TREND PUBLISHING (HK) LTD v. VIVIEN CHAN and CO (A FIRM)

1995 No. A9183

Headnote

[If a plaintiff starts an action which is bound to fail, it would be wrong to deprive a defendant of its legal costs of the action simply because, irrespective of the merits, it made commercial sense for the action to be discontinued at an early stage.]

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

(Action No. 9183 of 1995)

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J U D G M E N T

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INTRODUCTION

1. In this action, the Plaintiff claimed damages for the Defendant's negligence. The Defendant applied for the Plaintiff's claim to be struck out. Before that application had been determined, the Plaintiff applied for leave to discontinue the action. On 15th April 1996, Master Cannon gave the Plaintiff leave to discontinue the action, but she ordered that the parties bear their own legal costs. The Defendant now appeals against that order. It contends that Master Cannon (a) should have ordered the Plaintiff to pay to the Defendant its costs of the action, including the costs of the application for leave to discontinue the action, and (b) should have made the discontinuance of the action conditional upon the Plaintiff not commencing another action on the same or substantially the same subject-matter as the present action.

THE FACTS

2. In the summer of 1993, the Plaintiff was negotiating with Shang Tai Enterprises Ltd. ("the Landlord") for the grant to the Plaintiff of a tenancy of office premises in King's Road. Terms were eventually agreed between the Plaintiff and the Landlord. Those terms included the grant by the Landlord to the Plaintiff of an option to renew the tenancy for a further year on its expiration at a rent which was to be at such "market rental as may be agreed by the parties". In due course, the Landlord instructed its solicitors, the Defendant, to prepare a form of tenancy agreement. The form of tenancy agreement prepared by the Defendant and executed by the parties incorporated the terms which they had agreed.

3. When its tenancy was coming to an end, the Plaintiff decided to exercise its option to renew the tenancy. However, there were two developments which then occurred which have resulted in this and other litigation. First, the parties could not agree what the market rental was. Secondly, the Defendant, in its capacity as the Landlord's solicitors, informed the Plaintiff that in its view the option was void for uncertainty. The consequences were :

(i) the Landlord refused to renew the Plaintiff's tenancy;

(ii) the Plaintiff remained in possession of the premises after the tenancy had expired;

(iii) the Landlord commenced proceedings against the Plaintiff for possession of the premises; and

(iv) by its counterclaim in those proceedings, the Plaintiff sought specific performance of the option and an order requiring the Landlord to renew the tenancy for a further year.

Eventually, these proceedings were compromised when the parties agreed a rent for a further tenancy, and a consent order which brought the proceedings to an end was filed in court on 23rd November 1995. However, by then the Plaintiff had commenced this action claiming damages against the Defendant for negligence. The allegation was that the Defendant had permitted an unenforceable option to renew to be included in the original tenancy agreement, and had failed to advise the Plaintiff of the possibility that the option might not be effective. It will be noted that the Plaintiff's allegations in the two actions were inconsistent with each other. In the first action, the Plaintiff was arguing that the option was valid and enforceable. In the second action, it was arguing that the option was invalid and unenforceable. It was against that background that the Plaintiff applied for leave to discontinue the current action.

THE RELEVANT RULES

4. It is well-settled that the general rule is that a defendant is entitled to the costs of the action if the action is discontinued. That rule is reflected in the provisions of Ord. 21 r. 2(1) and Ord. 62 r. 10(1). Ord. 21 r. 2(1) permits a plaintiff to discontinue an action without the leave of the Court. However, if he does so, Ord. 62 r. 10(1) renders him liable for the defendant's costs of the action. But that is not an absolute rule. The Rules recognise that there may be circumstances in which a plaintiff should be permitted to discontinue an action without having to pay the defendant's costs. Thus, if the plaintiff wishes to discontinue the action without being liable for the defendant's costs, he must obtain the leave of the Court under Ord. 21 r. 3(1) which provides, so far as is material :

"Except as provided by rule 2, a party may not discontinue an action ... without the leave of the Court, and the Court hearing an application for the grant of such leave may order the action ... to be discontinued ... on such terms as to costs, the bringing of a subsequent action or otherwise as it thinks just."

The principal issue which this appeal raises relates to the circumstances in which the Court can depart from the general rule as to costs.

THE RELEVANT AUTHORITIES

5. In Barretts & Baird (Wholesale) Ltd. v. Institution of Professional Civil Servants, "The Independent", 9th December 1988, Henry J. (as he then was) expressed the view "that the general rule should only apply when the discontinuance could safely be equated with defeat or an acknowledgement of likely defeat". The correctness of that observation was questioned by Kaplan J. in Inchroy Credit Corporation Ltd. v. Cheung Man Cheung [1992] 1 HKLR 120. He thought that Henry J. had gone too far. That was because there may well be cases where justice requires the defendant to recover its costs from the plaintiff, even when the plaintiff has discontinued the proceedings for reasons other than the certainty or likelihood of defeat. I agree with Kaplan J. Ord. 21 r. 3(1) gives the Court a complete discretion to do justice between the parties. It would, in my view, be regrettable if that discretion was fettered in the way suggested by Henry J.

IS THE ISSUE BETWEEN THE PARTIES ACADEMIC?

