should be awarded or enhanced interest only at judgment rate should be awarded, and that such enhanced interest should not be awarded regarding certain periods.

25.  The power to award enhanced interest on the judgment sum is compensatory and not penal in nature.  It “is conferred to enable the court … to redress the element of perceived unfairness, otherwise inherent in the legal process, which arises from the fact that damages, costs (even costs on an indemnity basis)  and statutory interest will not compensate the successful claimant for the inconvenience, anxiety and distress of having to resort to and pursue proceedings which he had sought to avoid by an offer to settle on terms which (as events turned out)  were less advantageous to him than the judgment which he achieved” (per Chadwick LJ in McPhilemy v Times Newspapers Ltd (No 2) [2002] 1 WLR 934 at paragraph 21).

26.  The defendant also relies on the follow principles summarized by Deputy District Judge Jonathan Chang in Cheung Shuk Han v Chik Wai Yin[3]:-

13.  The court may award enhanced interest at a rate of up to 10% above judgment rate, but it should not start from the assumption that the full uplift should normally be awarded or should otherwise be taken as the starting point, since litigation varies greatly in weight and complexity, and the underlying facts in any given case will be different: Earl v Cantor Fitzgerald International (No 2) (2001)  LTL (3 May 2001)  per Moore-Bick J; Petrotrade Inc v Texaco Ltd [2002] 1 WLR 947 at p 951F per Lord Woolf MR (as he then was).

14.  That said, the level of enhanced interest on the judgment sum should make a material, albeit proportionate, difference to the outcome of the case, or else O.22 would become otiose: Little v George Little Sebire & Co reported in The Times (17 November 1999)  where Deputy High Court Judge David Foskett QC noted in the full judgment as follows:

“… since one of the factors mentioned in the overriding objective is the saving of expense, the powers conferred by the rules are likely to be interpreted by the Courts in a way that encourages settlement. Settlement is achieved only if parties focus properly on the strengths and weaknesses of their respective cases. The powers conferred by r 36.21 [our equivalent of O.22] are plainly designed to sharpen that focus. Unless the discretions conferred by the rule are exercised in a way that makes a material, albeit proportionate, difference to the outcome of the case, the rule becomes otiose.”

15.  That explains why generally the uplift should be at a higher rate for small claims, otherwise the additional advantage for the receiving party (and, in turn, the imposing of a material difference or impact to the outcome of the case)  would not be achieved.  The size of the claim is thus a relevant factor when considering the amount of the uplift in interest under O.22: see Petrotrade Inc v Texaco Ltd at p 951D-E, followed in Poon Yiu Cheung v World Mastery Technology Ltd, DCCJ 632/2005 (unreported, 30 September 2011)  at para 15 per Deputy Judge R Yu, and in Tsang Yuen Mui v蔡嬋貞, DCCJ 1347/2008 (unreported, 15 December 2011)  at para 11 per Judge H C Wong.

16.  The conduct of the paying party in the proceedings is also a relevant factor. …

17.  I add that in assessing the conduct of the paying party in the proceedings, the difference between the sanctioned offer and the judgment sum should also be a relevant consideration: the larger the difference (ie the receiving party being more prepared to forgo part of his claim to settle), the more unreasonable it is for the paying party not to take up the offer.

18.  At the same time, it is also necessary for the court to stand back and consider whether, viewed in the round, any given award of enhanced interest would provide a disproportionate benefit to the receiving party or impose a disproportionate burden on the paying party: Earl v Cantor Fitzgerald International (No 2).

19.  For instance, the low interest regime over the relevant period of time is a relevant consideration in determining the appropriate uplift: Chung Mei Industries Ltd v So Kwok Keung, HCA 2604/2005 (unreported, 10 June 2011)  at para 5 per Deputy High Court Judge Carlson.  This is to guard against making an award that has the effect of giving the receiving party a windfall in interest that he would otherwise not have been able to achieve under the prevailing economic environment and conditions.”

27.  These principles are not disputed by the plaintiff.

28.  In the circumstances of this case, I take the view that the judgment rate is the appropriate rate of enhanced interest on the judgment sum, for the following reasons:-

a.  The issue of liability hinged very much on the evidence of the liability experts.  I accept what Chan said in her affirmation, that it was because the defendant placed heavy reliance on its liability expert that it decided not to accept the Sanctioned Offer.  In the circumstances of this case, I would not fault the defendant’s such reliance on its liability expert as being unreasonable.

b.  The low interest regime over the period relevant to this action should form the background and context in considering the appropriate rate of enhanced interest.

c.  The amount of judgment sum is substantial such that any uplift in the interest rate would have a relatively significant impact.

d.  The enhanced interest rates now sought by the plaintiff, with the low interest regime as context, would clearly create a huge windfall to the plaintiff, which would be a disproportionate benefit to the plaintiff and a disproportionate burden on the defendant, so much so that I think it goes beyond what is appropriate to achieve the proper purpose of the sanctioned payment and offer regime.

e.  In Golden Eagle International (Group)  Limited v GR Investment Holdings Limited [4] Johnson Lam J (as he then was)  noted that the 3% per annum uplift of the judgment rate from Prime rate already carried an enhanced element for pre-judgment interest and he there approved the agreement of the parties to use the judgment rate as an appropriate rate for the enhanced interest.

f.  Likewise, I consider in the overall circumstances of this case, that the uplift of 3% from the Prime rate to the judgment rate of 8% is appropriate.

