KO PHILIP ZHI YAO v. THE INCORPORATED OWNERS OF HAMBURG VILLA

DCCJ 5363/2020

[2024] HKDC 1388

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 5363 OF 2020

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BETWEEN

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DECISION

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Introduction

1.  This is the decision in respect of the plaintiff’s application dated 16 February 2024 for varying the cost order nisi in the judgment dated 5 February 2024 (“Judgment”)[1], whereby it was ordered that:

(a) There be a monetary judgment in the sum of $173,648.00 (“Judgment Sum”);

(b) Interest on the judgment sum shall accrue from the date of the writ to the date of payment at the judgment rate; and

(c) There be an order nisi that half of the costs of the plaintiff shall be paid by the IO, with certificate for Counsel, to be taxed if not agreed.

2.  On 16 February 2024, the plaintiff filed a summons (“Summons”) seeking to vary the cost order nisi to the effect that:

(a) The defendant do pay the plaintiff all (as opposed to half) costs of this action (a) on a party and party basis up to 20 May 2022, and (b) from 21 May 2022 on an indemnity basis, including all costs reserved with certificate for counsel, to be taxed if not agreed;

(b) The defendant do pay the plaintiff enhanced interest on the Judgment Sum at 10% above judgment rate from 21 May 2022 until the date of the judgment;

(c) The defendant do pay the plaintiff interest on the Judgment Sum at prime rate plus 10% per annum from the date of the service of the Writ on 6 October 2020 until 20 May 2022, and at judgment rate from date of the Judgment until payment; and

(d) The defendant do pay the plaintiff interest on costs incurred in this action from 21 May 2022 at half of the enhanced interest rate provided for in paragraph 1(2) above, such interest to accrue from 21 May 2022 until the date of judgment.

3.  The plaintiff also seeks costs of the Summons with certificate for one counsel on an indemnity basis, to be taxed if not agreed.

Parties’ negotiations

4.  The plaintiff’s main basis in support of the Summons is the second sanctioned offer made in compliance with Order 22 of the Rules of the District Court, Cap 336H (“RDC”), on 22 April 2022 (“2^nd SO”), whereby the plaintiff offered to settle the action by a payment of $5,000 from the IO. The last date of accepting the 2^nd SO was 20 May 2024, hence the temporal dividing line for the various reliefs set out in the Summons.

5.  Both parties have extensively referred to various events in relation to the negotiations. To put the 2^nd SO in context, such events are summarized as follows:

(a) The present proceedings were commenced on 6 October 2020.

(b) On 28 December 2020, upon reviewing the Defence filed by the IO, the plaintiff made a Calderbank offer to the IO, proposing terms of settlement to the effect that the IO should arrange for the walls of the Lightwell as well as the B5 Stairwell to be repaired and re-waterproofed, and the plaintiff should arrange (at the IO’s costs) an expert to examine the work afterwards (“1^st CO”). The plaintiff also left the question of legal fees, costs, and other expenses open and stated that he was “willing to consider a reasonable proposal from [the IO]”.

(c) Between January and August 2021, parties were in discussion of the arrangement for an expert inspection of the relevant areas. The discussion turned confrontational after the water-spraying test was aborted on 13 April 2021, whereby parties were arguing whether the water-spraying test was aborted by consent or unilaterally by Dr Patrick Lau, the expert engaged by the plaintiff at that stage. I refer to paragraph 25 of the Judgment for my views on the unsatisfactory handling of such disagreement by both parties.

(d) Meanwhile, in February 2021, parties were in brief discussion about arranging for mediation, but it became apparent that the IO only intended to mediate after the expert reports were available.

(e) On 5 August 2021, the plaintiff made another Calderbank offer to the IO. The plaintiff proposed to settle the whole action by a sum of $160,000 payable by the IO plus costs to be taxed if not agreed (“2^nd CO”).

(f) On 11 August 2021, the IO replied and pointed out that payment of any settlement sum would require a resolution. Documents, e.g. an expert report, in support of the reasonableness of the sum would be necessary. Since the expert inspection was yet to take place, the IO could not accept the 2^nd CO. The IO also urged the plaintiff to arrange for the expert tests to be conducted as soon as possible, such that any mediation or further negotiation for settlement could be conducted on an informed basis.