6. The Plaintiff has not instructed its solicitors to represent it on this appeal, but its argument before Master Cannon was that its action had become academic when it had agreed a new rent with the Landlord for the renewal of the tenancy. That argument must have been advanced on the basis that the discontinuance was not an acknowledgement of likely defeat, but a recognition of the fact that, as a result of the events which had occurred since the issue of the proceedings brought by the Landlord, no damages could have been awarded against the Defendant because the Plaintiff had suffered no loss. This argument was not without force. After all, a passage in The Supreme Court Practice 1995, Vol. I, para. 21/2-5/12 suggests that a departure from the general rule that a defendant is entitled to the costs of the action if the action is discontinued might be proper where the matter in dispute between the parties has become academic. That, I think, is what Godfrey J. (as he then was) was saying in Standard Chartered Bank (Hong Kong) Trustee Ltd. v. Brogan (HCMP No. 2553/89).

7. As it is, I do not think that the issue had become entirely academic. It is correct that, as a result of the renewal of the tenancy at the agreed rent, no damages could be awarded to the Plaintiff for the loss of the option to renew the tenancy. However, the renewal of the tenancy at the agreed rent had only been achieved at some cost to the Plaintiff, namely its legal costs of the action brought against it by the Landlord. The compromise of that action had included a term that the Landlord and the Plaintiff would each be responsible for their own legal costs. Accordingly, on the assumption that the Plaintiff established a breach by the Defendant of any duty which the Defendant may have owed to it, damages could still have been awarded to the Plaintiff for its legal costs of the proceedings brought against it by the Landlord.

8. Having said that, though, I entirely understand why the Plaintiff would not have wanted to litigate the issue. Even if the present action had gone to trial, and the Plaintiff had been awarded damages on this basis against the Defendant, the damages would have been very modest, and I expect that they would have been significantly less than what the Plaintiff's irrecoverable costs of the present action would have been, i.e. the difference between its taxed costs and its solicitors' ultimate bill of costs. In those circumstances, it made absolute sense for the Plaintiff to decide to discontinue this action.

WAS THE ACTION BOUND TO FAIL?

9. But I do not think that that is the end of the matter. I say that because the Plaintiff's action against the Defendant was, I believe, bound to fail. A number of reasons for that were advanced by Mr. Benjamin Yu Q.C. for the Defendant, but the most obvious one, in my view, is that the Defendant owed no duty of care to the Plaintiff. It was conceded before the master that the Defendant owed no contractual duty of care to the Plaintiff. That was apparent from cl. 11 of the tenancy agreement, which recorded that the Defendant was appointed as the Landlord's solicitors for the preparation of the agreement. The only basis for saying that the Defendant owed a duty of care in tort to the Plaintiff was that cl. 10 of the agreement provided that the legal costs of the Landlord's solicitors in the preparation and completion of the agreement were to be borne by the Landlord and the Plaintiff in equal shares. However, such an argument was rejected (in my view rightly) by Nicholls V.-C. (as he then was) in Gran Gelato Ltd. v. Richcliff (Group) Ltd. [1992] Ch. 560 at p. 572E-F.

EFFECT OF THE ACTION BEING BOUND TO FAIL

10. In the final analysis, I do not see why a defendant should be deprived of its costs of an action which it was bound to win, merely because the plaintiff discontinued the action for reasons unconnected with the likelihood of ultimate success or failure in the action. If a plaintiff starts an action which is bound to fail, it would be wrong to deprive a defendant of its legal costs of the action simply on the basis that, irrespective of the merits, it made commercial sense for the action to be discontinued at an early stage. After all, if the Plaintiff had not discontinued the action, the Defendant would have pressed ahead with its summons to strike out the action, the action would have been struck out, and the Defendant would by that route have been awarded its legal costs of the action. In my view, the master should have ordered the Plaintiff to pay to the Defendant its costs of the action, including the costs of the application to discontinue the action.

THE COMMENCEMENT OF FRESH PROCEEDINGS

11. The discontinuance of an action does not prevent a plaintiff from commencing a subsequent action for the same or substantially the same cause of action (see Ord. 21 r. 4). Accordingly, if a plaintiff seeks leave to discontinue an action in order to avoid having to pay the defendant's costs of the action, the plaintiff runs the risk that leave would only be granted on condition that no subsequent action will be commenced on the same or substantially the same grounds. The resurrection of actions which have been discontinued is something to be avoided if at all possible, and I see no reason at all why the Plaintiff's sensible decision to discontinue these proceedings should not be treated as bringing the dispute between it and the Defendant to an end once and for all. In my view, the master should have made the discontinuance of the action conditional upon the Plaintiff not commencing another action on the same or substantially the same subject-matter as the present action. To be fair to the master, it may be that she lost sight of this point because the principal focus of the argument before her obviously related to the issue of costs.

CONCLUSION

12. For these reasons, this appeal must be allowed, the order of Master Cannon of 15th April must be set aside, and there shall be substituted for her order an order that leave be granted to the Plaintiff to discontinue the action on condition that

(i) the Plaintiff pays to the Defendant the Defendant's costs of the action, to be taxed if not agreed, including the costs of the application for leave to discontinue it, and

(ii) the Plaintiff will not commence another action on the same or substantially the same grounds as the present action.

The effect of this order is that the action remains alive until the costs of the action have been paid by the Plaintiff to the Defendant.