THE NATIONAL COMMERCIAL BANK LTD. v. KANISHI (FAR EAST) LTD. & OTHERS

HCMP5045/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.5045 OF 2000

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REASONS  FOR  DECISION   ON  COSTS

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The application

1. On 2 April 2001, the plaintiff obtained a charging order nisi on 25 shares held in the name of the 1st defendant in a private company, Main World Development Limited. This charging order followed an order against the 1st defendant for the payment of certain sums to the plaintiff.

2. The claimant sought to set aside the charging order nisi on the return date of the notice to show cause. On 11 September 2001, Master De Souza set aside the charging order nisi with costs. The plaintiff appealed and on 18 December 2001, in a judgment handed down on that day, I allowed the appeal and made absolute the charging order nisi.

3. I also made an order nisi as to costs, namely, that the claimant was to bear the plaintiff's costs, both before the Master and on appeal, such costs to be taxed if not agreed. By a letter dated 31 December 2001 from the claimant's solicitors to the plaintiff's solicitors, however, notice was given of the claimant's intention to ask for a variation of the costs order nisi.

4. After hearing argument on 30 January 2002, I ordered that the costs order nisi just referred to, be made absolute and that the costs of the hearing be to the plaintiff to be paid by the claimant, such costs to be taxed if not agreed.

5. I now give my reasons.

The issue

6. The claimant submits that the usual order for costs (i.e. that they follow the event) should not be made in the present case. Two alternative submissions are made :

(1) The claimant's main argument was that since an offer had been made in correspondence to the plaintiff substantially in terms of the order eventually made by this court, which offer had been rejected by the plaintiff and unreasonably so, the plaintiff should be deprived of its costs. [The 1st Ground]

(2) Alternatively, the order for costs made by Master De Souza should remain and no order for costs should be made for the appeal, on the basis that the plaintiff had succeeded before this court on a ground "substantially different" from the "primary" argument made before the learned master. [The 2nd Ground]

7. The 1st Ground involves a consideration of the law relating to the use of without prejudice correspondence, while the 2nd Ground requires an examination of the submissions made before Master De Souza.

The 1st Ground

8. Here, the claimant relies on a letter dated 6 September 2001 from its solicitors to the plaintiff's solicitors. It is marked "WITHOUT PREJUDICE" and states as follows :

" As you are aware, we act for Po Ding Co. Ltd. [the claimant]

Please refer to your client's application for an order to make absolute the above Charging Order Nisi in respect of the captioned shares.

Entirely without prejudice to our client's rights herein, our client would be prepared not to raise objection to your application on the condition that :-

1. such Order Absolute as the Court may see fit to make shall be subject to the charge of our client on the said 25 shares of Main World; and

2. no order as to costs.

We understood that you have not yet delivered Brief to Counsel. For the sake of saving costs and settlement, it would be appropriate if you should withhold delivering brief to your Counsel in the meanwhile.

May we hear from you at your earliest convenience."

9. As I have already stated, the offer contained in this letter was rejected by the plaintiff.

10. Two questions arise under this ground :

(1) In view of the letter being marked "WITHOUT PREJUDICE", is it admissible so that the court can take into account its contents for the purposes of an argument on costs?

(2) If the answer to (1) is "yes", did the plaintiff act reasonably in rejecting the offer contained therein?

11. As I briefly indicated to the parties at the conclusion of the hearing, my answers to the said two questions are : -

(1) No.

(2) In any event, yes.

12. The admissibility of without prejudice correspondence has been the subject of numerous decisions. The general rule is that without prejudice correspondence is inadmissible and cannot be used in proceedings before the court. One of the reasons for this general rule, perhaps the main one, is one of policy : parties should be encouraged to try to resolve their differences by compromise without fear that such attempts will somehow be used in the future against them (see Hong Kong Civil Procedure 2002 at para.24/5/41; Rush & Tompkins Ltd v. Greater London Council [1989] 1 AC 1280). There are usually three scenarios in which this fear becomes potentially relevant : -

(1) In terms of liability at the substantive hearing of the dispute when one party seeks to take advantage of admissions or concessions made in without prejudice correspondence or at without prejudice meetings.

(2) In terms of costs, when one party seeks to avoid what would otherwise be the order for costs, by relying on matters contained in without prejudice correspondence or made at without prejudice meetings : see Walker v. Wilsher (1889) 23 QBD 335; Computer Machinery Company Limited v. Drescher [1983] 1 WLR 1379, at 1382h-1383b.