(g) On 6 October 2021, expert directions were granted by the Court.

(h) On 30 December 2021, a joint site inspection of the Property, the Lightwell and B5 Stairwell took place. I again refer to paragraph 25 of the Judgment for the unfortunate dispute during the joint inspection.

(i) On 28 January 2022, the expert witnesses filed their respective reports.

(j) On 18 February 2022, the expert witnesses met for the preparation of the Expert’s Joint Statement on Liability and Quantum Matters (“Joint Statement”).

(k) On 15 March 2022, the plaintiff made the first sanctioned offer under Order 22, whereby the plaintiff offered to settle the action by a payment of $30,000 by the IO (“1^st SO”).

(l) On 16 March 2022, the expert witnesses issued the Joint Statement.

(m) On 13 April 2022, the IO replied to the 1^st SO and counter-proposed a settlement sum of $12,000 payable by the IO, with no order as to costs. (“IO Counteroffer”)

(n) On 14 April 2022, the plaintiff further counter-proposed a settlement sum of $12,000 plus costs of the action on a party and party basis payable by the IO. (“P Counteroffer”)

(o) On 20 April 2022, the IO replied and asked for the breakdown of the costs of the Action (including all disbursements) for the IO’s consideration, as a decision to accept the offer would require a resolution with supporting documents at the general meeting.

(p) On 21 April 2022, the plaintiff responded the solicitors would begin preparing a bill of costs upon “receipt of a positive response” from the IO.

(q) On 22 April 2022, the plaintiff revised the 1^st SO to reduce the proposed settlement sum to $5,000, hence the 2^nd SO. The last day for acceptance of the said offer, without leave, was 20 May 2022.

(r) On 23 May 2022, the management committee of the IO held a meeting. The IO’s legal representative as well as Mr Simon Cheung were present. It was stated in the minutes, inter alia, that the IO had reasons to doubt the authenticity of the allegation of water seepage, and the IO would instruct the legal team to mediate with the plaintiff.

(s) On 9 June 2022, the Court ordered the parties to attend the Case Settlement Conference (“CSC”) to be held on 9 August 2022. The legal representatives of the parties were directed to, inter alia, prepare their respective statements of costs as in Appendix A to Practice Direction – 14.3 to give information as to their costs incurred up to the CSC and their estimates of costs up to and including the trial. The statement of costs should be lodged and exchanged at least 7 days before the CSC.

(t) On 9 August 2022, the CSC took place which apparently did not result in any settlement. On the same day after the CSC, the plaintiff made the third Calderbank offer and proposed a global settlement sum (inclusive of legal costs) of $500,000 payable by the IO (“3^rd CO”).

(u) On 10 August 2022, the IO replied to ask for invoice(s) of the plaintiff’s expert(s) for the IO to disclose the same at the general meeting.

(v) On 27 August 2022, the IO held a general meeting. Three options were considered, namely (i) the 2^nd SO, (ii) the 3^rd CO, and (iii) continuation of defending the action. The attending owners unanimously voted for continuation of defending the action.

(w) On 10 June 2023, the IO held another general meeting. The attending owners voted unanimously to continue with the present proceedings.

Applicable rules

6.  Order 22 rule 24 paragraphs (1) and (4) of the RDC provide that where a defendant fails to achieve a better result than a sanctioned offer, the Court shall, unless it considers unjust to do so, make the orders referred to in rule 24 paragraphs (2) and (3), namely (i) enhanced interest on the judgment sum for some or all of the period after the latest date on which the defendant could have accepted the sanctioned offer without requiring leave of the Court or agreement with the plaintiff on costs (“Latest Date”), (ii) costs on indemnity basis after the Latest Date, and (iii) interest on costs.

