MEGA YIELD INTERNATIONAL HOLDINGS LTD v. FONFAIR CO LTD

HCA 948 of 2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATION REGION

COURT OF FIRST INSTANCE

ACTION NO. 948 OF 2009

--------------------

----------------------

D E C I S I O N

----------------------

Introduction

1. This case relates to a claim for breach of a tenancy agreement by the landlord (the defendant) in failing to give possession of the Lot that it had agreed to let to the plaintiff which was, as well known to the defendant, to be used for a concrete batching plant.  After a 16-day trial before me, on 5 March 2013, I handed down judgment for the plaintiff in the sum of $7,463,708.60 with interest (“the Judgment”).  I made an order nisi that the plaintiff have its costs of this action against the defendant, with a certificate for two counsel, although the plaintiff was represented by a leader with two junior counsel at the trial.

2. The defendant, on the other hand, appeared before me by a leader and a junior.

3. The defendant now applies to vary the costs order nisi to the extent that the plaintiff should have only 50% of the costs of the action and only the costs of leading counsel or only those of one junior counsel should be allowed.

4. By agreement of the parties, there is no hearing of arguments in respect of the defendant’s application.  Instead, the parties’ contentions are to be made in written submissions consecutively provided to the court.

5. The defendant’s submission is dated 5 April 2013 and in the name of Mr Harry Liu, junior counsel who appeared with Mr Chua Guan-Hock SC before me during the trial.  The plaintiff’s submission in opposition of the application is dated 19 April 2013 in the name of Mr Danny Choi (one of the plaintiff’s junior counsel at trial), which was followed by Mr Liu’s submission in reply dated 3 May 2013.

The law

6. I should start by citing the law from the principles enunciated by Nourse LJ in Re Elgindata (No. 2) [1992] 1 WLR 1207 at 1214A-C:

“… The principles are these. (i) Costs are in the discretion of the court. (ii) They should follow the event, except when it appears to the court that in the circumstances of the case some other order should be made. (iii) The general rule does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, but where that has caused a significant increase in the length or cost of the proceedings he may be deprived of the whole or a part of his costs. (iv) Where the successful party raises issues or makes allegations improperly or unreasonably, the court may not only deprive him of his costs but may order him to pay the whole or a part of the unsuccessful party’s costs. Of these principles … The third depends on well established practice. Moreover, the fourth implies that a successful party who neither improperly nor unreasonably raises issues or makes allegations on which he fails ought not to be ordered to pay any part of the unsuccessful party’s costs.”

[Emphasis added.]

The defendant’s application for variation clearly places reliance on principle (iii) because it asks the court to deprive the plaintiff of part of its costs of this action.  Principle (iv) is not engaged at all as there is no request to the court to order the plaintiff to pay any part of the defendant’s costs.

7. These principles have since been significantly developed, especially following the implementation of the Civil Justice Reform (“CJR”) in 2009.

8. The “following the event” in principle (ii) is no longer regarded as a general rule but “only operates to shift to the unsuccessful party the burden of showing why some different approach should be adopted on the facts of a particular case, since “a mechanistic adoption of the ‘following the event principle’ may result in parties incurring unnecessary costs in civil litigation” (Wong Kam Tong v Tin Shing Court, Yuen Long (IO) (No 2) [2012] 2 HKLRD 1125 at 1133-1135, paras 10-13 and Hung Fung Enterprises Holdings Ltd v Agricultural Bank of China [2012] 3 HKLRD 679 at 701, para 100), and “too robust an application of the ‘follow the event principle’ encourages litigants to increase the costs of litigation, since it discourages litigants from being selective as to the points they take” (AEI Rediffusion Mustic Ltd v Phonographic Performance Ltd [1999] 1 WLR 1057, at 1522-1523; see also Chan Ching Kit Katherine v Lam Suk Kei, HCMP 2239/2000 (8 October 2002, unreported) paras 10-12; Chan Mei Yiu Paddy v Secretary for Justice, HCAL 16-19/2007, HCMP 1175/2007 (9 December 2010, unreported) para 5).

