HO KIN PONG AND ANOTHER v. TAM KOK HUNG AND ANOTHER

DCCJ 624/2010

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 624 OF 2010

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DECISION

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Background

1.  On 24 March 2011, this Court handed down judgment in favor of the Plaintiffs ("Judgment"), whereby the Defendants were ordered to pay to the Plaintiffs the sum of $346,677 ("Judgment Sum") with interest.  An order nisi was made that the Defendants should pay to the Plaintiffs the costs of the main action, with certificate for Counsel, to be taxed if not agreed.

2.  By its Summons dated 12 April 2011, the Plaintiffs apply under Order 22 rule 24 of the Rules of the District Court for the Defendants' payment of enhanced interest on the Judgment Sum at a rate not exceeding 10% above judgment rate, and costs of the action on an indemnity basis, together with enhanced interest on such costs at a rate not exceeding 10% above judgment rate, from 20 August 2010 until payment.

3.  The basis of the Plaintiffs' application is that on 23 July 2010, the Plaintiffs had offered to accept a sum of $342,900 (inclusive of interest) in settlement of their claim ("Sanctioned Offer"). The Plaintiffs claim that the amount awarded in their favor under the Judgment, plus interest, is higher than the sum comprising the Sanctioned Offer, and that they are therefore entitled to enhanced interest and costs for the period after the latest date on which the Defendants could have accepted the Sanctioned Offer, i.e. from 20 August 2010.

4.  Since the Defendants are held liable for more than the amount proposed in the Sanctioned Offer, Order 22 rule 24 is triggered, and under rule 24 (2), the Court may order interest on the whole or part of any sum of money awarded to the Plaintiffs 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).

5.  Order 22 rule 24 (4) provides that the Court shall make the orders in question unless it considers it unjust to do so.

Failure to comply with the form and content specified in O. 22 r. 5

6.  It was alleged by the Defendants in their affirmation filed in opposition to the Plaintiffs' application that the letter dated 23 July 2010 from the Plaintiffs' solicitors to the Defendants' solicitors comprising the Sanctioned Offer failed to comply with Order 22 rule 5, in that despite express reference being made to the letter being a sanctioned offer made pursuant to Order 22, it did not provide, as required under rule 5 (7), that after the expiry of 28 days from the date the Sanctioned Offer is made, the offeree may only accept the Sanctioned Offer if the parties agree on the liability for costs, or the Court grants leave to accept it. At the hearing, Counsel for the Defendants sensibly did not pursue this, accepting that it would be appropriate to waive any technical defects of the Sanctioned Offer, where the parties are legally advised and have not been misled in any way. Further, under Order 22 rule 2 (4), it is always open to the Plaintiffs to make an offer to settle in any way they choose, and if the offer is not made in accordance with the express provisions of Order 22, the Court may still order that the offer can have the consequences specified in Order 22.

Is it unjust to make the orders sought?

7.  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.

8.  The Defendants essentially rely on the fact that they became liable to the Plaintiffs in damages, as assessed by the Court under the Judgment, as a result of their inability to complete the sale of their premises ("Property") to the Defendants. Their inability to complete the sale resulted from their tenant ("Tenant")'s failure to duly deliver up vacant possession of the Property, and the Defendants have consequently issued third party proceedings against the Tenant for damages and indemnity of their liability to the Plaintiffs. The Defendants allege that as their claims against the Tenant are contested by the Tenant, the Defendants are under a duty to mitigate their loss, and the Defendants consider that it was prudent and necessary for them to submit the issue of the quantum of the Plaintiffs' loss and damage for assessment by the Court, to avoid any challenge by the Tenant in the third party proceedings.

