CHAN OI WAH v. CHEUNG CHUN WAI, THE EXECUTOR OF THE ESTATE OF CHEUNG SAI SUN, THE DECEASED

DCCJ448/2014

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 448 OF 2014

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DECISION

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Factual Background

1.  This is a water seepage case.  The Plaintiff is the registered owner of 1/F of SS 13 of SB of Lot No 90 in DD115, House No B21 of Kwan Lok Sun Tsuen, Yuen Long, Hong Kong (“the Property”).  The Defendant is the registered owner of the floor above, namely, 2/F of the Property.

2.  The legally aided Plaintiff commenced proceedings against the Defendant and sought the following reliefs: (i) an injunction against the Defendant to prevent further water seepage; (ii) special damages which include the costs for rectifying the damaged structure and making good the decoration in the 1/F Property and (iii) general damages for diminution in the amenity value of the 1/F Property.

3.  The Defendant did not admit liability and defended the Plaintiff’s claim.  The parties engaged experts on liability and quantum.  Joint inspection and examination of the 2/F Property was conducted on 5, 19 and 29 October 2015.

4.  On 22 January 2016, the parties’ experts submitted their Joint Expert Report.  The following matters were agreed by the experts: (i) the source of water seepage at the 1/F Property comes from the 2/F Property; and (ii) rectification works are required at 2/F Property to stop the water seepage.

5.  The parties were able to reach a settlement and the matter did not proceed to trial.  Pursuant to the Order of Master S P Yip dated 23 March 2016 (“the Order”), costs of the action up to and including 9 April 2015 be to the Plaintiff, to be taxed if not agreed.

6.  The Order also provided that upon the Defendant’s undertaking to rectify the 2/F Property within 60 days so as to prevent further seepage of water from his property to the Plaintiff’s property, judgment would be entered against the Defendant and the Defendant should pay damages in the sum of HK$153,400 to the Plaintiff.

7.  The Order also stipulates that the costs of this action (together with expert fees) thereafter as from 10 April 2015, save and except those consented by the parties or from orders made by the court are to be determined by the court under its general discretion as to costs under Order 62 rule 3 of the Rules of the District Court, Cap 336H (“RDC”).

8.  The subject matter of this hearing is the dispute as to the costs of the action from 10 April 2015.

Plaintiff’s Submission

9.  The Plaintiff submits that she has effectively obtained what she had claimed in the action and therefore is the successful party in the action.  As such, the Plaintiff claims that she is entitled to recover costs of the whole action.  The Plaintiff asks for costs on an indemnity basis from 2 July 2015 or 8 February 28 being 28 days after the Plaintiff’s 2^nd settlement offer dated 4 June 2015 and the Plaintiff’s 3^rd settlement offer dated 11 January 2016 respectively.

Defendant’s Submission

10.  The Defendant submits that costs of the action from 10 April 2015 and thereafter should be paid by the Plaintiff to the Defendant by reason of (i) the offers to settle made by the Defendant; (ii) the unreasonableness of the Plaintiff for pursing certain issues; (iii) the manner in which the Plaintiff pursued her case; (iv) the conduct of the Plaintiff and her legal representatives during the proceedings after 9 April 2015 and (v) the failure of the Plaintiff to take into account the objectives of the Civil Justice Reform.

11.  The significance of the date of 10 April 2015 as argued by the Defendant is that the Defendant made a sanctioned offer to the Plaintiff on 12 March 2015 and expiration of 28 days for acceptance falls on 9 April 2015.  The Defendant argues that it was open for the Plaintiff to accept the Defendant’s offer dated 12 March 2015, in which case the action would have been settled and no costs would be incurred thereafter.

The Court’s Discretion as to Costs

12.  Pursuant to section 53(1) of the District Court Ordinance, Cap 336, costs are in the discretion of the court.  Costs normally follow the event, but the court can make some other costs order in appropriate circumstances (see Order 62 rule 3(2) RDC).

13.  Order 62 rule 5 RDC provides guidance on how the court should exercise its discretion on costs.  It stipulates:-

“(1) 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) .....