9. The emphasis of principle (iii) has also been shifted. It is less generally followed than it has been in the past and it is no longer necessary for a party to have acted unreasonably or improperly to be deprived of his costs of a particular issue on which he has failed (AEI, supra, at 1523-1524; Wong Kam Tong, supra, at 1133-1135, paras 10-13; Chan Ching Kit, Katherine, supra, at paras 10-12; Chan Mei Yiu Paddy, supra, at para 7; and Zhuhai International Container Terminal (Jiuzhou) Ltd v Lo Tong Hoi, CACV 181/2011 (12 July 2012, CA, unreported) at para 33, nor is it necessary to show that the plaintiff has deliberately wasted time and costs. In short, intent is irrelevant: Re Ricacorp Limited, CACV 3884/2001 (16 July 2002, unreported) at paras 23-24, upheld on appeal (2003) 6 HKCFAR 265. Even before the CJR, “where the issues as to which the petitioner was unsuccessful were substantive rather than peripheral, that alone would have justified depriving the petitioner of at least a proportion of his costs”: Re Ricacorp, supra at para 24.

10. “… where principle (3) [ie principle (iii) in Re Elgindata] refers to a significant increase in the length or costs of the proceedings, this does not mean that a precise quantum of costs over a particular threshold must be ascertained.  … the phrase simply requires the court to be satisfied that the increase is one that can be estimated as a more than trifling proportion of the total costs.  As for the question of isolation of those costs from the costs of a successful cause of action, I do not consider that it is necessary for the court to be able to quantify this to any precise extent.  It suffices if the court can give an estimate of the proportion of these costs”: Chan Lan v Shing Kei & Anor, HCA 1260/2006 (16 June 2008, unreported) at para 16.

11. There is no hard and fast rule as to how an “issue” is defined in this context.  It all depends on the circumstances of the case: Wong Kam Tong, supra, at 1136, para 16.  

12. A party may be deprived of part of his costs on the “failed issues” even if such costs overlap with those of the “succeeded issues”.  This may be the case where, for instance, the trial would not have gone to the length it had gone to, or costs would not have accumulated to the extent that they have accumulated, if the failed issues had not been raised: Zhuhai International, supra, at para 33.

13. Moreover, there have been amendments to the RHC upon the implementation of the CJR.  Under the RHC as now amended, O 62, r 5 provides:

“(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;

…

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

…

(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;

(2) For the purpose of paragraph (1)(e), the conduct of the parties include –

(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.”

[Emphasis added.]

14. RHC O 62, r 5(1)(aa) expressly refers to the underlying objectives set out in RHC O 1A, r 1(1), namely,

(a)  to increase the cost-effectiveness of any practice and procedure to be following in relation to proceedings before the Court;

(b)  to ensure that a case is dealt with as expeditiously as is reasonably practicable;

(c)  to promote a sense of reasonable proportion and procedural economy in the conduct of proceedings; and

(d)  to ensure fairness between the parties;

(e)  to facilitate the settlement of disputes; and

(f)  to ensure that the resources of the Court are distributed fairly.”

[Emphasis added.]

15. In Zhuhai International, supra, at para 33, Kwan JA gave the following admonition:

“By the amendments introduced to Order 62 rule 5, litigants should bear in mind the possible costs implications. There is incentive to conduct litigation in a responsible way and be selective as to the issues raised.”

16. Mr Danny Choi, for the plaintiff, emphasises that the effect of payment into court under O 62 r 5(1)(b) should be adhered to and not to be departed from lightly, which is, as the Hong Kong Civil Procedure 2013 puts it at para 22/5/2, “In the event that the plaintiff is awarded a sum greater than the payment in, the plaintiff will usually recover the costs of the whole proceedings unless there are special circumstances.”  I shall call this “the payment in rule”.  The factual background is that on 3 March 2010, the defendant served on the plaintiff a Notice of Sanctioned Payment of $5,905,500.  On the defendant’s application and by order of a Master dated 18 March 2011, the Sanctioned Payment was diminished to $3,767,080.  The plaintiff has achieved more than the amount paid in when I gave judgment for it in the sum of $7,463,708.60, and Mr Choi submits that the amount paid in could not fairly be described as a “near miss”. 

