MAYSUN ENGINEERING CO LTD v. INTERNATIONAL EDUCATION AND ACADEMIC EXCHANGES FOUNDATION CO LTD t/a HONG KONG INSTITUTE OF TECHNOLOGY

DCCJ 27/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 27 OF 2006

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BETWEEN

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DECISION

Background

1.  On 12 January 2011, this Court handed down judgment in favor of the Plaintiff ("MEC"), whereby the Defendant ("Institute") was ordered to pay to MEC the sum of $394,203.21 ("Judgment Sum") together with interest at judgment rate from the date of the Writ until payment ("Judgment").  The Institute's Counterclaim was dismissed.  An order nisi was made that the Institute should pay to MEC the costs of the main action and of the Counterclaim, to be taxed if not agreed.

2.  By its Summons dated 21 January 2011 ("Summons"), MEC applied under Order 22 rule 24 of the Rules of the District Court (“RDC”) for the Institute's payment of costs of the main action and of the Counterclaim on an indemnity basis after 2 June 2009, with interest on costs at 10% above judgment rate until payment.  The Summons was returnable on 26 January 2011.

3.  On 25 January 2011, MEC applied by a further summons to amend the Summons, seeking :

(1) the Institute's payment of indemnity costs from 2 June 2009, or 18 September 2009, or a date to be determined by the court, with interest on costs at a rate of not exceeding 10% above judgment rate until payment;

(2) the variation of the rate of interest on the Judgment Sum to a rate not exceeding 10% after 2 June 2009, or 18 September 2009, or a date to be determined by the court;

(3) costs of the entire main action and of the Counterclaim to be paid to MEC on an indemnity basis; and

(4) costs of the application by the Summons to be on an indemnity basis.

4.  The Summons to seek indemnity costs and interest on such indemnity costs is based on a sanctioned offer made by MEC to the Institute on 4 May 2009 ("1st Sanctioned Offer"), whereas the application to amend the Summons is based on a further sanctioned offer made by MEC on 20 August 2009 ("2nd Sanctioned Offer").

5.  At the hearing of the Summons on 26 January 2011, Counsel for the Institute applied for the hearing to be adjourned, to consider with the Institute whether evidence should be filed to resist the extended ambit of the application by virtue of the summons to amend. I took the view that when instructions were sought from the Institute on the original ambit of the Summons, such instructions would inevitably have covered events from the 1st Sanctioned Offer until the commencement of trial, including the making of the 2nd Sanctioned offer, but to avoid any injustice to the Institute, I granted a short adjournment to 28 January 2011.

6.  At the adjourned hearing on the 28 January 2011, Counsel for the Institute confirmed that no further evidence would be filed.

7.  It is not disputed that on 4 May 2009, MEC made the 1^st Sanctioned Offer to accept a sum of $550,000 in settlement of the entirety of its claim against the Institute. The sum proposed was stated to have taken into account the whole of the Institute's Counterclaim against MEC, and includes interest. On 20 August 2009, MEC made the 2^nd Sanctioned Offer, proposing to accept the lesser sum of $430,000 in settlement of its claim. The settlement sum was again stated to have taken into account the whole of the Institute's Counterclaim, and to include interest.

8.  The payment sought by MEC in the Writ and the Statement of Claim was $641,133.69. After trial, the Judgment Sum awarded to MEC was $394,203.21. The Judgment Sum, and interest thereon as at the date of the Judgment, was $578,838.07. By the time of the hearing on 28 January 2011, the Institute no longer disputes MEC's entitlement to enhanced interest and indemnity costs from 18 September 2009 on the basis of the 2nd Sanctioned Offer, and MEC no longer pursues any claim in reliance on the 1st Sanctioned Offer. The dispute relates to the rate of interest, the relevant period to be covered and whether the Institute should be liable for costs of the entire action including the Counterclaim on indemnity basis.

9.  The 1^st Sanctioned Offer was superseded by the 2^nd Sanctioned Offer, and since the Institute is held liable for more than the proposal contained in the 2^nd Sanctioned Offer, Order 22 rule 24 is triggered. Under rule 24 (2), the Court may order interest on the whole or part of any sum of money awarded to MEC at a rate not exceeding 10% above judgment rate. The Court may also order costs on an indemnity basis and interest on costs under rule 24 (3). Under Order 22 rule 24 (4), the Court shall make the orders in question unless it considers it unjust to do so.

Is it unjust to make the orders sought?