7.  Order 22 rule 24(5) requires the Court, in considering whether it would be unjust to make the orders in paragraphs (2) and (3), to take into account all circumstances of the case including:

(a) the terms of any sanctioned offer;

(b) the stage in the proceedings at which any sanctioned offer was made;

(c) the information available to the parties at the time when the sanctioned offer was made; and

(d) 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.  Order 62 rule 5(1) provides for a list of factors that the Court shall take into account in exercising its discretion as to costs, including:

(a) under rule 5(1)(d), any written offer which is expressed to be “without prejudice save as to costs” and which relates to any issue in the proceedings, but the Court may not take the offer into account if, at the time it is made, the party making it could have protected his position as to costs by means of a sanctioned payment or a sanctioned offer under Order 22; and

(b) under rule 5(1)(e), the conduct of all the parties.

9.  Order 62 rule 5(2) further elaborates rule 5(1)(e):

“For the purpose of paragraph (1)(e), the conduct of the parties includes—

(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."

Half or full costs?

11.  In paragraph 63 of the Judgment, I allowed (on a nisi basis) only 50% of the plaintiff’s costs because much of the evidence as well as arguments of the plaintiff were devoted to the issues of (i) the Alleged Secret Repair and (ii) the failure of conducting the water spraying test on 13 April 2021 (“Rejected Case”), but both of which did not end up in the plaintiff’s favour. I have rejected the plaintiff’s allegation of the Alleged Secret Repair. Also, I have found that the dispute in relation to the reason why the water spraying test on 13 April 2021 was aborted was irrelevant, as it could not shift the parties’ respective burdens of proof and parties could always have resorted to the Court’s assistance under Order 29 rule 3 of the RDC.

12.  The plaintiff seeks to vary this part of the cost order from 50% to 100% of his costs. Whilst the plaintiff has made expansive submissions, the upshot of his contention is that the IO was behaving unreasonably in refusing to accept various offers made by the plaintiff as well as refusing to mediate.

13.  Noticeably, the plaintiff has not directly addressed the effect of my findings against the Rejected Case. Nor does the plaintiff argue for a different proportion of costs that was attributable to the Rejected Case.

14.  I do not find that the plaintiff’s arguments could merit a change of the proportion of the costs that the plaintiff is entitled to.

15.  First, the plaintiff’s arguments focused on analyzing the various factors under Order 62 rule 5 governing the Court’s exercise of discretion on the awarding costs. Therefore, the plaintiff is apparently not arguing, and rightly so, that the Court is mandated by Order 22 rule 24 to award full costs. Such argument would be wrong in principle as illustrated in the respective rulings of the Court of First Instance and the Court of Appeal in CEP Ltd v Wuxi Jiacheng Solar Energy Technology Co Ltd [2014] 4 HKLRD 44 and [2016] 1 HKLRD 960.

16.  As I have found in the Judgment, very significant portion of the evidence and time of the trial were devoted to the Rejected Case. The fact that the IO could and should have approached the negotiations for settlement a lot more proactively could not be a justification for the plaintiff to run unmeritorious/irrelevant arguments, let alone substantially basing his case on them. None of the underlying objectives of the RDC as set out in Order 1A rule 1, to which the Court is under a duty to give effect under rule 2, would lead to a different conclusion.

17.  One of the most unfortunate features of the present case is the plaintiff seemed to be labouring under heavy cynicism towards the acts of the IO. For example, the plaintiff should have instructed the expert witness Mr Honby Chan to conduct his own assessment of the condition of the Property. Instead, the plaintiff was entrenched in his pre-conception that the water seepage had stopped, and focused on establishing the case of the Alleged Secret Repair.

18.  Also, Mr Honby Chan as well as those advising the plaintiff should have noticed the most significant flaw in the evidence of Mr Simon Cheung, namely the apparently inconsistent interpretations of the infrared images in respect of the Upper Corner and the Lower Corner as set out in the Infrared Report (see paragraph 15(g) of the Judgment). The Infrared Report was apparently made available to Mr Honby Chan, who referred to it in his own expert report filed on 28 January 2022.

19.  During cross-examination, Mr Simon Cheung u-turned on his interpretation of the infrared images about the Upper Corner when I requested him to clarity. Such request for clarification should have been made by Mr Honby Chan as early as 18 February 2022 when he met Mr Simon Cheung for preparing the Joint Statement, if not before.