(b) any payment of money into court and the amount of such payment;

(c) .....

(d) any written offer which is expressed to be “without prejudice save as to costs” and which relates to any issue in the proceedings, but the Court may not take the 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;

(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.

(2) For the purpose of paragraph (1)(e), the conduct of the parties includes-

(a) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;

(b) the manner in which a party has pursued or defended his case or a particular allegation or issue;

(c) whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim; and

(d) conduct before, as well as during, the proceedings.”

14.  The parties do not dispute the applicability of the above principles.

The Parties’ Settlement Offers

15.  Both parties made a number of settlement offers but unfortunately none were accepted.  The Defendant made five settlement offers and the Plaintiff made three.  It is regrettable that the parties were unable to reach an agreement on liability for costs.  This has led to a situation which settlements are intended to prevent – further litigation between the parties with the incurrence of additional costs in deciding who should pay the costs already incurred.

16.  On 12 March 2015, the Defendant made a sanctioned payment of HK$120,000 into Court in settlement of the whole of the Plaintiff’s claim.  This sanctioned payment does not beat the damages ultimately awarded to the Plaintiff in the sum of HK$153,400 as reflected in the Order.  There is a difference of HK$33,440 between the Defendant’s sanctioned payment and the ultimate award.

17.  The Defendant submits that a sanctioned offer was also made on 12 March 2015 by way of letter marked as “without prejudice save as to costs” to the Plaintiff’s solicitors, containing two settlement options and further additional terms.  Notwithstanding that the Defendant’s offer is expressed as a “sanctioned offer”, the court’s approach is to look at the contents of the offer and ascertain its validity with reference to the requirements of Order 22 rule 5.  As held by Saunders J in Kwok Chun Wing v 21 Holdings Ltd [2011] 3 HKC 542:-

“Unless the sanctioned offer is in the prescribed form it will not constitute a sanctioned offer. The consequence of the offer not constituting a sanctioned offer is that a plaintiff who has made the offer, if successful, cannot rely upon the provisions of O 22 r 24 as to costs and other consequences where he does better than his offer. The principal provision that the plaintiff will not be able to rely upon is that in relation to enhanced interest.”

18.  The Plaintiff contends that the Defendant’s settlement proposal dated 12 March 2015 does not constitute a sanctioned offer as it contains provisions as to costs and that at best it is a Calderbank offer.  The terms of the Defendant’s offer is reproduced below (“D’s 1^st Offer”):-

“Option 1

1.1 The Defendant shall help the Plaintiff to repair or rectify those damage in her property situate at 1/F, SS.13 of S.B. of Lot No. 90 in DD115, House No. B21 of Kwan Lok Sun Tsuen, Yuen Long, Hong Kong (“the Property”) as set out in paragraph 28 of the Plaintiff’s witness statement filed on 28 November 2014 namely,

1.1.1 廚房天花滲水

1.1.2 廁所天花滲水

1.1.3 大廳近廁所天花位置滲水

1.1.4 廚房對出天花位置滲水

1.1.5 露台天花滲水

1.1.6 廁所天花有石屎剝落，鋼筋及電線外露

1.1.7 廚房天花有石屎剝落，鋼筋外露

1.1.8 近露台的睡房天花石屎剝落

1.1.9 廚房窗花部份鬆脫

1.1.10 廁所窗花部份鬆脫

(collectively referred to as “the Damage”);

1.2 The repair or rectification of the Damage as referred to in paragraph 1.1 above shall be carried out by a licensed contractor (“the Contractor”) engaged and instructed by the Defendant at a reasonable market contract price between the range of HK$100,000 – HK$150,000. Such repair or rectification works shall be commenced by the Contractor within 2 months from the date of acceptance of this offer;

1.3 The Defendant will require the Contractor to provide to the Plaintiff a guarantee on quality of work for 3 years commencing from the date of completion to the repair or rectification works;

1.4 The Plaintiff shall sign a release form (in the form agreed between the parties) to discharge the liabilities of the Defendant in respect of water leakage from the Defendant’s property to the Plaintiff’s property;

