XCHRX UNISTRESS BUILDING CONSTRUCTION LTD. v. HUMPHREYS ESTATE (FORRESTDALE) LTD.

1991 No. MP 3268 & 3311

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. When these parties agreed to arbitrate any disputes which might arise under their construction contract, little did they expect that they would be appearing before this Court on no less than 4 separate occasions.

2. On 30th May 1991, I was asked to consider whether the Court had jurisdiction under s.23A of the Arbitration Ordinance to determine a preliminary question of law which had arisen during the course of the reference relating to further and better particulars. I delivered a full judgment on this topic.

3. On 16th March 1992, I delivered a full judgment on the issue as to whether the plaintiffs should be allowed to take out of Court the sum of $3.3m paid into Court after the commencement of the substantive hearing (in fact during the first day). This application was opposed and was met by an application by the defendants to reduce the payment in to $2.7m odd. The issue was whether the risks of the litigation had substantially altered since the payment into Court. I gave the plaintiffs leave to take the payment out of Court and I could have been forgiven for thinking that that was the end of this matter. Not so, as will become apparent shortly.

4. Mr. John Scott, who appeared for the defendants throughout, placed before me a helpful written argument at the hearing which led to the judgment on 16th March 1992. It is necessary for me to quote the last paragraph of this argument which has led to all the subsequent difficulties. It read as follows;

"21. COST OF THE ARBITRATION

By RSC Or. 73 r. 14(3) the Court on the hearing of an application to take money out of Court after the hearing has begun has, rather surprisingly, to go and deal with "the whole of the costs of the Arbitration". In the event that Unistress succeed in their applications Humphreys submit that the consent (correct) approach to costs of the Arbitration is as follows:

"In so far as costs have not already been dealt with by previous arbitration directions the costs of the Claimant's claim in the Arbitration be to the Claimant up to close of business on 22nd October 1991. costs of the counterclaim and the costs of the claim after 22nd October 1991 be to the Respondent."

The costs of the counterclaim must in any event be to the Respondent (RSC Or. 62 r. 3(8)) since the payment-in took account of the counterclaim."

0.62 r.3(8) of the RSC (which differs from the latest English equivalent - 0.62 r.5(6) provides as follow;

"Where a plaintiff accepts money paid into Court by a defendant who counterclaimed against him, then, if the notice of payment given by that defendant stated that he had taken into account and satisfied the cause of action or, as the case may be, all the causes of action in respect of which he counterclaimed, that defendant shall, unless the Court otherwise directs, be entitled to his costs of the counterclaim incurred to the time of receipt of the notice of acceptance by the plaintiff of the money paid into Court." [emphasis added]

5. At the end of the argument on 21st February 1992, Mr. Scott submitted that if I were against him and were to give the plaintiffs permission to take out the $3.3m in Court, I should make the costs order as set out in para. 21 of his skeleton. Mr. Graham for the plaintiffs agreed to this course.

6. In due course, the following order relating to costs was drawn up and has been perfected;

"AND FURTHER as regards the costs of the arbitration proceedings and interest accrued on the sum paid into Court it is by consent ordered that: -

1. Insofar as costs have not already been dealt with by previous arbitrator's directions the costs of the claimant's claim in the arbitration be to the Plaintiff up to close of business on 22nd October 1991;

2. Costs of the counterclaim and costs of the claim after 22nd October 1991 be to the Defendant; and

3. Any interest accrued on the sum in court be paid out to the Defendant's solicitors."

7. It will be readily apparent what is in dispute now. Mr. Graham says that the order is clear and it means that his clients only have to pay the costs of the counterclaim after 22nd October 1991. Mr. Scott says that it was clearly intended by him to mean that his clients should have all the costs of the counterclaim and the costs of the counterclaim after 22nd October 1991.

8. By summons dated 12th May 1992, the defendants sought the following order;

"1. The costs of the counterclaim awarded to the defendant pursuant to the order of Mr. Justice Kaplan dated 16th March 1992 be more fully expressed as follows:-

(a) "Costs of the counterclaim from 12th October 1990 up to and including 30th October 1991 be to the defendant" or;

(b) Such other wording as this Hon. Court deems appropriate."

9. This summons was taken out under 0.20 r.11 - The Slip Rule.

10. This summons came before me on 18th June 1992 and I heard both Mr. Graham and Mr. Scott and disagreed with both their submissions.

11. Because Mr. Graham now submits that I am functus officio and cannot deal with the defendants' restored summons, I feel I should set out in full Mr. Scott's note of what I said on that occasion. [I had not approved this note in advance]

"My understanding of the problem is that it is normal practice that the Respondent would have all of the costs of the claim and the counterclaim after 22nd October 1991. [This is clearly incorrect. If I said this I meant all the costs of the counterclaim and of the claim after 22nd October 1991.]

