CHEVALIER (CONSTRUCTION) CO LTD v. TAK CHEONG ENGINEERING DEVELOPMENT LTD

HCA 153/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 153 OF 2008

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JUDGMENT ON COSTS

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1.  In my judgment of 30 March 2011, I ordered judgment be entered in favour of the Plaintiff in the sum of $436,403.01 and I dismissed the counterclaim of the Defendant.

2.  I heard submissions as to costs on 9 May 2011.  The Plaintiff asked for costs of the action on the following grounds,

(a)  Overall, the Plaintiff is the winning party in the action;

(b)  The Plaintiff had made an offer in March 2010 to settle the action by offering to pay the Defendant $150,000 and the Defendant unreasonably rejected that offer.  That led to substantial costs being incurred after March 2010;

(c)  Parts of the Defendant’s counterclaim were obviously without merits even on the Defendant’s own evidence. 

3.  The Defendant ceased to be represented by lawyers and (with the leave of a master) was represented by its director Mr Lai at the costs hearing.  He submitted that the Defendant should get its costs because the court found that the Plaintiff had repudiated the contract.  He urged the court to take into account of the wrongful termination of the contract by the Plaintiff and it was the Plaintiff who started the action.  He said but for the unreasonable action of the Plaintiff, the matter could have been resolved without court proceedings and legal costs could have been avoided.

4.  Whilst I have some sympathy with the predicament of the Defendant, and I agree I should bear in mind that on my findings the Plaintiff had terminated the contract wrongly, it is not correct to regard the termination of the contract as the sole cause of the litigation.  It cannot be disputed (as the Defendant initially did after the action had been commenced) that the Plaintiff had paid the salaries of the workers of the Defendant on behalf of the Defendant.  There were disputes as to the calculation of the variation orders.  In my judgment, the whole piece of litigation can be regarded as an accounting exercise between the parties.  And the Plaintiff emerged as the party entitled to a judgment at the end of the day.

5.  At the same time, I do not think it is fair to regard the Plaintiff as the substantial winner in all respects.  Of the three main issues identified at para. 6 of my main judgment, I would consider the Plaintiff to be the loser in respect of the first two main issues.  I hold against the Plaintiff on the legality of the termination of the contract.  On the unfinished and substandard works, though I assessed $49,575.07 and $76,780.00 respectively, it is fair to say that I accept most of the Defendant’s submissions regarding the quantum for such works.  On the variation works, whilst I held in favour of Mr Ho’s submissions on many disputed items, the Plaintiff had to concede up to $481,534.81 for other items[1] which it has previously challenged.

6.  Further, as explained in my main judgment and my interlocutory judgment on 23 February 2011, I do not find the expert evidence of the Plaintiff’s expert to be very helpful.  Irrespective of the general outcome as to my decision as to costs, I think this is a case where I should not give the Plaintiff the costs of its expert evidence.

7.  But I agree with Mr Ho that the court should attach some significance to the Defendant’s rejection of the March 2010 offer. Though I had queried whether the Plaintiff should have made a sanctioned offer or sanctioned payment at the hearing, on reflection I agree given that the Plaintiff’s offer was that each party should bear his own costs (as the Plaintiff did not regard it should bear the Defendant’s costs) it is not a situation falling within Order 22.  The final outcome has vindicated the Plaintiff’s refusal to pay the Defendant’s costs.  It is thus a situation where the Plaintiff could not have protected itself by making a sanctioned offer or sanctioned payment, see Wealthy Plus Ltd v Lai Man Ho [2001] 4 HKC 691. Hence, Order 62 Rule 5(1)(d) does not prevent this court from taking the March 2010 offer into consideration.

8.  I also agree that the Defendant should have accepted that offer.  The only reason advanced by Mr Lai for rejecting that offer was that the Plaintiff should also pay the Defendant’s costs.  However, that position cannot be sustained in the light of the overall result.  Had the Defendant acted reasonably, the costs after March 2010 could have been avoided.

9.  However, I do not think it follows that the Plaintiff should have all the costs of the action incurred after March 2010.  Order 62 Rule 5(2) requires this court to consider the conduct of the parties including whether it was reasonable for a party to raise, pursue or contest a particular issue, the manner in which a party has pursued his case or a particular issue and whether a party has exaggerated his claim.  In the present context, I find that the Plaintiff acted unreasonably in defending the legality of the termination and exaggerated its claims (its claim was reduced from $3,522,075.12 in the Re-Amended Statement of Claim to $1,339,355.95 in its Closing Submissions and further reduced to $436,403.01 in my judgment).  Having regard to the final outcome, the time and costs spent on the respective issues at the trial and other relevant considerations under Order 62 Rule 5, apart from depriving the Plaintiff of its costs on the expert evidence, I think it is appropriate to further reduce the entitlement of the Plaintiff to its costs by 20% from March 2010 to the end of trial and such costs should be taxed on District Court Scale instead of High Court Scale.  As regards the costs prior to the March offer, bearing in mind my view as to the merits of the respective issues, I will only give the Plaintiff 50% of its costs, again excluding the costs of the expert evidence and again to be taxed on District Court scale.