20.  Instead, Mr Honby Chan focused his evidence on attacking the reliability of the Infrared Report based on the limit of the relevant equipment’s function, and he maintained the argument that the Infrared Report could not demonstrate any remaining moisture at the Lower Corner. Rather than objectively assess the infrared images that Mr Simon Cheung had collected, Mr Honby Chan sticked to the premise that the water seepage had ended, which was not a considered view based on his expertise, as he never independently verified the plaintiff’s view about the cessation of seepage.

21.  Similarly, the plaintiff never noticed the fact that the Jan 2019 BD Letter was suggesting there were defects on the 2/F section of the Lightwell Wall, whilst Tin Hung only repaired the 1/F section of it. Again, such discrepancy was only noticed by the Court during the cross-examination of Madam Poon.

22.  Having missed the most significant features of the evidence of facts, the plaintiff devoted a substantial portion of his case to the Alleged Secret Repair. Also, instead of making an application under Order 29 rule 3 of the RDC to seek a proper opportunity to conduct the appropriate tests, the plaintiff spent significant effort to argue with the IO as to whether Mr Simon Cheung also consented to the abortion of the intended water spraying test on 13 April 2021.

23.  I therefore do not find the additional materials in respect of the parties’ negotiations sufficient for varying the plaintiff’s entitlement to costs from 50% to 100%. I maintain my ruling that only 50% of the cost of the action be awarded to the plaintiff.

24.  That said, parties’ conduct during the negotiations for settlement will be relevant to whether I should impose upon the IO the consequences of failing to better a sanctioned offer under Order 22 rule 24, and if so, in what manner.

Should the orders under Order 22 rule 24(2) and (3) be made?

25.  There is no suggestion that the 2^nd SO was not made in compliance with Order 22 rule 5 of the RDC, or that the plaintiff had failed to better the 2^nd SO.

26.  Given the express terms of Order 22 rule 24(4), and the rationale behind the sanctioned offer regime, there must be some positive reasons making it unjust for the orders Order 22 rule 24(2) and (3) to be made: Qvist Henrik v Clatronic Far East Ltd [2020] 1 HKLRD 703, at §18.

27.  The IO argues that the following facts collectively (not individually) render it unjust to impose the orders under Order 22 rule 24(2) and (3):

(a) The 1^st and 2^nd SOs were merely nominal, whilst the major consideration was on the plaintiff’s entitlement to costs;

(b) The plaintiff has failed to provide the breakdown of costs and disbursement as requested by the IO for the purpose of deliberation at the general meetings;

(c) The IO was correct in respect of the Rejected Case; and

(d) At the time when the 1^st and 2^nd SOs were reviewed and considered by the IO, the IO was not insisting on a weak or hopeless case in terms of evidence, but a case that was at least level with or even more promising than the plaintiff’s case.

28.  I have considered those grounds, and I do not consider any of them to be valid, whether individually or collectively.

29.  First, the IO’s repeated emphasis that “costs was [sic] the ‘meat’, offer on the substantive claim was only the ‘sauce’” is neither here nor there. The costs consequence upon the acceptance of a sanctioned offer is the design of Order 22 rule 24. Without more, it could not be an unjust factor. Also, the 2^nd SO was made 6 months before parties filed their respective witness statements in October 2022, i.e. it was a time when the costs in relation to the preparation of factual evidence were yet to be substantially incurred (if at all). The IO would also be protected by the taxation mechanism against any unreasonable claim of costs to be made by the plaintiff.

30.  Insofar as the failure to provide the breakdown of costs and disbursements is concerned, such failure lasted until 7 days before the CSC on 9 August 2022 (as ordered by the Court in fixing the CSC), which was about slightly over 3 months after the 2^nd SO was made. In the minutes of the IO’s management committee meeting dated 23 May 2022, there was no record of any inability to deliberate on the 2^nd SOS arising from the lack of necessary information about the plaintiff’s incurred costs. Instead, it showed that the IO was suspicious about the genuineness of the plaintiff’s claim. In the minutes of the general meeting of the IO dated 27 September 2022, the IO with full information of the costs incurred (albeit the actual invoices issued by the experts might still be at large) resolved unanimously to reject both the 2^nd SO and the 3^rd CO.