17. Mr Choi submits that the party who makes the payment in controls the level of the payment.  If a payment in is made, it ought to be realistic enough to create a real risk for the other party.  If the claimant recovers more than the amount paid in, he will be entitled to the whole of the costs of the action.  Any dilution of this practice would reduce the incentive to settle. 

18. It seems to me that although the consideration of the deprivation of the successful claimant’s costs under the authorities since Re Elgindata above cited (“the deprivation rule”) is a separate consideration, it does seem to dilute the normal payment in rule. Where the defendant has paid in a certain sum, which the plaintiff chooses to ignore, the amount recovered by the plaintiff in the action will normally under the payment in rule decide who is to get the costs of the action.  By reason of the knowledge of both of the parties of the amount paid in, both will fight the case with all out efforts with the possible effect of increasing the length and costs of the trial.  This is discouraged by the deprivation rule.  However, the payment in rule is to encourage settlement of an action even before it reaches trial.  When full effect is not given to the payment in rule by applying the deprivation rule, the offeror is given second bite at the cherry and it may discourage him from adopting the payment in avenue made available by O 22 of the RHC.  In my view, where the two rules are considered together, a fair balance has to be struck so as not to undermine the CJR principles.  Normally, in a case where a payment in has been made, effect has to be normally given to the payment in rule.  It is only in exceptional circumstances where the court is satisfied that certain distinct portions of costs are wasted that the deprivation rule should be applied.  When considering if to apply the deprivation rule, the conduct of both of the parties and all the relevant circumstances must be considered.  This is important.  One does not only consider whether the plaintiff has wasted costs by raising discrete points on which he is unsuccessful for depriving him of a certain portion of costs, one has also to consider whether the defendant has wasted costs by raising unnecessary or unreasonable defences that have failed.  Otherwise the deprivation rule would be applied unfairly against the successful litigant alone.  This is entirely consistent with and supported by O 62, r 5(1)(e) of the RHC which provides that the court shall take into account “the conduct of all the parties”, including “the conduct” as explained in r 5(2).

Discussion of the parties’ submissions

19. Mr Liu submits that the plaintiff’s claim has transmogrified significantly over the four years since the writ was issued on 31 March 2009 until the plaintiff’s oral closing submissions on 8 January 2013.  However, I think the plaintiff’s closing submissions should properly be counted as produced on 21 December 2012 when its written closing was submitted, not as late as 8 January 2013 the last date of the oral reply of the plaintiff’s counsel.  The transmutation was from $200 million in the statement of claim dated 31 March 2009, to $90 million in the Amended Statement of Claim dated 8 October 2010, as clarified to be $87 million by way of exhibit P3 produced in the middle of the trial on 3 December 2012 and in the plaintiff’s closing submissions on 21 December 2012 to $42,014,678 or alternatively $12,912,611.  Eventually, in the Judgment, I totally disallowed $39 million as the difference in rental value between the Lot and the Aberdeen site and another $1.036 million (the costs in procuring the Ping Che site), while I only partially allowed $1,517,706.60 out of a claim of $5,671,371 for operational overheads.  Thus the total damages awarded by me was $7,463,708.60 out of the claim of $42,014,678 or out of the alternative claim of $12,912,611.  This demonstrates that the original claim was grossly exaggerated.

20. Mr Liu summarises his ground to support a reduction of the costs order as follows:

(a)   The plaintiff was unsuccessful on 8 discrete issues, which were substantial rather than peripheral issues.

(b)   The plaintiff’s pursuit of these issues caused “a significant increase in the length or costs of the proceedings”, in the sense that the litigation of these issues has accounted for “more than trifling proportion of the total costs”.

(c)   In all the circumstances, the plaintiff ought to be regarded as having grossly exaggerated its claim within the meaning of RHC, O 62, r 5(2)(c).