It is argued that as the Order is now drafted the Order limits the costs of the counterclaim to the period after 22nd October 1991. I have no doubt that was not what Mr. Scott intended. He says his approach is reinforced by the general practice and the rules and the sentence in Or.62 r.3(8). That may be right but Or.62 r.3(8) is subject to the Court making a different order. At the hearing on 16th March 1992 I was not addressed on this point.

Mr. Graham says that this application is not under the slip rule because Or.20 r.11 does not allow a Defendant to take an argument over the temporal limitation. His clients, he says, will have to bear whole of the costs of the counterclaim if I make the Order sought by the Defendant on the Summons.

I do not think either the position of the Plaintiff or the Defendant is right. I am not prepared to change the present Order without an opportunity to both sides to be heard. I do not agree that there is a binding agreement which cannot be changed because it is clear and it was my understanding that the normal Order was being agreed by the parties since the payment-in took account of the counterclaim.

In my view the only fair and practicable way is to accede to Mr. Scott's submission that I have not dealt with the costs of the counterclaim prior to the 22nd October 1991. Under Or.72 r.14(3) I have to deal with the whole costs of the arbitration. My Order as drafted only deals with the costs of the counterclaim for the period after the 22nd October 1991.

Since the costs of the counterclaim are a very significant feature, I give leave to the Plaintiff to restore the Summons so that I can hear full argument of the costs of the counterclaim prior to 22nd October 1991. I accept there are extra costs involved. I give leave to restore the original Originating Summons and hear the parties orally or by written submission."

12. That Order was not appealed by the plaintiffs.

13. As I said in that judgment, I am quite satisfied that Mr. Scott intended to incorporate in his proposed Order for costs the effect of 0.62 r.3(8).

14. I am also satisfied that when I set out in my judgment dated 16th March 1992, the agreed Order for costs (which came directly from Mr. Scott's skeleton) I was under the impression that I was giving effect to 0.62 r.3(8) which I distinctly recollect looking up at the time.

15. I accept that on reflection the wording used is unfortunate as it appears to limit the costs of the counterclaim to the period after 22nd October 1991.

16. The Order that I made on the 18th June was as follows:

1. Plaintiffs' costs of today;

2. Liberty to restore plaintiffs' summons for argument concerning costs of the counterclaim. Half day reserved, 9.30 a.m. start;

3. Leave to plaintiff, if so advised, to file any evidence within 14 days;

4. Defendant to answer any evidence filed by plaintiff 14 days thereafter;

5. Leave to plaintiff to apply within 7 days.

17. That Order not having been appealed I do not see how it is now open to Mr. Graham to contend that I am functus officio. I made it clear in my judgment that I considered that the costs order in relation to the counterclaim only dealt with the period after 22nd October 1991 and that as the Order was drafted I had not dealt with the costs of the counterclaim before that date. I had received no argument to the effect that I should deprive the defendants of the usual order for costs on their counterclaim but I was not prepared to deprive the plaintiffs of an opportunity of arguing for what I would term an unusual order, in other words, to attempt to persuade me to "otherwise order" in the terms of 0.62 r.3(8).

18. In the light of the above I do not feel it necessary to deal with the cases cited by Mr. Graham in support of his submission that I am functus officio and cannot deal with the question of the costs of the counterclaim prior to 22nd October 1991. I will only add this in relation to the cases which he cited some of them referred to the intention of the Court when making the Order. I have no doubt that whatever the precise words used I was not intending to deprive the defendants of the costs of the counterclaim to which, all other things being equal, they would have been entitled.

19. It is also necessary to refer to 0.73 r.14(3) which deals specifically with payments into Court in pending arbitration. This rule provides;

"(3) Where after the hearing of the arbitration proceedings has begun a claimant party accepts any money paid into court and all further proceedings in the arbitration proceedings or in respect of the matter in dispute or matters in dispute, as the case may be, to which the acceptance relates are stayed by virtue of rule 13(4), then, notwithstanding anything in paragraph (2), the money shall not be paid out except in pursuance of an order of the Court, and the order shall deal with the whole costs of the arbitration proceedings or with the costs relating to the matter in dispute or matters in dispute as the case may be, to which the arbitration proceedings relate."

20. It is quite clear that I have not dealt with "the whole costs of the arbitration proceedings" because the plaintiffs have never addressed me to the effect that I should otherwise order i.e. that I should make an unusual order in relation to the costs of the counterclaim.

