KIN SHING (LEUNG'S) GENERAL CONTRACTORS LTD v. THE CHINESE UNIVERSITY OF HONG KONG

HCCT 69/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 69 OF 2010

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D E C I S I O N

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1.  The plaintiff seeks leave pursuant to section 23(3) of the Arbitration Ordinance, Cap. 341 for leave to appeal to the Court of First Instance from a partial award on costs dated 4 October 2010 of Charles Manzoni, QC (“the Arbitrator”) against paras. 10, 14 and 18 of the award.

2.  The grounds are that the defendant made an offer of settlement dated 23 July 2008 which was rejected by the plaintiff.  The Arbitrator made awards on the principal and interest payable to the plaintiff on 9 October and 23 November 2009 respectively.  The Arbitrator also made the partial award on costs dated 4 October after hearing submissions from the parties.  In making the award on costs, the Arbitrator took into account the offer and ordered the defendant to pay the costs to the plaintiff up until 23 July 2008 and the plaintiff to pay the costs to the defendant after that date.  The plaintiff takes the view that the Arbitrator should not have taken the offer into account on the question of costs.

3.  The test for exercising the discretion to grant leave has been set out by the CFA in Swire Properties Ltd & Ors v Secretary for Justice (2003) 6 HKCFAR 236 at paras. 29, 43 and 46:

“29. … A ‘one-off’ dispute, as Lord Donaldson MR put it in Seaworld Ocean Line Co SA v Catseye Maritime Co (The Kelaniya) [1989] 1 Lloyd’s Rep. 30 at p. 32, is a dispute ‘in which the general market and the Commercial fraternity has no interest’. The resolution of a ‘one-off’ question of construction merely affects the rights and liabilities of the parties to the contract concerned. It will be of no general legal interest. But where the true construction of a standard clause is in dispute, the resolution of the question of construction involved will be a matter — general legal interest ¾ sometimes great general legal interest.

…

43. … Where a question of law of general public importance or the construction of a standard clause is involved, I think that our courts should normally grant leave to appeal from an arbitral award when, but only when, there is at least a serious doubt as to its correctness. This caters for the public interest to which I have just referred. As it seems to me, the concept of serious doubt is the naturally apposite one. Certainty (i.e. freedom from serious doubt) on these matters is obviously in the public interest.

…

46. Where the construction of a ‘one-off’ clause is involved, I think that our courts should normally grant leave to appeal from an arbitral award when, but only when, the arbitral tribunal’s construction appears to be obviously wrong.

4.  Mr Shaw of the plaintiff’s solicitors submitted that the Arbitrator had erred in taking the offer into account and this is a question of general public importance rather than a one-off question of construction. 

5.  The offer dated 23 July 2008 was the second offer by the defendant and was headed “without prejudice save as to costs”. The relevant parts are:

“… [o]ur client offers to pay to your client a sum of HK$2,800,000.00 (inclusive of interest) but exclusive of costs in full and final satisfaction of all claims that the parties have, or may have, against each other in respect of the matters in these proceedings. As far as costs are concerned, our client in prepared to bear a reasonable sum in respect of your clients costs incurred in the proceedings inclusive of the Arbitrator’s costs but excluding any costs which the Arbitrators has ordered your client to bear. Our client’s strong preference is to resolve both matters of principle and costs at the same time however, and therefore this part of the offer is subject to your provision of a reasonable estimate thereof (with breakdown).

We should be obliged if you would take your clients instructions on the above and confirm whether your client agrees to settle its claim (inclusive of interest) at HK$2,800,000 and let us have the aforesaid costs estimate.”

The plaintiff rejected the offer outright on the next day.

6.  By another offer letter dated 31 July 2008, the plaintiff increased the sum of $2,800,000 to $4,800,000 with other terms remaining the same.  This third offer was also rejected outright on 1 August.

7.  The defendant made the fourth offer on 25 August by increasing the $4,800,000 to $7,000,000 with other terms remaining the same.