(3) In interlocutory applications, such as applications for security for costs, where one party tries to point out weaknesses contained in the other side's case : see for example Simaan General Contracting Company v. Pilkington Glass [1987] 1 WLR 516.

13. I should also make it clear that the protection afforded by without prejudice correspondence is not just to the author of the relevant document but also extends to the recipient : see Walker v. Wilsher at 338; Cutts v. Head [1984] 1 Ch. 290. This is the position in the present case where it is the plaintiff who opposes the use of the without prejudice correspondence.

14. The general rule as stated above is, however, subject to well-recognised exceptions. In Unilever Plc. v. The Procter and Gamble Company [2000] 1 WRL 2436, at 2444-5, Robert Walker LJ took the opportunity to set out some of the more important exceptions to the general rule in which it would be permissible to refer to without prejudice correspondence.

15. One of these exceptions is relevant to the present case. This is the exception where an offer is made in correspondence to settle "without prejudice except as to costs".

16. Such an exception has been clearly recognised by practitioners ever since the case of Calderbank v. Calderbank [1976] Fam. 93. In that case, which involved the question of financial provision following a divorce, the question arose whether an offer contained in correspondence marked "without prejudice" could be referred to in the determination of costs. The English Court of Appeal held that it could not on the facts of the case, but commended an approach whereby a party could in certain circumstances bring offers made to the other side to settle to the attention of the court on the question of costs : see page 105-6.

17. The importance of Calderbank v. Calderbank lay in the practice which thereafter sprung up of sending out what are now commonly called "Calderbank letters". These are letters in which a party offers to settle or compromise the proceedings without prejudice save as to the question of costs. This procedure is now codified under the provisions of RHC Order 22 rule 14.

18. In Cutts v. Head, the English Court of Appeal confirmed the usage of Calderbank letters for all cases where the issue was more than a simple money claim (Calderbank letters are inappropriate and therefore ineffective in situations where a payment into court should be made : see the proviso in Order 22 rule 14; Cutts v. Head at 312F-G; The Hong Kong & Shanghai Hotels Ltd v. Choy Bing Wing [1999] 1 HKLRD 473, at 478C-479E).

19. From a practical point of view, Cutts v. Head confirmed the conditions necessary to be fulfilled before a letter could be regarded as a Calderbank letter or, it must follow, where the contents of a without prejudice offer are sought to be referred to for the purposes of costs. Where a party seeks to alert the court to the fact that an offer to settle had been made at an earlier stage of the proceedings in without prejudice correspondence or negotiations, it is imperative it is made clear that the correspondence or negotiations (as the case may be) were without prejudice save as to the question of costs. This can be achieved either by a simple statement that the correspondence or negotiations are without prejudice save as to costs or an express reservation is made of the fact that the contents of any offer may be brought to the attention of the court on the question of costs. I refer here to the continued reference in Cutts v. Head to the "formula" as I have referred to above : see pages 300G-H, 304C-D, 305H-306A, 312C, 315E-G, 316H.

20. The Court of Appeal in Cutts v. Head also analysed the underlying theoretical basis for this approach. Reference was made to Walker v. Wilsher, which had been argued in Cutts v. Head to be authority for an absolute bar to the use of without prejudice correspondence in relation to the question of costs. The Court of Appeal held, however, that there was no such absolute bar. Where a letter was marked without prejudice except as to the question of costs (in other words, a Calderbank letter), there was nothing to prevent such a letter being referred to when arguing costs. This was so whether one regarded the underlying theoretical basis as one of public policy (the desirability of encouraging settlements) or as one which resulted from the implied or tacit agreement between the parties that such correspondence could be used for the limited purpose of an argument on costs : see Cutts v. Head at 307B-308A, 309G-310E, 312B-C, 316A-G.

21. Mr Yin, in an elaborate argument, submitted that Walker v. Wilsher was wrongly decided. Reference was made to the circumstances and the statutory regime prevailing in 1889 (when that case was decided) and the statutory and procedural changes that had occurred in England since then. What Mr Yin was arguing ultimately was that Walker should not be regarded as an impediment to the making of "without prejudice" offers of settlement with a reservation that if the offer was not accepted, this fact could be brought to the attention of the court on the question of costs. With this I agree and Cutts v. Head is authority for that.