10.  In considering whether it would be unjust to make the orders referred to in Order 22 rule 24 (2) and (3), the Court is to take into account all the circumstances of the case including the terms of the sanctioned offer, the stage at which any sanctioned offer was made, the information available to the parties at the time when the sanctioned offer was made, and 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.

11.  With regard to the terms of the sanctioned offers, the 1st Sanctioned Offer was made on 4 May 2009. By then, leave had been granted by the Court for the parties to file and exchange expert reports. The 2nd Sanctioned Offer was made on 20 August 2009. By then, an order had been made by the Court on 4 June 2009, directing the parties' experts to meet on or before 2 July 2009, for the purpose of preparing a joint statement to indicate those parts of their evidence on which they were, and those parts on which they were not, in agreement. After some procrastination (details of which I had referred to in my earlier Decision on experts' reports handed down on 22 September 2010), the experts' meeting was finally held on 30 July 2009, leading to the filing of the Joint Experts’ Report on 19 August 2009. Areas of agreement and disagreement were defined, and this led MEC to propose the terms of settlement set out in the 2nd Sanctioned Offer.

12.  I have not been referred to any evidence that the Institute had asked to be provided with any information which they needed in order to be able to assess whether or not to accept either of the sanctioned offers, but were refused such information. As evidenced by the Joint Experts’ Report filed after the joint meeting of the experts, the Institute should have had adequate information by the time of the 2nd Sanctioned Offer as to the basis of the claims for payments made by MEC for the work carried out and materials left on the site, and to compare these claims with the amount proposed in the 2nd Sanctioned Offer.

13.  The 2nd Sanctioned Offer was made in good time before trial, with ample time given to the Institute to consider its terms, and reasonable opportunity to avoid incurring the costs of trial.

14.  In McPhilemy v. Times Newspapers Ltd. (No. 2)[2002]1 WLR 934, it was made very clear that an order under rule 36.21 of the English rules, which is equivalent to Order 22 rule 24, carries no implied disapproval of the defendant's conduct, nor any stigma. The orders are aimed to provide a means of achieving a fairer result for a plaintiff, to compensate the plaintiff for having to come to court to bring proceedings and for the incidental inconvenience, anxiety, distress and disruption to its business (Petrotrade Inc. v. Texaco Ltd. [2002] 1 WLR 947), which are not compensated by orders for costs in the proceedings, even when they are made on an indemnity basis. These principles were recognized and accepted by Lam J in Golden Eagle International (Group) Ltd. v. GR Investment Holdings Ltd. [2010] 3 HKLRD 273. Chadwick LJ explained in his judgment in McPhilemy that it is when it must be assumed that the anxiety, inconvenience and distress of proceedings have already been taken into account (for example by the jury in reaching their award of damages in defamation proceedings) that enhanced interest should not be awarded, to avoid any element of double compensation.

15.  After considering all the circumstances of the case, I can see nothing which makes it unjust to grant the orders for enhanced interest on the Judgment Sum, indemnity costs and interest on costs.

What should be the rate of enhanced interest?

16.  Under Order 22 rule 24 (2), the Court may order interest 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. This does no more than to indicate the order which can be made by the Court.

17.  When considering all the circumstances of this case, I should take account of not only the 2^nd Sanctioned Offer, but also the 1^st Sanctioned Offer, as the making and terms of the 1^st Sanctioned Offer are all within the context of the time of the making and the terms of the 2^nd Sanctioned Offer.  The conduct of the Institute in its defence of the claims made by MEC can also be taken into consideration when the Court decides whether to make an order under Order 24, the rate of interest to be awarded and the period to which the orders may relate. In this context, I bear in mind that up until the commencement of trial, the Institute had maintained its defence, as pleaded, that MEC was in breach of contract by failing to submit layout plans to the Fire Services Department ("FSD") for approval before the commencement of its fire services works, and that the Principal had deleted the Payment Terms from the Contract with MEC. This obviously had effect at the time when MEC made the sanctioned offers.

18.  Taking into account all the circumstances of this case to which I have referred above, I consider that the appropriate rate of the enhanced interest to be paid on the Judgment Sum should be 5% above judgment rate.

19.  The 1st Sanctioned Offer was superseded by the 2nd Sanctioned Offer, and in view of the concession made by MEC, enhanced interest on the Judgment Sum is to be paid from 18 September 2009, being the date after the latest date on which the Institute could have accepted the 2nd Sanctioned Offer.