Option 2

2.1 The Defendant shall pay to the Plaintiff through the Director of Legal Aid a sum of HK$150,000 (“the Settlement Sum”) in which HK$120,000 will be paid out from the sanctioned payment made by the Defendant into court made on 12 March 2015, and the balance of HK$30,000 shall be paid by the Defendant to the Plaintiff through the Director of Legal Aid within 14 days from the acceptance of this offer;

2.2 The Plaintiff is required to undertake to the Defendant and to the court that she will apply the Settlement Sum to repair or rectify the damage in her Property as referred to in paragraph 1.1 above;

2.3 The Plaintiff shall sign a release form (in the form agreed between the parties) to discharge the liabilities of Defendant’s property to the Plaintiff’s property;

Additional terms applicable to both Options

3.1 The options of settlement hereinabove are made on the footing that water testing pursuant to the Order made by Master S.P. Yip dated 24 February 2015 is not carried out by either party, with the primary concern to save the parties’ experts costs on water testing.

3.2 If the Plaintiff accepts either Option 1 or Option 2 within 28 days from the date hereof, the Defendant agrees to pay the Plaintiff’s costs to be taxed if not agreed. However, after the expiry of 28 days from the date hereof, the Plaintiff may only accept either Option if the parties agree on the liability for costs (in which case the Defendant shall insist that each party bears his/her own costs, or such costs order that the Defendant is entitled to pursuant to Order 22 rule 23 of the Rules of the District Court Cap. 336 H) or if the court grants leave to accept it.

3.3 For the avoidance of doubt, if settlement is reached pursuant to this sanctioned offer, the Defendant shall not bear the Plaintiff’s expert costs relating to water testing pursuant to the Order made by Master S.P. Yip dated 24 February 2015 and any alleged costs thrown away due to the re-schedule of water testing on 7 March 2015.”

19.  As D’s 1^st Offer contains provisions as to costs, the question that arises is whether it is a valid sanctioned offer pursuant to Order 22.  Both parties have cited and relied on the case of Wong Yim Man Anthea v Wong Ho Ming Felix (Unreported, HCA 352/2011, judgment dated 22 April 2016, Deputy High Court Judge Kent Yee).  That case addressed the issue of whether the court can consider any offers described as a sanctioned offer and yet contains a provision as to costs.  Paragraphs 45-47 of the judgment are pertinent:-

“45. It is true that settlement to be reached between the parties before trial should be encouraged, which would result in huge savings of both their personal and the public resources. However, to alter the nature of a sanctioned offer in order to enable it to include a term as to costs would only do violence to the well-planned and self-contained mechanism in O.22.

46. In my view, O.22 adopts a carrot and stick approach. One of the attractions for a plaintiff to accept a sanctioned offer of the defendant is that the plaintiff can benefit from the favourable costs consequences under O.22 r.20. If the plaintiff refuses to accept such a sanctioned offer including the benefits under O.22 r.20 the and it turns out that he fails to do better than the sanctioned offer, he should take the consequences and would receive sanctions in costs and enhanced interests under O.22 r.23. The stick in O.22 r.23 is only justified when the plaintiff unreasonably rejects, among other things, the carrot in O.22 r.20.

47. The underlying objectives of O.22 are not compromised in any event.  A payment or offer which is not a sanctioned payment or offer can still be considered under O.62 r. r.5(1)(d) if it does not fall within the exclusionary rule therein.”

20.  The conditions of D’s 1^st Offer have altered the mechanism of Order 22, namely that the Defendant shall bear the Plaintiff’s costs up to the Plaintiff’s acceptance of the offer and that the Plaintiff’s expert costs relating to water testing on 7 March 2015 are to be borne by the Plaintiff.  Applying Wong Yim Man Anthea to the present case, I am of the view that the Defendant’s 1^st Offer does not constitute a sanctioned offer under Order 22.  In any event, the value of the rectification works in D’s 1^st Offer (both Option 1 and Option 2) is worse than the final sum awarded to the Plaintiff.  In addition, there is no exclusion of the costs of the abortive water test in the Order.