8.  The plaintiff’s solicitors rejected this offer on 1 September in the following terms:

“Your clients offer is rejected.

  We do not accept that that offer or any of the preceding offers are valid Calderbank offers.”

9.  The defendant’s solicitors then wrote again on 4 September as follows:

“We note that your client has rejected our global settlement offer of HK$7,000,000.00 being the principal sum and interest. In the last paragraph of your said letter, you alleged that all our offers were ‘invalid Calderbank offers’. Clearly, these are two separate matters. If your client is not happy with the form of our offers, we should be obliged if you would let us know what form of offer your client has in mind.”

10.  The plaintiff’s solicitors however refused to be more forthcoming.  Their reply of 4 September said:

“We do not propose to offer advice as to appropriate offers. Our letter was written, simply out of courtesy, so that it could not later be said we had acquiesced with an offer in that form.”

11.  The matter then proceeded to arbitration and the Arbitrator made the awards aforementioned.  In the partial award on costs, the Arbitrator said:

“THE OFFERS MADE

8. I clearly have a wide discretion on costs, although obviously that discretion must be exercised fairly and proportionately, upon appropriate grounds. I can, and should, take into account relevant factors. It seems to me that the various offers which have been made by the Respondent are indeed relevant factors, and should be taken into account, irrespective of the nature of the offers contained in them.

9. The fact that I do take them into account is not to say that they will automatically, or even as a matter of presumption, result in costs awards in favour of the Respondents after the date of the offer (assuming they have not been beaten). As A Cheung J pointed out in Chinney Construction Co Ltd v Po Kwong Marble Factory Ltd [2005] 3 HKLRD 758 at [43] — [44], the extent of the protection that offers (whether they be calderbank offers or any other form of offer) will provide depends upon all the circumstances, including for example the precise terms of the offer, the financial status of the offeror, whether a payment into court could and should have been made, and the reasons for any rejection of the offer.

10. Thus, the Respondents are correct to the extent that they submit that the offers cannot be taken as automatically resulting in a costs award in favour of the Respondent (assuming the offer has been beaten). But the Respondent is not correct in suggesting that I should ignore the offers entirely in the exercise of my discretion. They are but one factor in the discretionary mix, and I will have to make an assessment of the importance of those offers, having regard to all the circumstances. Overall, the question that I need to ask concerning the offers is whether they ought reasonably to have been accepted. This is consistent with the proposition of Mummery Li in Butcher v Woolfe [1999] 1 FLR 334 at p. 340 A/B-D. Mummery Li was talking about a classic Calderbank Offer, and on one view the offers in this arbitration are not classic Calderbank offers. But I am satisfied that the question posed is the relevant question to ask irrespective of the true nature of the offer. Any difficulties, or failures of the offer will inevitably be taken into account when asking whether it ought reasonably to have been accepted.

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13. The [first] offer was made on the basis that there should be no order for costs. I recognise that, on the basis that I have found only approximately HK$1 million as due, there is plenty of additional money available in the offer (i.e. around HK$1,800,000) by which the Claimant could absorb its costs up to that date. The Respondent asks me to assume that the costs incurred by that date would be less than the HK$1,800,000. Whilst I have some sympathy for that proposition, I do not think that I can conclude that the Claimant ought reasonably to have accepted that offer. I think that the possible ambiguity about the overall amount, and the lack of precise clarity on costs give rise to a reasonable doubt as to whether the offer ought reasonably to have been accepted. Consequently, I do not think that the 1st offer provides the Respondent with the protection it seeks.

14. The second offer however is a different proposition. The offer is in an increased amount overall, because it includes an offer to pay a reasonable sum in respect of costs. … There is no additional difficulty in respect of costs, and consequently in my view the second offer is one that ought reasonably to have been accepted.

…

18.   Consequently I conclude that the Respondent should pay the costs of the Claimant up until 23 July 2008, and the Claimant should pay the costs of the Respondent after that date.”