22. I also agree with Mr Yin's argument that it is a matter of construction as to whether in any given case, an offer has been made in Calderbank terms (if I may be permitted to use this term). What I disagree with, however, is the submission that as an aid to construction, it should somehow to be presumed that an offer to settle must necessarily be an offer on Calderbank terms even though not expressed as such and only expressed to be "without prejudice".

23. On the question of construction, I gratefully adopt the words of Oliver LJ in Cutts v. Head at 307H, where he said :

"If this is right, then is there any logical reason why, in appropriate circumstances, the conventional meaning of the phrase [i.e. without prejudice] should not be modified so long as this intended modification is clearly expressed and brought the attention of the recipient?" (emphasis added)

24. True it is, as Mr Yin submits, that there is no magic in the words "without prejudice" because their effect must be construed in the light of the relevant circumstances, but if a Calderbank letter is intended, it is important to get the message across. In other words, if a reservation is intended, it should be made clear. In Cutts v. Head, Fox LJ said at 316G-H :

"In the end, I think the question of what meaning is given to the words 'without prejudice' is a matter of interpretation which is capable of variation according to usage in the profession. It seems to me that, no issue of public policy being involved, it would be wrong to say that the words were given a meaning in 1889 which is immutable ever after, bearing in mind that the precise question with which we are concerned in this case did not arise in Walker v. Wilsher, 23 QBD 335, and the court did not deal with it. I think that the wide body of practice which undoubtedly exists must be treated as indicative that the meaning to be given to the words [i.e. without prejudice] is altered if the offer contains the reservation relating to the use of the offer in relation to costs."

25. Mr Yin said he was not making a submission adopting a more extreme position that in every case where letters were marked "without prejudice", then such letters could always be referred to on the question of costs. He was right not to do so as this would be contrary to principle, authority and also statute. The matters contained in "without prejudice" correspondence would, but for the without prejudice tag, almost always be useful to a court in determining questions of costs, just as they would assist in the disposal of questions of liability or other matters. This provides a great disincentive for parties to settle if the matters contained in such correspondence could freely be revealed to the court.

26. The need to have the requisite Calderbank formula has been recognised in many cases since Calderbank v. Calderbank : see Cutts v. Head and Rush & Tompkins Ltd v. Greater London Council.

27. With the above in mind, I finally approach the letter dated 6 September 2001. In my view, on a true construction thereof, it just cannot be said that what was meant was an offer on Calderbank terms. If this was what the claimant intended, it could simply and clearly have said that the claimant reserved the right to refer to the letter on the question of costs. It just did not express clearly enough to the recipient that it was a Calderbank letter. If anything, it would appear that this was not a Calderbank letter : note the words "Entirely without prejudice to our client's rights herein..." (emphasis added).

28. In the circumstances, I am of the view that the letter is inadmissible and although I have by necessity looked at it to determine the question of admissibility, I cannot take it into account for the purposes of exercising my discretion as to costs.

29. If I am, however, wrong on the question of admissibility so that I can take into account the offer contained in the letter, what effect should it have on the question of costs? In my view, it would not be sufficient to disturb my order nisi. Were it relevant, I would find that the plaintiff acted reasonably in rejecting the offer.

30. When the offer was made (on 6 September 2001) this was some five days before the substantive hearing of the setting aside application before Master De Souza. Whether or not counsel's brief by then had been delivered, it is reasonable to assume that not insignificant costs would already had been incurred by the plaintiff. The position of the claimant until that letter was, as is shown by the exchange of solicitors' correspondence, that it opposed the charging order nisi obtained by the plaintiff.

31. In the circumstances, one can appreciate why the plaintiff rejected an offer that there be no order as to costs. I would not describe the aspect of costs as "de minimis" (as Mr Yin appeared to suggest).

The 2nd Ground

32. This is an independent ground raised by the claimant. I have already earlier set out the basis for this ground.

33. In my judgment, it is clear from the material placed before me that the plaintiff argued before Master De Souza the same two grounds as those argued on appeal. Whether the emphasis in the arguments before the learned master was on one ground or the other, does not seem to me to be relevant, unless it is to be suggested that the plaintiff has somehow wasted the court's time or has in some other way misconducted itself. As to this, there was, rightly, no suggestion that this was what had occurred before Master De Souza.