29.  The defendant also submits that it is unjust for the defendant to pay enhanced interest for the following periods, which were not occasioned by it but were occasioned by events completely out of its control:-

a.  from 20 March to 20 June 2017 for the change of the plaintiff’s liability expert;

b.  from 19 May 2017 to 15 March 2018 for the change of the plaintiff’s quantum expert (the initially appointed expert unfortunately passed away); and

c.  from 13 May to 13 December 2020, as the trial was adjourned due to the Covid-19 pandemic.

30.  The plaintiff’s evidence only pointed out that the defendant had consented to orders being made to change the plaintiff’s liability and quantum expert but did not dispute that those changes were out of the control of the defendant.  The plaintiff also did not lodge any reply submissions to contest this.  I would therefore accept the defendant’s submission and would not award enhanced interest over these periods.  For ease of calculation, I would round these periods up to 20 months, and would award enhanced interest on the judgment sum at the judgment rate from 20 months after 9 April 2018, ie from 9 December 2019 until the date of the Judgment.

Interest on costs

31.  The power to order interest on costs under O22 is conferred to redress the element of perceived unfairness which arises from the general rule that interest is not allowed on costs paid before judgment, and therefore the successful litigant who has made payments to his own solicitors on account of costs in advance of the trial will be out of pocket even if he obtains, at the trial, an order for costs on an indemnity basis.  An order for payment of interest on costs under O22 enables the court to achieve a fairer result (McPhilemy v Times Newspapers Ltd (No 2) [2002] 1 WLR 934).

32.  It follows that a litigant seeking interests on costs under O22 would need to show that he has made payments to his solicitors by way of costs on account (whether for profit costs or disbursements).

33.  In Shih Pik Nog v G2000 (Apparel)  Ltd[5], Bharwaney J held

“18. In my judgment, save for legally-aided parties, it is incumbent on the party seeking interest on costs, be that party a plaintiff or defendant, to state, in his supporting affidavit, the amount of disbursements, costs, and costs on account paid to his solicitors during the period commencing from the last date of acceptance up to the date of the supporting affidavit, and the date(s)  of payment. Upon sight of this information, the court can either refuse to or make an order for enhanced interest on the actual amounts of disbursements, costs, and costs on account paid during the relevant period, and the court can award interest either at the full rate from the actual dates of payment or adopt the modified approach of Lam J. The former approach would be suitable for cases where there have been only a few payments and the latter approach for cases where there have been multiple payments spanning a long period of time.”

34.  In Cheung Shuk Han v Chik Wai Yin, the Deputy Judge cited Shih Pik Nog and said at p 322 paragraph 34 that “Plainly, in order to seek interest on costs, the applicant must put forward evidence before the court to show that he was actually out of pocket by payment of costs on his solicitors on account ahead of trial … Without such evidence, there may be no basis for any order for pre-judgment interest on costs”.

35.  In the present application, no information or material whatsoever about how much disbursements, costs or costs on account were paid, and when they were paid, was proffered by the plaintiff, whether in the 2 affidavits of Cheung Wai Chung Humphrey filed respectively on 22 December 2021 and 26 January 2022, or otherwise.

36.  Here, the plaintiff simply relies on Golden Eagle International (Group)  Limited and assumes the court will automatically, without such evidence, award interest on costs under O22 by way of the modified approach suggested in that case – ordering interest on costs at half of 9% on all costs incurred after the last day the sanctioned offer or payment ought to have been accepted, with interest starting to run from the same day for all items of costs.

37.  In my respectful view, one must bear in mind that the approach suggested in Golden Eagle International (Group)  Limited is only a practical approach of convenience to “simplify the process” to avoid “a complicated process if each item of work were to carry interest from a different date” (as Lam J himself explained in p 279 paragraph 18).  As said, the award of interests on costs under O22 is premised and grounded on redressing the unfairness mentioned above.  If it is not shown that the receiving party had actually made payment(s)  and therefore was actually out of pocket, the award of interest on costs would be a total windfall, and it would seem to me unjust to so award.

38.  As mentioned and unfortunately, there is no evidence whatsoever proffered by the plaintiff in that regard. Without such evidence, I find myself unable to approach the matter in the manner as held by Bharwaney J in Shih Pik Nog.

39.  Moreover, in the circumstances of this case and for the following reason, I also do not think it right or appropriate to award interest on costs on the modified approach.  To do so, it would mean that interest at 4.5% per annum is awarded on the overwhelming majority portion of the plaintiff’s costs incurred from 9 April 2018 to the Judgment – namely, counsel fees and solicitors’ costs for attending trial – to run from 9 April 2018, when the same was only incurred in December 2020 and when there is no information whatsoever as to when they, or part of them, were actually paid.  The risk of overcompensating the plaintiff and overburdening the defendant, in my view, is too high to ignore.

40.  I therefore come to the conclusion, not without some misgiving, that I cannot accede to the plaintiff’s application for interest to be awarded on costs.

Disposal

41.  I will therefore vary the costs order nisi to this: The defendant do pay the plaintiff the costs of this action including all costs reserved with certificate for one counsel to be assessed at High Court scale before this action was transferred to the District Court on 19 June 2019 and then after at District Court scale, to be taxed if not agreed, which costs will be assessed on party and party basis up to 9 April 2018 and thereafter on an indemnity basis.

42.  I will also order the defendant to pay the plaintiff interest on the judgment sum of HK$1,715,820 at Prime Lending Rate from the date of the Writ to 9 December 2019 and thereafter at the judgment rate until full payment.

43.  On nisi basis, I will order the defendant to pay the costs of this application on an indemnity basis, with certificate for counsel, to be taxed if not agreed; and this order nisi will become absolute in 14 days unless any party applies to vary.

44.  Lastly, I thank both counsel for their assistance.