(d)   Overall, the plaintiff’s conduct of the action was unreasonable.

(e)   The plaintiff’s costs incurred for engagement of more than one counsel for the trial is disproportionate to the extra amount ($3,696,628.60) that it recovered on top of the defendant’s sanctioned payment of $3,767,080.00 made in March 2010.

21. Mr Liu submits that the although the issues on liability and mitigation of damage were found in favour of the plaintiff, the plaintiff squarely failed in eight distinct “sub-issues” under mitigation, namely, (i) whether the Aberdeen site was a proper substitute for the Lot; (ii) whether the plaintiff’s acquisition of the Aberdeen site, involving such a large expenditure, could reasonably be regarded as a responsibility that the defendant assumed when the contract (the Lease) was entered into by the parties; (iii) whether the difference between the rent for the Lot and that for the Aberdeen site was a proper measure of the damages for the plaintiff’s “expectation interest” when it was the plaintiff’s own case that both were market rental; (iv) whether there was causation between the defendant’s breach and the plaintiff’s acquisition of the Aberdeen site, especially on the point of two sites being required for starting to run a concrete batching business; (v) whether the Lot and the Aberdeen site were comparable; (vi) whether there was any causal link between the defendant’s breach and the plaintiff’s attempt to acquire the Ping Che site; (vii) whether the operational overheads were proper “reliance loss”; and (viii) whether the plant storage costs were claimable by the plaintiff as “incidental loss”.  Mr Liu’s submission is that a lot of time had been spent on these eight issues and 50% reduction in costs is more than justified on the materials before the court.

22. The two points made by Mr Liu that I consider that may be of substance are that the claim was grossly exaggerated from the start and the failure of the plaintiff in the 8 sub-issues.  I disagree with Mr Liu on all the other points he raises.  It is unreasonable to raise the unattractive argument that the plaintiff’s costs incurred for engaging more than one counsel for the trial is disproportionate to the extra amount of $3,696,628.60 that it recovered on top of the defendant’s sanctioned payment of $3,767,080 made in March 2010.  The absurdity of the argument can be immediately recognised if the payment in was just a dollar less than the judgment sum.  Counsel were retained for the conduct of the proceedings and their services cannot be measured against the amount of the judgment that exceeds the sanctioned payment.  It would have been more realistic to say that more than one counsel were retained to beat the sanctioned payment.  Whether the plaintiff’s conduct of the action was unreasonable should not only be measured by its failure on the 8 sub-issues identified by Mr Liu; rather all the circumstances of how the action and defences were run should be considered.

23. I accept as a matter of fact that the plaintiff’s claim was grossly exaggerated from the start.  However, when it was presented at trial to me by Mr Daniel Fung SC, it was drastically reduced in substance to $12 million since the claim for $42 million was in actual fact not pursued in earnest.  If there was anything serious about the $42 million claim, it was based on the Aberdeen site being obtained as a substitute and comparable site for the Lot.  That was the matter that involved most of the 8 sub-issues. To be precise, while sub-issues (vi), (vii) and (viii) were separate and discrete issues, sub-issues (i), (ii), (iii), (iv) and (v) were intertwined or connected and they all related to the claimed damages based on the rental paid for the Aberdeen site.  The increase of the length of the trial and costs for the three separate sub-issues was very little in the 16-day trial, and one should not forget that I allowed the plaintiff a portion of the operational overheads.  The increase for the Aberdeen site issues was more substantial but was far below the extent of 50% as suggested by Mr Liu.  I would consider it fair and just if about 15% of the costs of the action were treated as attributable to these five issues relating to the Aberdeen site on which the plaintiff failed. Apart from these five issues on the Aberdeen site that had increased the length and costs of the action, the grossly exaggerated claim that had been regularised in the plaintiff’s closing submissions did not have any impact of substance on the duration and costs of the trial.  I do not think it proper, in all the circumstances of this case, to penalise the plaintiff for its originally exaggerated claim.