12.  The plaintiff makes this application by relying on Luk Kwan Hung Nelson v Victory Mark Investment Ltd [2004] 2 HKC 305. The plaintiff in that case claimed rescission of an agreement and the setting aside of an assignment of a piece of property.  Sakhrani J on 19 September 2003 awarded the plaintiff damages in the sum of $1,158,967 with interest and a costs order nisi requiring the defendant to pay the plaintiff costs. The defendant sought a variation of the order on the ground that the defendant’s former solicitors had made a Calderbank offer dated 28 February 2000 to the plaintiff’s former solicitors to settle the action and the offer should have been accepted.  The learned Judge held against the application and said in paras. 7 and 10:

“7. The first question for me to consider is whether or not the terms are sufficiently certain as to be capable of a valid acceptance by the defendant without any further query or negotiation on the matter. In other words, if everything set out in the letter had been accepted by the defendant, would that have constituted a binding and enforceable contract between the parties?

…

10. There must, of course, be certainty in the essential terms. … That being so, the offer made in the letter was not, in my view, capable of a valid acceptance by the plaintiff without any further query or negotiation on the matter. The acceptance of the offer without any further query or negotiation would not have resulted in a binding and enforceable contract between the parties.

13.  Mr Shaw submitted in the light of the reasoning in Luk Kwan Hung, the second offer of the defendant herein was:

(a)     not capable of a valid acceptance; or

(b)    not in clear terms so that the plaintiff knew what it was offered.

14.  The reason being that the second offer only started a negotiation about costs and thus did not satisfy the requirements set out in Luk Kwan Hung.  The plaintiff accepts that the Arbitrator has a wide discretion on costs.  However, Mr Shaw submitted that the discretion did not extend to relying on matters which as a matter of law, the Arbitrator could not take into account.

15.  Mr Houghton, SC, for the defendant, did not accept that the question raised by the plaintiff has public general importance.  He also submitted that it is not necessary to consider whether the second offer was a valid Calderbank offer because Article 18 of the Domestic Arbitration Rules, to which the parties have subscribed, enabled the Arbitrator to take into account of any written offer.  Article 18 provides:

“Article 18 Payment into Court

Any party may at any time avail himself of the procedure for payment into court pursuant to the provisions of Order 73 of the Rules of the Supreme Court of Hong Kong, although the Arbitrator may take account of any written offer of settlement where a payment into court could have been made.”

16.  Mr Houghton also relies on Chinney Construction Co. Ltd v Po Kwong Marble Factory Ltd [2005] 3 HKLRD 758 at para. 43 where A Cheung J said:

“Costs is a matter of discretion

43.    For my part, I would proceed along the following lines: whether in litigation or arbitration, costs is a matter of discretion.  The discretion can only be exercised judicially after taking into account all relevant considerations.  Authorities aside, a Calderbank offer (including the fact that it has been made, the circumstances under which it was made, the content of the offer etc.), the refusal of such an offer (including the circumstances under which the offer was refused and the reasons behind), what happened subsequent to the refusal (e.g. continued negotiations, if any), other related matters (such as why a payment-in was not made – including whether it could be made as a matter of law and whether it was reasonable to make it as a matter of practical realities), and so forth, are or may be (depending on the facts of each case) relevant circumstances and considerations that should be taken into account before the discretion on costs can be exercised judicially. In short, these are matters that may or may not be relevant at all, depending on the facts, and if they are relevant, their weights on the weighing scale may vary depending on individual circumstances.  All these are matters to be dealt with by the one who has to exercise the discretion.”

17.  Mr Shaw replied that “any written offer” in Article 18 was not meant to include any offer other than a Calderbank offer.  He said Article 18 was to do away with the uncertainty of whether Calderbank offers could still be made when payment could be made into court.  Article 18 was therefore not intended to include offers other than Calderbank offers.

18.  Regarding A Cheung J’s decision in Chinney Construction, Mr Shaw submitted that the decision was also focused on the situation where payment into court could be made.  The decision thus only resolved the same ambiguity that had prompted the making of Article 18. It should therefore not be read to include invalid Calderbank offers.