21. I reject Mr. Graham's submission that I have dealt with these costs sub silentio. I will only add this. Mr. Graham quite properly approached his submission that I was functus officio with some diffidence in the light of the short judgment that I delivered on 18th June 1992. In my judgment, he was correct to be diffident.

Should I make an unusual order?

22. In Vianini Lavori v. The Hong Kong Housing Authority [1992] 2 HKLR 131, I had cause to consider the provisions for payment into Court in a pending arbitration. On p.141 under the heading "The unusual order" I made reference to the unreported decision of the English Court of Appeal in Glenlion Construction Ltd. v. Beaverfoam (Moreton) Limited (G No. 370 of 1980 - unreported 3rd November 1983). This was an appeal from a decision of His Honour Judge Lewis Hawser Q.C. who had made an order in the following terms;

"...that the sum of ￡ 21,250 in Court be paid out to the plaintiff's solicitors. And do make no order as to the costs of the action save that the parties are to have any cost awarded to them on any interlocutory application."

23. At page 142 in Vianini I dealt with the facts of the case and set out the comments of Stephenson L.J. who gave the leading judgment upholding His Hon. Judge Hawser Q.C..

"It appears that this was one of those cases where the plaintiff started off by claiming ?114,000 and finally agreed to settle for considerably less, and there were difficulties in getting particulars out of the plaintiffs. It is also to be noted that His Honour Judge Hawser had been in charge of the interlocutory stages of the case and was thus fully aware how the case was being prepared by both parties. Stephenson, L.J. (with whom Lord Justices Griffiths and Purchas agreed) dealt with this matter in some detail and referred to the provisions of O.22 which are very similar to our 0.73. The learned Lord Justice also referred to O.62, r.10(2) to which I have referred above. In answer to the suggestion of counsel that the court had no jurisdiction to do other than let the plaintiff have his costs and have them taxed, the learned Lord Justice put forward certain absurdities. He pointed out that there might be a case where, say, ￡ 1m is claimed by a plaintiff who settles finally for ￡ 1,000. Is it to be said that the court has no power to deprive the plaintiff of the costs of the action up to payment in?

The learned Lord Justice summarised his view of the matters as follows:

"But this, as I shall endeavour to indicate later, was an exceptional case and treated as an exceptional case by the judge; it was an order, and the order which he made, and which should only be made, in an exceptional case. Secondly, it was a case in which the plaintiffs from the very early stage had been put on notice by a warning from the defendants that they were going to ask the court to make the order which the judge in fact made. They said from very early days that they were prepared to pay the reasonable costs of the work which had actually been done by the plaintiffs, though on their, the defendants', basis of calculation, and if that was not accepted they would quantify that claim - that is why they wanted particulars - and pay the money into court, and do what they successfully did before Judge Hawser. I would regard it as a wrong exercise of the judge's discretion to make such an order as was made in this case unless there had been a clear warning to the plaintiffs by the defendants that that was their intention - that it was their intention to claim such an order. I agree with what the learned judge said at p.8 of the transcript at letter G that the present situation very seldom arises in practice. I would think the cases in which the plaintiffs have so conducted the action as to disentitle themselves to costs on a proper exercise of discretion would not be many, and the cases where they have not only done that, but have been warned by the defendants that they would be at risk of getting no costs if they did accept a payment into court, would make those cases even fewer."

It is of course true that Glenlion deals with payment into court in a court action and not in an arbitration. However, the principle stated must be equally applicable and that is that it would be a most unusual case for a claimant accepting money paid in not to have his costs up to that date. However, he may be deprived of those costs if his behaviour justifies such a course and if he had been warned that such an application would be made. Transposing that principle to the situation which exists in this case, it seems to me obvious from a practical point of view that the arbitrator is the only person who can decide whether Vianini have in any way misconducted themselves so as to justify an unusual order and he will be able to decide from the correspondence which he has already read and the hearings which he has already conducted, whether or not a warning shot has been given to Vianini. Again I repeat that would be intolerable in the extreme for a judge to have to decide these issues in this sort case without having previously been seized of the case. In my judgment Mr. Graham will have to consider all questions relating to costs including the Authority's application for unusual order which they tell me they wish to make."

24. I agree with the Court of Appeal's decision and propose to follow it. Therefore the Court should only consider granting this unusual order if it is satisfied that a warning had been given to the defendants that such an order would be sought. I accept that in Glenlion it was a plaintiff who accepted a payment into Court who was being deprived of his costs. In the present case, it is being asserted that a defendant whose payment in had been accepted where the payment in took into account the counterclaim should be deprived of his costs of the counterclaim. However, it appears to me that this is a distinction without a difference and that the principles of Glenlion are just as applicable to the facts of this case as they were in that case.