21.  However, D’s 1^st Offer may be considered under Order 62, rule 5(1)(d) RDC under the court’s general discretion on costs.  The offer to settle was not simply payment of money by the Defendant to the Plaintiff.  It also involved the engagement of a licensed contractor to carry out repair and rectification works.  The exercise of discretion should influence but not govern the exercise of discretion on costs.  In Luk Kwan Hung Nelson v Victory Mark Investment Limited [2004] 2 HKC 305 Sakhrani J adopted the following guidance by Mummery LJ in Butcher v Wolfe & Anor [1999] 1 FLR 334 at 340:-

“A Calderbank offer is made for the same reason as a payment into court is made; to encourage a settlement and, failing a settlement, to protect the position on costs of the person making the payment in or the Calderbank offer. But a Calderbank offer is not to be treated as, or to be regarded as a substitute for, or to be equated for all purposes with, a payment into court. As a Calderbank offer is appropriate in a case other than a claim for debt or damages, it requires a greater degree of flexibility. The proper approach to a Calderbank offer, when it is taken into account on a later argument on costs, is to ask whether the party to whom the offer was made ‘ought reasonably to have accepted the proposal in the letter?’ Or, to put it another way, account must be taken of the reasonableness or otherwise of the refusal to accept the offer - see Cutts v Head and Another [1984] Ch 290, 302 per Oliver J, and Chrulew and Others v Borm-Reid & Co [1992] 1 WLR 176, 182A. This approach is to be compared with the payment into court where, in the absence of a special reason for depriving the offering party of his post-offer costs, the simple question is whether the payment in is equal to or is beaten by the defendants at trial.

(8)  A Calderbank offer must be made in clear terms so that the party against whom it may be used on the issue on costs knows what he is offered - see C & H Engineering v F Klucznic & Sons Ltd [1992] FSR 667, 671.  It may well be reasonable for a party to whom an offer is made to refuse an offer made in ambiguous terms.”

22.  By letter dated 30 March 2015, the Plaintiff’s solicitors wrote back to the Defendant’s solicitors regarding D’s 1^st Offer.  The Plaintiff expressed her desire to consider Option 1 subject to clarifications form the Defendant.  The Plaintiff’s position was that:-

(i) The standard of the rectification works should be stated, ie in accordance with the original type and standard.

(ii) It should be stated that the rectification works may be required at the 2/F Property so as to stop the water seepage problems.

(iii) The rectification works should be completed within 2 months.

(iv) The price range, ie HK$100,000 – HK$150,000 in relation to Option 1 should be deleted.

23.  Despite conveying her concerns and seeking clarifications from the Defendant in relation to D’s 1^st Offer, the Defendant did not write back to the Plaintiff.  I find that the concerns raised by the Plaintiff are all reasonable.  I note that D’s 1^st Offer was made at a time before detailed examination of the 2/F Property was carried out.  The joint inspection and examination of the 2/F Property was conducted in October 2015.

24.  The Plaintiff’s 1^st Offer was made in the same letter marked as “without prejudice save as to costs” dated 30 March 2015 in which she expressed concerns over D’s 1^st Offer (“P’s 1^st Offer”).  P’s 1^st Offer was expressed to be a sanctioned offer.  P’s 1^st Offer included the following terms: (i) the repair and rectification work was to include “subsequent making good of the finishes with the original type and standard” in the Property as set out in paragraph 28 of the Plaintiff’s witness statement filed on 28 November 2014; (ii) that the repair and rectification was to be completed within 2 months of acceptance of P’s 1^st Offer and for the contractor to provide a guarantee on the quality of works for 3 years commencing from the date of completion; and (iii) the Defendant should pay HK$30,000 to the Plaintiff as compensation within 14 days from the acceptance of P’s 1^st Offer.

25.  The Defendant argues that P’s 1^st Offer could not have been a valid sanctioned offer as it was withdrawn on 9 April 2015, less than 28 days from 30 March 2015 without any leave from the court in breach of Order 22 rule 7(1).  As the HK$30,000 compensation was not allowed in the Order, the Plaintiff concedes that P’s 1^st Offer is of no effect apart from demonstrating the Plaintiff’s attempt in exploring settlement with the Defendant.