9.  The Plaintiffs' Writ was issued in these proceedings on 22 February 2010. Shortly before the commencement of proceedings, the Plaintiffs had on 11 February 2010 served on the Defendants the expert report which they relied upon in these proceedings to support the valuation of the Property at $4,910,000. On 9 April 2010, the Defendants issued a Third Party Notice against the Tenant. On 27 April 2010, interlocutory judgment was entered in favor of the Plaintiffs and against the Defendants, by consent. On 22 July 2010, leave of the court was obtained for the Plaintiffs and the Defendants to adduce expert evidence on the valuation of the Property. On 23 July 2010, the Plaintiffs' Sanctioned Offer was served on the Defendants. On 23 August 2010, the Defendants filed and served their expert report, valuing the Property at $4,370,000 (which was equivalent to $4,378,405, using the same gross floor area of the Property as adopted by the Plaintiffs' expert).

10.  I do not agree that the mere fact of there being third party proceedings would justify a defendant not responding to a sanctioned offer made by a plaintiff, or insisting that damages should be assessed by the Court. There are a number of fallacies in such an argument.

11.  First, as Counsel for the Plaintiffs has also sought to highlight, the issue as to whether the Defendants can seek indemnity from the Tenant depends not on whether the Court has adjudicated on the issues between the Plaintiffs and the Defendants and on the amount payable by the Defendants to the Plaintiffs, but on whether the amount paid by the Defendants to the Plaintiffs, and sought to be recovered from the Tenant by way of indemnity, is reasonable. This is trite law. So long as the Defendants can show that the amount they paid to the Plaintiffs by way of settlement of the Plaintiffs' claim against them was, in all the circumstances, within the range of what was reasonable or, to use the words of Ramsey J in Siemens Building Technology FE Ltd. v. Supershield Ltd. [2009] 2 All ER (Comm) 900 at 918, "within the range of settlements which reasonable people in the position of the settling party might have made", the Tenant cannot, on good grounds, dispute the amount claimed by the Defendants.

12.  Further, it is equally open to the Tenant to claim that it was in fact unreasonable for the Defendants not to have accepted the Sanctioned Offer and not to have settled the Plaintiffs' claim for damages, but to incur the unnecessary costs of the trial for assessment, when the Plaintiffs' claim could have been reasonably settled. The existence of third party proceedings is therefore not the reason for insisting on trial.

13.  There are ways for the Defendants to safeguard their interests and position as against the third party Tenant. They could have obtained the appropriate and necessary directions under Order 16 rule 4, e.g. for determination of the Tenant's liability to the Defendants at the same time or immediately after the determination of the Defendants' liability as against the Plaintiffs, or to give leave to the Tenant to appear at the assessment to take such part as may be just or necessary. When the Sanctioned Offer was made, the Defendants could also have made a corresponding offer to the Tenant, to safeguard their own position. The Defendants chose not to take any of these steps.

14.  The Defendants also allege that they needed time and their own expert evidence before they could reasonably respond to the Sanctioned Offer. The Defendants claim that it was only on 22 July 2010 that the parties obtained leave from the Court to adduce expert evidence, and the Sanctioned Offer was made immediately the next day, on 23 July 2010. According to the Defendants, they should only be liable for enhanced payment of interest and for indemnity costs from the date of the joint expert report which was prepared on 10 November 2010, and filed on 17 November 2010.

15.  I do not agree that the Defendants did not have sufficient information to consider their position in relation to the Sanctioned Offer. When the Sanctioned Offer was made and received, the Plaintiffs had already served their valuation report on the Defendants, and that report set out the basis of and rationale for the valuation made by the Plaintiffs' expert, in the sum of $4,910,000, at a unit rate of $8,150 per square foot and using the saleable area of the Property of 603 square feet. If the Defendants wanted further information or details as to how the Sanctioned Offer of $342,900 was calculated, they could have asked the Plaintiffs, but there is no evidence that they had ever done so.

16.  In fact, the Plaintiffs' valuation report had been served on the Defendants since 11 February 2010, more than 5 months before the Sanctioned Offer, and there is no evidence of the Defendants having taken any action since then, either to seek information or clarification as to the valuation, or of the damages claimed by the Plaintiffs as particularized in the Statement of Claim.