31.  Further, I reject the IO’s contention that given the Court’s ruling against the Rejected Case, it was right for the IO to refuse the 2^nd SO (or any other offers), otherwise the IO would have to bear the 50% costs arising from the Rejected Case which was rejected by the Court. Such convoluted argument is missing the key for the failure of the IO’s case, namely the fundamental error in Mr Simon Cheung’s original analysis about the infrared images, which caused the IO to continue to defend the action unnecessarily. The action should have come to an end before the costs of factual evidence and the trial were incurred. It is highly unlikely that, had the IO accepted the 2^nd SO, it would be liable for a larger amount of costs than the amount under the order nisi in the Judgment.

32.  Finally, for reasons stated above, the argument that the IO was not insisting on a weak or hopeless case in terms of the evidence but a case which was equally meritorious as, if not more promising than, that of the plaintiff’s is, with respect, totally misconceived. Mr Simon Cheung’s opinion was based on a fundamental (and obvious) flaw in the Infrared Report, and such error should have been noticed by those advising the IO before the 2^nd SO was made. For the purpose of assessing whether it is unjust to impose the orders under Order 22 rule 24, the IO cannot simply disclaim the responsibility arising from the error of Mr Simon Cheung’s opinion.

33.  I therefore find that it is not unjust to impose the orders under Order 22 rule 4(2) and (3) in the circumstances of the present action. For avoidance of doubt, I have also considered the IO Counteroffer of $12,000 inclusive of legal costs. Such offer was far below the Judgment Sum, and it would be even more inadequate when the legal costs are taken into account. I do not consider that IO Counteroffer would tilt the balance in favour of the IO, whether individually or collectively with all other matters relied on by the IO as analyzed above.

34.  The orders under Order 22 rule 4(2) and (3) should therefore be made.

Costs on the indemnity basis

35.  Pursuant to Order 22 rule 4(2), the plaintiff’s costs should be taxed on a party and party basis between the date of the Writ of Summons and 20 May 2022, i.e. the Latest Date, and on an indemnity basis from 21 May 2022 until the date of the Judgment. 

Enhanced interest rate on the Judgment Sum and costs

36.  The maximum uplift of 10% above judgment rate is only saved for the worst cases: Qvist Henrik v Clatronic Far East Ltd (supra), at §29.

37.  There is no lack of criticisms against the IO’s conduct of the action, e.g. the unexplained change of expert witness in the beginning of 2021 and a relative lack of proactiveness in arranging for expert inspections after the originally intended test was aborted on 13 April 2021. However, the IO’s conduct is not of the most egregious type, e.g conducting the proceedings with dishonest ulterior motive or dishonest behaviour.

38.  Having considered the relatively small amount of the Judgment Sum, and the difference between it and the 2^nd SO as well as the IO Counteroffer, I consider an enhanced interests of 5% above the judgment rate to be appropriate for the Judgment Sum. The enhanced interest rate should start to apply from 21 May 2022, i.e. the day after the Latest Date.

39.  One matter should be specifically addressed. At paragraph 1(3) of the Summons, the plaintiff seeks an order that:

“The defendant do pay the plaintiff interest on the Judgment Sum at prime rate plus 10% per annum from the date of the service of the Writ on 6 October 2020 until 20 May 2022, and at Judgment rate from date of judgment until payment.”

40.  Nevertheless, in paragraph 43 of the submissions in support of the Summons, Mr Adrian Leung, counsel for the plaintiff, apparently no longer pursue paragraph 1(3) of the Summons. Instead, he referred to paragraph 1 of the sealed judgment and proposed an order that:

“…the IO do pay P interest on the judgment sum at judgment rate from the date of the service of the Writ on 6/10/2020 until 20 May 2022 (the latest date for acceptance of P’s 2^nd SO), and from date of judgment until payment.”

41.  Apparently, the order as proposed under paragraph 1(3) of the Summons was misconceived. I consider Mr Leung’s submissions as an appropriate proposal.

42.  As to enhanced interest on costs, the IO relied on this Court’s ruling in Leung Tak Kwan t/a Wallpaper Warehouse (HK) Co. v Gao Meng Fa Limited [2022] HKDC 260, the material ruling in which was based on Shih Pik Nog v G2000 (Apparel) Ltd [2011] 4 HKLRD 121, §18, and argued that the party seeking such relief should adduce evidence showing that he or she has already made the payment of costs and disbursements to solicitors.