Costs and interest on costs

20.  As I have found nothing to make it unjust to grant the orders under Order 22 rule 24, I will order indemnity costs from 18 September 2009, and enhanced interest on these costs to be paid by the Institute under rule 24 (3).

21.  The rationale for payment of interest on costs is explained by Chadwick LJ in McPhilemy (at para 23, page 944 of his Judgment):

"Nor do I see any injustice, in principle, in an order … for the payment of interest on the costs which are the subject of the order which I would make under paragraph (3)(a). The purpose for which the power to order interest on costs under that paragraph is conferred is, I think, plain. It is to redress, in a case to which rule 36.21 applies, the element of perceived unfairness which arises from the general rule that interest is not allowed on costs paid before judgment: see Hunt v. R M Douglas (Roofing) Ltd. [1990] 1AC 398, 415F. So, in the ordinary case, the successful claimant who has made payments to his own solicitor 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. He will get interest on his costs from the date of the order (whether he has actually paid them or not); but he will get nothing to compensate him for the cost of money (or the loss of use of money) which he has had to bear before trial in relation to payments which he has made on account of costs. An order under paragraph (3)(b) of rule 36.21 enables the court to achieve a fairer result in that respect."

22.  In McPhilemy, Chadwick LJ set the period for payment of interest on costs to run from the date upon which the work was done or liability for disbursements was incurred, at a rate which reflects the cost of money, 4% over base rate.

23.  In the case of KR v. Bryn Alyn Community (Holdings) Ltd [2003] PIQR P30, the Court pointed out that interest on costs is intended to compensate a litigant who is out of pocket, having funded litigation which he should not have had to fund, and that in cases where there is no evidence to demonstrate the actual dates when clients had put up funds from which interest will run, the Court may order interest to run from the date when the work was done or liability for disbursements was incurred, as in McPhilemy.

24.  There is no evidence in this case as to when MEC was out of pocket in having to make payment on account of costs, or in having to actually put up funds for payment of its legal costs. Nor is there evidence of when liability for disbursements such as Counsel’s fees was incurred. If I do not make an order for enhanced interest on costs under rule 24 (3), interest on costs will run from the date of the judgment (Caltex Oil Hong Kong v. Director of Lands and Buildings [1994] HKDCLR 31), at judgment rate. To reflect the spirit of Order 22 and the principle of compensation for the cost of money paid before trial, I will order interest on indemnity costs from 18 September 2009, at a lower rate of 2% above judgment rate.

Interest after Judgment

25.  As to whether it is open for the Court to award interest after the date of the Judgment until payment, s. 49 of the District Court Ordinance ("DCO") provides that the Court may include interest at the rate the Court thinks fit in the judgment for any debt or damages for the period between the date when the cause of action arose and the date of the judgment in respect of the judgment sum. Counsel for MEC has pointed out that under s. 50 (1) of the DCO, judgment debts carry interest from the date of the judgment until payment “at the rate the Court orders” (s. 50 (1) (a)), or “in the absence of an order of the Court, at the rate the Chief Justice determines by order” (s. 50 (1) (b)). This section expressly confers on the Court the power to fix the rate at which interest is payable on judgment debts, and the rate determined by the Chief Justice applies only in the absence of an order of the Court which so fixes the rate. The Hong Kong position is thus distinct from that in England, where the power to fix the rate of the interest payable on judgment debts is conferred on the Lord Chancellor under s. 17 of  the Judgments Act 1838 and s. 44 of the Administration of Justice Act 1970, which do not contain the equivalent of s.50 (1) (a) of DCO.  

26.  I therefore agree that the comments made by Chadwick LJ at paragraph 24 of his judgment in McPhilemy, where he concluded, on the basis of the provisions of the Judgments Act 1838 and the Administration of Justice Act 1970, that the English Court does not have power under paragraphs (2) and (3) (b) of Rule 36.21 of the English procedural rules to either vary the rate fixed by the Lord Chancellor as that at which interest is payable on a judgment debt, or to make an order for the payment of interest in respect of any period after judgment, do not apply. This Court does have the power to order the rate of interest to be paid on a debt for the period from the date when the cause of action arose until payment, and to vary the rate of interest payable after the date of judgment. An order for payment of costs is, of course, a judgment debt.

27.  I therefore order that interest on the Judgment Sum and on indemnity costs under Order 22 rule 24 (2) and (3) is to be paid from 18 September 2009 until payment.