25. It is common ground that no such warning had been given and the first time that this matter was raised was on 18th June 1992 when Mr. Graham complained that he had been given no opportunity to argue for such an order because he had assumed that the original order awarded to the defendants the costs of the counterclaim only after 22nd October 1992.

26. The failure to give such a warning leads me to conclude that the defendants are entitled to the usual order. I well appreciate that I have a general discretion but I must take into account the practice of the Court built up over many years of experience. It is interesting to note that by an amending rule in 1991, the words "unless the Court otherwise directs" have been omitted from the equivalent English rule. I know not for certain but it may well be that this was done because it is so difficult for a Court to otherwise order without going into details of the conduct of the case. It seems an unnecessary burden when the parties have come to terms on the claim and the counterclaim. It also seems to me important that there should be a well-established practice in relation to costs where the money paid in is accepted and where it is paid in consideration also of a counterclaim. Legal advisers must be able to tell their clients what are the costs consequences of a payment in and its acceptance. It would be contrary to the whole spirit of the payment into Court provisions to encourage long and detailed arguments about costs which raise detailed issues as to the conduct by one party or the other in relation to the litigation or arbitration. I am not saying that there are not exceptional cases where this may have to be done, but in the vast majority of cases, the standard approach must be applied.

27. Having decided that I should not exercise my discretion to otherwise direct because no warning had been given, it is strictly not necessary for me to go into whether or not I would have exercised my discretion if a warning had been given or was not, as a matter of law or practice, required. However, lest this litigation refuses to end and this matter should go further I propose briefly to state my reasons why I would not, in any event, have otherwise ordered.

Should I make an unusual order?

28. Mr. Graham relied on 4 points.

1. Ouantum

29. This argument was based on the proposition that the defendant recovered nothing on the counterclaim. I was never able to follow this argument. The claim was originally for about $9m but this was reduced to about $7m on the first day of the arbitration. The counterclaim was said to be pleaded at $10m but it is clear that some double accounting was included. At the end of the day the plaintiff accepted $3.3m and it is quite impossible for me to speculate on the thought processes of either party. As the plaintiff's solicitor stated in an affirmation the acceptance was based on a commercial settlement of the dispute and I do not propose to get involved in playing around with the figures so as to attempt to arrive at the conclusion that the defendant valued his counterclaim at zero. In my judgment this is unarguable and except in the most exceptional case, which this is not, should a court be asked to consider such arguments on this sort of application. I am not satisfied that the plaintiff has got anywhere near to establishing that the counterclaim was abusive or vexatious.

2. The Scott Schedule

30. It is suggested that this was served late. It was a little late but in my judgment it was served in sufficient time before the hearing and I note that no application for an adjournment was made. It seems clear to me that this Schedule followed the format of an earlier Schedule and I do not believe the plaintiff was taken by surprise. I am not impressed by the argument based on the number of items in the Schedule as it was obviously based on an earlier Schedule but this one had to be more itemised and less generic to enable the arbitrator to rule on each item.

3. Rental claim

31. It is suggested that the claim for loss of rental was inflated but as this argument depends on unresolved issues of fact I do not propose to get involved in them.

4. Late discovery

32. Late discovery is an unfortunate fact of life in many cases but particularly in construction cases. Whatever the rights or wrongs of this issue no application for an adjournment was made by the plaintiff and I agree with Mr. Scott that the court should give consideration to such arguments only if the effect of the late discovery was fundamentally to impair a party's ability to comprehend the issues in the arbitration. I am not satisfied that the plaintiff suffered any prejudice let alone sufficient prejudice to lead me to make a most unusual order in relation to costs.

33. In conclusion, therefore, I am not satisfied that the plaintiff has got any where near to establishing that this case is so exceptional that an order other than the usual order should be made in relation to the costs of the counterclaim. This case is in no way similar to the Glenlion case I should make it clear that the plaintiff was only seeking to avoid paying the defendant's costs of the counterclaim and was not seeking an order that the defendant do pay the plaintiff's costs of the counterclaim. I also appreciate that the plaintiff is concerned at the likely costs of the counterclaim in relation to his claim and the costs of the claim. However I am sure that the taxing Master can be relied upon to sort out all matters of quantum and the disputes which will inevitably arise in this taxation.

34. I therefore propose to make an order that the defendant do have the costs of the counterclaim together with the costs of the claim after 22nd October 1991. In the light of the history of this matter the only fair order as to costs of this application is that there be no order as to costs and that is the costs order nisi that I make.