17.  It was only on 23 August 2010 that the Defendants filed and served their own expert report on the valuation of the Property. There is a large disparity between the valuation made by the Plaintiffs' expert and the Defendants' expert, the latter expressing the view that the value of the Property had fallen below the contract price concluded between the Plaintiffs and the Defendants, such that the Plaintiffs have not sustained any damage.

18.  Notwithstanding the fact that the Defendants' expert only finalized his valuation report for filing and service on 23 August 2010, the Defendants had put the Property on the market for sale since July 2009 at the latest, had received the Plaintiffs' valuation report in February 2010, and had been served with the Writ and the Statement of Claim with details of the Plaintiffs' claim shortly thereafter. I consider that by 19 August 2010, which was the last day for the Defendants to accept the Sanctioned Offer without leave of the Court, the Defendants had adequate information available to them about the approximate value and market price of the Property at the relevant time of the scheduled completion in December 2009, and that in all likelihood, the Defendants would also have obtained from their expert by 19 August 2010 an indication of his valuation and his assessment of the range of the price at which comparable properties were sold at the material time.

19.  The expert reports relied upon by the parties were clear as to the bases used for the valuation, and the comparables used by the experts in arriving at their respective valuation. On the evidence, I do not consider that the parties had to wait for the joint meeting of the experts in order to understand the difference in the experts' approach, and the disparity in the figures arrived at.

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

What should be the rate of enhanced interest?

21.  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. Obviously, this does no more than to indicate the order which can be made by the Court.

22.  Order 22 rule 24 (5) provides that in considering whether it would be unjust to make the orders for payment of enhanced interest, costs and interest on costs, the Court shall take into account all the circumstances of the case, including the matters outlined in (5) (a) to (d). Hence, the conduct of the Defendants in their defence of the claims made can be taken into consideration when the Court decides whether to make an order under Order 22, the rate of interest to be awarded, and the period to which the orders may relate.

23.  The low valuation made by the Defendants' expert and relied upon by the Defendants in their defence is due to the fact that inappropriate comparables were used in the valuation of the Property, which produced an unreasonably low figure for the market value of the Property, which is inconsistent with the generally rising Hong Kong property market - a fact accepted by both experts. In my view, it should have been obvious to the Defendants that their expert's valuation was premised entirely on the wide use of smaller units within the Development (11 out of the 13 comparables used), and that there was a high risk of their valuation being found to give a distorted picture of the value of the Property.

24.  Considering all the circumstances of this case, including the terms of the Sanctioned Offer, the timing of the Sanctioned Offer which was over 5 months before trial, the fact that the Defendants never asked for any clarification or information relating to the Sanctioned Offer, the time by which the Defendants' own expert report was available, I consider that a fair rate of the enhanced interest to be paid by the Defendants should be 4% above judgment rate.

Period for payment of enhanced interest

25.  On the facts of this case, I will order enhanced interest on the judgment sum to the paid from 20 August 2010, being the date after the latest date on which the Defendants could have accepted the Sanctioned Offer.

Costs and interest on costs

26.  As I have found nothing to make it unjust to grant the orders under Order 22 rule 24, and bearing in mind the factors outlined in paragraphs 23 and 24 above, I will order indemnity costs from 20 August 2010, and enhanced interest on these costs to be paid by the Defendants.

27.  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."

28.  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.

29.  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.

30.  There is no evidence in this case as to when the Plaintiffs were out of pocket in having to make payment on account of costs, or in having to actually put up funds for payment of their legal costs. Nor is there evidence of when liability for disbursements such as Counsel's fees was incurred. 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 20 August 2010, at a lower rate of 2% above judgment rate.

Conclusion

31.  I allow the Plaintiffs' application for enhanced interest on the judgment sum at the rate of 4% above judgment rate, indemnity costs and interest on costs at the rate of 2% above judgment rate, from 20 August 2010 until payment.

32.  The Defendants are to pay to the Plaintiffs the costs of the application, to be taxed if not agreed, with certificate for counsel, on an indemnity basis.