Costs of the proceedings before 18 September 2009

28.  The order nisi for costs made under the Judgment was simply for the Institute to pay the costs of the main action and of the Counterclaim. MEC seeks to vary such order to provide for such costs to be paid on an indemnity basis.

29.  Under Order 62 rule 5 (1) of the RDC, the Court in exercising its discretion on costs shall take into account, amongst other things, the underlying objectives set out in Order 1A rule 1 of RDC, the conduct of the parties, and any admissible offer to settle made by a party which is drawn to the attention of the Court.   Under Order 62 rule 5 (2), the conduct of the parties includes whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue, the manner in which a party has pursued or defended his case or a particular allegation or issue, and conduct before as well as during the proceedings.

30.  It cannot be disputed that costs of all proceedings are in the unfettered discretion of the Court, and the Court of Final Appeal has emphasized in Town Planning Board v. Society for Protection of the Harbour Ltd. (No.2) (2004) 7 HKCFAR 114 that it is undesirable to define the circumstances in which orders for indemnity costs should be made.

31.  As can be seen from the Judgment, I rejected the evidence of the Principal on essential points relating to the Defence, including whether the Payment Terms form part of the Contract. I agree with the conclusion made by Counsel for MEC that the entire defence was founded on a lie. The trial could have been shortened and the conduct of the case could have been simplified, if not for the Institute's claim that the Payment Terms had been deleted.  The Institute had admitted that it did not pay the Institute’s 2^nd interim payment application in accordance with the Payment Terms but maintained that such terms did not form part of the Contract.  As a result, days had to be spent in Court on the examination and cross-examination of witnesses in relation to the negotiations on and inclusion of the Payment Terms.

32.  Further, on the basis of the evidence available to the Institute, it could have made clear to MEC and the Court at an earlier stage of the proceedings that it was no longer pursuing its pleaded defence of MEC’s alleged breach of contract by failing to obtain FSD approval before commencement of works. That would, again, have saved costs in the preparation of the evidence and for trial. As things transpired, it only became apparent in the course of trial that such defence was not pursued.

33.  The Institute's conduct in relation to the expert evidence is also an affront to the Court and is relevant to the question of the order for costs to be made in the proceedings. It is not just an issue of the expert's own conduct. The correspondence produced and considered by the Court when the Decision of 22 September 2010 was handed down (on the subject of whether leave should be granted to the Institute to produce its expert's supplemental report) shows that the Institute was unreasonable and disruptive at the stage when the experts were to meet and to finalize their joint report. The Institute delayed for at least 6 months when it was required by the Court to explain why it required 2 experts in this case. It insisted on its solicitor and counsel attending a meeting of the experts to be held pursuant to an order made by Master Lee on 4 June 2009. The Court had to make a further order on 10 July 2009, restricting the meeting to be attended by the experts only. The delay in the meeting of the experts necessarily delayed the definition of the areas of dispute and, in this case, the making of any meaningful sanctioned offer. On the facts, the 2nd Sanctioned Offer was made immediately after the joint meeting of the experts held on 30 July 2009 and the joint experts’ report of 19 August 2009.

34.  The Institute's conduct of its case had no doubt unnecessarily and unreasonably lengthened the proceedings and the trial, thereby unreasonably escalating costs. This cannot in any way be consistent with the underlying objectives of the Civil Justice Reform, with its emphases on reasonable proportionality, cost-effectiveness, expeditious dealing with cases, and the facilitation of settlement - which objectives the parties to any proceedings as well as their legal representatives are bound to further.

35.  Having considered all the circumstances, I conclude that this is an appropriate case for the Court to mark its strong disapproval of the Institute's conduct of litigation by awarding to MEC the costs of the entire action, including the Counterclaim, on an indemnity basis.

Conclusion

36.  I allow MEC's application, and will accordingly vary the orders I made on 12 January 2011 with regard to the rates of interest and costs. I will allow interest on the Judgment Sum from the date of the Writ at judgment rate, enhanced interest on the Judgment Sum at the rate of 5% above judgment rate from 18 September 2009 until payment, costs of the entire main action and the Counterclaim to be taxed on an indemnity basis, and interest on such costs at judgment rate, save that interest on indemnity costs from 18 September 2009 until payment shall be at 2% above judgment rate.

37.  I will make an order nisi, that the Institute is to pay to MEC the costs of the Summons, including the costs of the hearings on 26 and 28 January 2011, to be taxed if not agreed, with certificate for counsel, on indemnity basis.  I will not make any order on the summons to amend.