26.  The Defendant criticized the Plaintiff’s refusal toacceptD’s 1^st Offer and argued that the Plaintiff’s behavior in frivolous nit-picking and seeking clarifications was unreasonable.  The Defendant sought to reply to the Plaintiff’s concerns in the 2^nd Affirmation of Cheung Chun Wai dated 28 June 2016 alleging that: (i) there was no evidence to suggest that the standard of repair and rectification work would not be as good as the original type and standard; (ii) the implementation of a price range of HK$100,000 – HK$150,000 is reasonable as there is no reason why the Plaintiff should insist on the Defendant engaging a more expensive contractor; (iii) the comment that “repair/rectification works may be carried out in the 2/F Property as well” was not specifically mentioned in P’s 1^st Offer and is the Plaintiff’s attempt to nit-pick D’s 1^st Offer; (iv) the alleged costs of the re-scheduling of water testing on 7 March is not part of the costs of this action and is not a matter for taxation and (v) the claim for general damages for the diminution in the amenity value of the 1/F Property was ultimately not pursued by the Plaintiff.

27.  It is not in dispute that P’s 1^st Offer was withdrawn by letter dated 9 April 2015 and subsequently reinstated by a second letter on the same day.  On 5 May 2015, the Plaintiff’s solicitors wrote to the Defendant’s solicitors stating that the Plaintiff was prepared to accept Option 1 of D’s 1^st Offer but asked for no order as to costs after 9 April 2015 up to the date of the consent summons to be signed by the parties and that there be no order as to costs as to the consent summons to be made.  This early offer to agree to no order as to costs would have quickly brought these proceedings to an end.  However, the Defendant refused to agree to no order as to costs.

28.  The onus to set out the settlement offer in clear terms rests on the Defendant.  The Defendant could have responded to the Plaintiff’s concerns regarding D’s 1^st Offer in an effort to settle the matter.  Given the circumstances and the information available to the Plaintiff at the material time, the Plaintiff cannot be criticized for not accepting D’s 1^st Offer immediately, but to enter into further “without prejudice” discussions and negotiations on the offer which she did. 

29.  I find that the Plaintiff’s request for the Defendant to specify the time period for the completion of rectification works is reasonable and understandable.  I do not agree with the Defendant’s submission that this is frivolous nit-picking.  The Plaintiff would undoubtedly want some assurance with regards to the time frame to rectify the water seepage problem.

30.  In my view, most of the Plaintiff’s concerns have been addressed in the Order in her favour.  I note that there is an undertaking made by the Defendant to rectify the 2/F Property to prevent further water seepage on top of the damages payable by the Defendant to the Plaintiff.  In addition, the rectification works at the 2/F Property should be completed within 60 days and there is no exclusion of the costs of the abortive water test.

31.  Although the Defendant contends that D’s 1^st Offer was made to avoid significant legal costs, that was not achieved.  One of the obstacles in reaching settlement was the Defendant’s stance in relation to costs arising from the abortive water test (see D’s 1^st and 3^rd Offers).  At the hearing, the Defendant argued that the costs of the aborted water test on 7 March 2015 should not be borne by the Defendant and were unnecessarily incurred by the Plaintiff.  The Defendant’s stance in relation to the aborted water test was set out in the 1^st and 2^nd Affirmation of Cheung Chun Wai. As a matter of fact, the costs of the aborted water test have not been excluded in the Order and I do not find it appropriate to disturb the Order (which was reached by consent).

32.  Throughout these proceedings, the Defendant did not admit liability.  It was not until 16 March 2016 that the Defendant admitted liability for the water seepage in its Timetabling Questionnaire.