19.  I deal with the first issue of the nature of the question raised by the plaintiff.  The plaintiff submitted that the question of whether the Arbitrator had erred in taking the second offer into account is a question of general public importance.  But the scope of the plaintiff’s argument is very narrow and is limited to the question of whether the second offer was a valid Calderbank letter capable of being accepted or was it in sufficiently clear terms for the plaintiff’s acceptance.

20.  It is a question of whether the second offer, when properly construed, is or is not a Calderbank offer.  The second offer contained no standard clause and the construction exercise has no relevance to the general market or the commercial fraternity.  On the question as raised and framed by the plaintiff, I do not think that it is a matter of general public importance.  It is a one-off question of construction only.  Therefore, the plaintiff in order to succeed has to demonstrate that the Arbitrator’s decision was obviously wrong. 

21.  Regarding the two submissions in reply by Mr Shaw, I disagree with them.  For the first one, I do not think “any written offer” in Article 18 should be read to refer only to valid Calderbank offers. If that should be the purpose and intent of Article 18, it would have been easy to express it clearly.  Article 18 is drafted in a broad fashion and I will interpret it broadly.  It must be a mandate for the Arbitrator to take into account of “any written offer of settlement” including the second offer.

22.  Regarding the second point, A Cheung J was saying in Chinney Construction that the decision can only be judicially exercised after taking into account all relevant considerations. The learned Judge then cited some matters which, depending on the facts of the particular case, may or may not be relevant considerations.  The learned Jude did not exclude non-Calderbank written offers at all.  I do not think it right to read the decision in the narrow way as suggested by Mr Shaw.

23.  The Arbitrator in his decision acknowledged his wide discretion. He referred to A Cheung J’s decision in Chinney Construction and opined that the extent of the protection that the Calderbank or other offers may provide depends on all the circumstances including the precise terms of the offer and the reasons for its rejection.  He asked himself whether the second offer should have been accepted.  Even though one may regard the second offer (and the third and fourth offers) not as classic Calderbank offers, the Arbitrator was satisfied that the question he asked was relevant irrespective of the true nature of the second offer.  If there should be any difficulties or failures of the offer, the same would be taken into account in deciding whether it ought reasonably to have been accepted.  He decided that the second offer should have been accepted because in addition to the lump sum offered for full and final settlement of all claims inclusive of interest, there was an offer to pay a reasonable sum in respect of costs.  He did not agree that it was not capable of a valid acceptance or that the terms were not clear enough.

24.  Having considered the terms of the second offer, the subsequent correspondence of the parties and the Arbitrator’s reasoning, I regard the Arbitrator’s decision on costs as entirely fair and reasonable.  The plaintiff has therefore failed to convince me that the Arbitrator’s decision to take the second offer into account was obviously wrong.  I will go further and hold that even if the question raised by the plaintiff were of general public importance, the plaintiff has still failed to convince me that there is any doubt as to the correctness of the Arbitrator’s decision.

25.  I would also highlight the point made by Lord Justice May in Codent Ltd v Lyson Ltd [2005] EWCA Civ.1835 at para. 35 which was derived from Butcher v Wolfe [1999] 1 FLR 334 that a claimant in receipt of a Calderbank offer, who failed to negotiate about it, might be penalised in costs if the refusal to negotiate was unreasonable.  This should also apply to an offer which is not strictly a Calderbank offer.

26.  Mr Shaw said that this principle only prevails in England in the context of the Civil Procedure Rules (“CPR”) there.  I disagree.  Butcher v Wolfe was decided by the English Court of Appeal on 30 October 1998 and the CPR was only implemented in April 1999.

27.  I therefore dismiss the plaintiff’s application with a costs order nisi that the plaintiff do pay the defendant the costs of this application to be taxed on the indemnity basis.  These costs are to be assessed summarily by me at a 9:30 a.m. hearing to be fixed outside the next 14 days unless the amount can be agreed between the parties within the next 14 days.