24. However, the time and costs that were contributed to and wasted by the defendant in trying to establish various defences, including that as to liability and mitigation, as well as regarding losses incurred by the plaintiff but paid for by subsidiary companies, especially the latter two issues, outweighed those incurred for all the eight sub-issues.  On top of that, Mr Leung’s way of giving evidence neither helped the court nor time and costs.  Mr Choi seeks to refer to the quality of Mr Leung’s evidence to support his contention that there is no substance in Mr Liu’s argument that the plaintiff’s conduct of the action was unreasonable.  My comments on Mr Leung in the Judgment were that

“5. … Mr Leung … tended to avoid answering questions straight, veered off from the question and tried not to answer it if not pressed.

6.   … In fact, when he was answering questions in chief, this ‘keenness to assist the Court with background details’ did not find much expression, but it became more and more manifest and acute during cross-examination and as it progressed.  My impression of him was that he was an evasive witness cleverly cloaked in attempting to provide details or to slightly misunderstand the question.  What was apparent was that he was at times trying to hide things from the Court. … I also find that Mr Leung made up evidence as he went along in cross-examination …”

25. Mr Liu, in reply, argues that I have not found Mr Leung to be a “dishonest” witness of “low moral character”, and that I have also found Mr Zen of the plaintiff being prompt to “adjust” his evidence to “suit a particular purpose important to the plaintiff”.  Putting the matter in proper perspective, namely, whether the conduct of the two witnesses had increased the length or cost of the trial, my view is that regardless of whether Mr Leung is dishonest, he obviously lengthened his stay in the witness box by introducing a lot of irrelevant details and attempting to sidetrack the cross-examiner and the court.  On the other hand, Mr Zen’s evidence, despite the occasional “adjustment”, did not have that effect.  I was thinking of penalising the defendant for the behaviour of Mr Leung in the box by a higher order of costs, but eventually taking into account of the plaintiff’s exaggerated claim and failed issues, I desisted. 

26. To support his contention that no more than one junior counsel alone should have been engaged, Mr Liu describes this case as involving the application of well established principles to the particular facts, and does not involve any novel point of law; at bottom this is a contractual dispute between landlord and tenant which, although cannot be described as simple, is nevertheless one that someone of the standing and with the experience of the plaintiff’s junior counsel is perfectly competent to handle alone.  He criticises the engagement of three counsel to fight for the plaintiff by saying that taking into account the defendant’s sanctioned payment of $3,767,080 and the ultimate judgment sum of $7,463,708.60, the plaintiff effectively engaged three counsel to fight for an extra $3,696,628.60.  Earlier on, I have already dismissed this argument.  Besides, this insufficient payment in, which is very far off the mark, is indicative of how difficult it was, even for the defendant with a leader and a competent counsel as Mr Liu, for them to make a fair and more accurate assessment, which betrays the argument that the case is merely a contractual dispute between landlord and tenant that cannot be described as simple, but where the word complicated is deliberately avoided.

27. There were a large number of bundles prepared by the parties, about 20 box files, and the legal issues entwined with the factual matrix were complicated though not novel.  Briefing leading counsel to appear with a junior counsel was fully justified.  With hindsight, the evasiveness of Mr Leung additionally justified the presence of leading counsel with experience and technique having to vigilantly tackle him, and as it turned out, with success.

28. The defendant could well have protected itself from any exorbitant or excessive claim as well as from the costs of pursuing such exorbitant claim by making an adequate sanctioned payment into court.  The defendant appears to be financially capable of paying a sum into court that can slightly exceed of the award I may make in favour of the plaintiff.  That is the protection offered by the RHC.  The present application is a second bite at the cherry, upon the failure to avail itself of the protection by way of the sanctioned payment.  Nothing prevents the defendant from doing so, subject of course to the court being satisfied as to its justification.  I am, however, not so satisfied. 

Conclusion

29. This application to vary the costs order nisi is therefore dismissed.  I order that the costs of this application be paid by the defendant to the plaintiff, to be taxed if not agreed.