10.  I therefore order the Defendant to pay 50% the Plaintiff’s costs of the action (excluding that in respect of the expert evidence) up to 26 March 2010 and 80% of the Plaintiff’s costs after that date, and such costs to be taxed on District Court Scale.

11.  The Plaintiff shall also have the costs of the hearing on 9 May 2011, again on District Court scale.

12.  The assessor’s remuneration shall be paid out of the money paid into court by the parties.  In view of my comments as to the expert evidence, I think the costs of the assessor shall be borne by the parties in equal share.  The assessor will be notified to lodge his bill with the court within 14 days.  After the approval of his remuneration by the Registrar, there will be payment out of the approved remuneration to the assessor with notification to the parties.  After that, the parties shall have liberty to apply regarding the balance of the money paid into court.

13.  Before I leave this case, I wish to make some observations about the disproportionality of costs incurred in this action to the real subject of dispute.  By real subject of dispute, I refer not to the quantum of the claim and the counterclaim as pleaded in the pleadings.  Very often, figures set out in the pleadings do not represent the parties’ real expectation and as mentioned in my main judgment, the Plaintiff’s claim shrunk from $3.5 million to $1.3 million (by the end of trial) and the Defendant’s counterclaim shrunk from $1.6 million to $360,000 odd.  The end result is a judgment of $436,403.01.

14.  According to the estimate of costs lodged in November 2010, the Plaintiff had incurred $1.2 million by then and expected to incur another $1.4 million up to the end of trial.  As for the Defendant, it had incurred $1 million by November 2010 and expected to incur another $800,000 for the trial.

15.  Thus, by the time of the first pre-trial review on 15 November 2010, counsel acknowledged that the costs were disproportionate to the real difference between the parties.

16.  Parties have undergone two rounds of mediation. Unfortunately, they were not able to settle their dispute.  For the mediation in 2009, parties paid a total of $25,500 for 3 sessions (altogether 9 hours 15 minutes, including preliminary joint meeting).  The second round of mediation took place in January 2011 after the preparation of revised Joint Expert Report.  It only lasted for 4 hours and parties paid $12,000 for the exercise.

17.  After the second round of mediation on 5 January 2011 failed to achieve any settlement and before incurring further substantial costs on preparation of trial, solicitor for the Plaintiff wrote a Calderbank letter to solicitor for the Defendant proposing each party to ‘drop-hand’ to settle the whole action.  That proposal was rejected by the Defendant’s solicitor.  In their letter of 7 February 2011, solicitor for the Defendant said they believed the Plaintiff’s termination of the contract was wrongful and with that the Plaintiff’s claim must go.

18.  That was an unfortunate position to take as it is legally misconceived and unsound.  As explained above and further in my judgment on the application by the Defendant for stay of execution, a finding that the Plaintiff had repudiated the contract did not mean that the whole of the Plaintiff’s claim would be dismissed.  The action is in substance an exercise in taking account between the parties.

19.  I do not know to what extent the Defendant was driven by the misconceived notion in handling settlement negotiations and participating in the mediation process.  But based on what Mr Lai told me at the application for stay, this piece of litigation had imposed serious financial burden not only on the Defendant but also on him personally.  With the benefit of hindsight, it is a great pity that he did not accept the March 2010 offer.

20.  I again do not know the extent to which the Defendant’s solicitor had explained to Mr Lai the costs and risk associated with the litigation and the merits of the claim and the counterclaim. But I must emphasize again the importance of the lawyers explaining comprehensively and professionally all pros and cons of the litigation to their respective clients before the clients participate in a mediation.  A solicitor who paints an unrealistic rosy picture for his client would generate unrealistic expectation on the part of the client.  At the end of the day, if mediation fails and litigation fails to deliver the expected result, the client would suffer tremendously.  Such a solicitor is not doing a service to his client.

21.  Further, apart from mediation and settlement negotiations, there are other modes of alternative dispute resolution.  In the construction field, adjudication has become very popular in the United Kingdom and in Australia.  I see no reason why this option should not be adopted in Hong Kong.  I believe we have sufficient number of experienced surveyors, architects or engineers in Hong Kong to undertake the role of adjudicators.  In many construction disputes, I believe adjudication can provide a more efficient and effective mode of dispute resolution.  As a matter of proper case management, this option should be considered by everyone involved in construction disputes.