33.  The Defendant made further settlement offers in the form of letters to the Plaintiff marked as “without prejudice save as to costs” but none were accepted.  They are summarized and set out in the table below:-

	D’s 2nd Offer 9/11/15	D’s 3rd  Offer 22/12/15	D’s 4th Offer 6/1/16	D’s 5th Offer 23/2/16
Terms	HK$150,000 as full and final settlement of P’s claims	HK$150,000 as full and final settlement of P’s claims	HK$150,000 as full and final settlement of P’s claims	D pays HK$153,400 to P as damages
Costs	D pays all-inclusive cots at HK$300,000 to P	Costs up to 9/4/15 except the costs of the abortive water test on 7/3/15 be to P.  Costs after 9/4/15 be to D	Costs up to 9/4/15 be to P.  Costs after 9/4/15 be to D	Costs up to 9/4/15 be to P.  Costs after 9/4/15 be to D
Length of time offer was open for acceptance	7 days	2 days	5 days	3 days

34.  I find that the terms of D’s 2^nd to D’s 5^th Offers are worse that what was ultimately awarded to the Plaintiff as reflected in the Order.  I also find that D’s 2^nd to D’s 5^th Offers do not constitute valid sanctioned offers as they all contain terms as to costs.  In addition, D’s 2^nd to D’s 5^th Offers were not served on the Director of Legal Aid in breach of Order 22 rule 6(b) RDC.

35.  The Plaintiff also made further settlement offers expressed as a sanctioned offer in letters marked as “without prejudice save as to costs” to the Defendant and they are summarized and set out in the table below:-

	P’s 2nd Offer 4/6/15	P’s 3rd  Offer 11/1/16
Terms	D to engage licensed contractor to carry out rectification works.  Works to be completed within 2 months, guarantee of 3 years shall be provided.	D to engage licensed contractor to complete the rectification works within 2 months.  D pays HK$150,000 to P as damages.
Costs	Costs up to the acceptance of the offer be to P	Costs of the action together with P’s expert fee be to P to be taxed if not agreed
Length of time offer was open for acceptance	28 days	28 days

36.  P’s 2^nd Offer is essentially the same as P’s 1^st Offer except that the Plaintiff no longer insisted that the Defendant pay HK$30,000 to her as compensation.  P’s 2^nd Offer was subsequently withdrawn by letter from the Plaintiff’s Solicitors to the Defendant’s solicitors dated 11 January 2016.

37.  In the same letter, the Plaintiff set out P’s 3^rd Offer.  This offer was made after the joint inspection and examination carried out in October 2015.  The Defendant submitted that the P’s 3^rd Offer was not a valid sanctioned offer as it includes a term as to the costs of the action and it failed to stipulate the circumstances enabling acceptance of the offer after the expiry of 28 days. I find that P’s 3^rd Offer is not a sanctioned offer under Order 22.  As such, it is not just and appropriate to order indemnity costs against the Defendant.

38.  As I have found that D’s 1^st to 5^th Offers are not sanctioned offers pursuant to Order 22, I proceed to consider D’s 1^st to 5^th Offers pursuant to Order 62 rule 5 in the Court’s exercise of discretion on costs.  As set out in the table above, D’s 2^nd to D’s 5^th Offers were open for acceptance for 7, 2, 5 and 3 days respectively.  I do not consider the short time frame to be reasonable.  Such a short time frame does not facilitate and is not conducive to a settlement of the proceedings.

39.  Notwithstanding the fact that the Joint Expert Report dated 22 January 2016 concluded that the source of water seepage at the 1/F Property comes from the 2/F Property, the Defendant did not admit liability until 16 March 2016 in its Timetabling Questionnaire.

40.  I do not accept the Defendant’s submission that the Plaintiff was acting unreasonably and holding up the settlement by raising minor and insignificant issues such as the time by which repairs had to be completed and the standard of the rectification works.  I do not find any merit in the Defendant’s criticisms against the Plaintiff’s conduct.

Conclusion

41.  There is no reason to justify a departure from the general rule that costs should follow the event in the present case.  I therefore order that except otherwise provided by previous order(s), costs of this action from 10 April 2015 and thereafter to be to the Plaintiff, to be taxed if not agreed, with certificate for counsel.  The Plaintiff’s own costs to be taxed in accordance with Legal Aid Regulations.