43.  In reply, the plaintiff referred me to Antwerp Diamond Bank NV v Brink’s Incorporated (No 2) [2015] 4 HKLRD 628, whereby the Court of Appeal clarified the ruling in Shih Pik Nog v G2000 (Apparel) Ltd (supra):

“26 …with respect, Shih Pik Nog appears to have been a case in which insurers were involved for defendants, and in those circumstances the learned judge might well have been concerned to see that costs had actually been expended before making an order for interest to be paid on them. Most ordinary litigants (including companies and banks) can be expected to have to fund the litigation in which they are involved as it proceeds, and we do not think that such evidence should necessarily be required in every case. However, given that enhanced interest on costs is meant to be compensatory rather than punitive, if a paying party has reason to think that the receiving party has not actually paid its own costs in the usual manner (viz by different instalments over a period of time during the course of the litigation), the paying party can raise his query with the court and, depending on the circumstances, the court may require a statement from the receiving party’s solicitors certifying the dates and amounts of costs that have in fact been paid.”

44.  Antwerp Diamond Bank NV v Brink’s Incorporated (No. 2) (supra) is binding on this Court and it was not cited in Leung Tak Kwan t/a Wallpaper Warehouse (HK) Co. v Gao Meng Fa Limited (supra).

45.  I therefore follow the Court of Appeal’s ruling in Antwerp Diamond Bank NV v Brink’s Incorporated (No. 2) (supra) and reject the IO’s argument that the plaintiff should not be entitled to the enhanced interest on costs solely for failing to adduce evidence that he has been out of pocket. Nor has the IO put forward any suggestion (let alone reasons) that the plaintiff had not actually paid its own costs in the usual manner. The plaintiff should therefore be awarded interest on costs.

46.  Also based on paragraphs 27 and 28 Antwerp Diamond Bank NV v Brink’s Incorporated (No. 2) (supra), and upon taking the circumstances of the present proceedings into account, I order that interest on the entirety of the plaintiff’s taxed costs be paid at half of 4% above prime rate, accruing from 21 May 2022, i.e. the day after the Latest Date, which also happens to be about the half-way point in time between the issuance of the Writ of Summons and the handing down of the Judgment.

Disposition

47.  For reasons set out above, paragraphs 62(b) and 63 of the Judgment should be replaced by the following:

(a) The defendant do pay the plaintiff 50% of the costs of this action (a) on a party to party basis up to 20 May 2022, and (b) from 21 May 2022 on an indemnity basis, including all costs reserved with certificate for counsel, to be taxed if not agreed;

(b) The defendant do pay the plaintiff enhanced interest on the Judgment Sum at 5% above judgment rate from 21 May 2022 until the date of the Judgment;

(c) The defendant do pay the plaintiff interest on the Judgment Sum at judgment rate from the date of the service of the Writ on 6 October 2020 until 20 May 2022, and at judgment rate from date of the Judgment until payment; and

(d) The defendant do pay the plaintiff interest on costs incurred in this action from 21 May 2022 at half of 4% above prime rate from 21 May 2022 until the date of the Judgment.

48.  As for the costs of the Summons, the plaintiff has succeeded in obtaining the orders under Order 22 rule 24(2) and (3), but failed his application for varying his entitlement to costs from 50% to 100%. Considering (i) the fact that the evidence filed by parties was relevant to all aspects of the Summons, and (ii) the proportion of arguments for all issues under the Summons, the plaintiff should be awarded 75% of the costs of the Summons. There is no reason that the cost consequences under Order 22 rule 24(3) should not be applied to the costs of the Summons.

49.  As such, I make an order nisi that 75% of the costs of the Summons be to the plaintiff. To save costs of the parties, based on the Statement of Costs filed on behalf of the Plaintiff on 25 April 2024, I summarily assess the plaintiff’s full costs of the Summons as $100,000, which has already reflected the sanction under Order 22 rule 24(3) and a certificate for one counsel. Therefore, the plaintiff is entitled to $75,000 as costs. Such costs should carry the same interest as the costs of the action, namely half of 4% above prime rate, from the date of the Summons until payment.