Delco Participation B.V. v. Hwh Holdings Ltd

HCA 2943/2015

[2021] HKCFI 250

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2943 OF 2015

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AND

HCA 3040/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 3040 OF 2015

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AND

HCA 2939/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2939 OF 2016

________________

Before: Hon Coleman J in Chambers (Open to Public)

Date of Written Submissions: 6, 13 and 27 November 2020

Date of Decision: 29 January 2021

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D E C I S I O N   O N

S E C U R I T Y   F O R   C O S T S

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A.      Introduction

1.By summonses dated 3 August 2020 (“Summonses”), Fang/HWH have applied for security for costs of these three Actions (“A2943”, “A3040” and “A2939” respectively).  For the purposes of these applications, it is unnecessary to rehearse the facts, but reference can be made to the broad nature of each Action as has been identified in previous decisions.

2.Security for costs is sought in the following sums:

(1)  in respect of A2943, HK$13,649,030 (up to trial);

(2)  in respect of A3040, HK$13,649,030 (up to trial); and

(3)  in respect of A2939, HK$10,315,696 (from the time after pre-trial review (“PTR”) up to trial).

3.Fang/HWH seek those sums on the basis that a total costs of HK$24,976,788 were incurred in the Actions up to the end of July 2020, and another HK$15,970,300 would have to be incurred up to and including the trial of the Actions.  The very broad breakdown and/or estimate of those figures is contained in the ‘Brief Statement of Costs for Security for Costs’ exhibited to the affirmation leading the application. 

4.Those two figures total HK$40,947,088, which has been divided across the three Actions.  However, the sums now pursued take account of the sum of HK$3,333,333 paid by Delco in A2939 as security for costs up to the PTR, pursuant to the order dated 29 January 2019.

5.The application is made pursuant to RHC Order 23 rule 1(1), which materially provides that where the plaintiff is ordinarily resident out of the jurisdiction, then, if having regard to all the circumstances of the case the court thinks it just to do so, the court may order the plaintiff to give such security for the defendant’s costs of the action or other proceeding as it thinks just.

6.There is no dispute that Delco is a plaintiff which is ordinarily resident out of the jurisdiction.  Therefore, it is not in dispute that the court has jurisdiction to make an order for security for costs.  However, Delco opposes the exercise of the jurisdiction in favour of the grant of an order for security for costs on various bases (see below), or alternatively challenges the quantum of costs for which security is sought.

7.The Summonses are dealt with on paper submissions, filed in accordance with directions given.

B.     Applicable Principles

8.The principles applicable on an application for security for costs, made on the basis that the plaintiff is ordinarily resident out of the jurisdiction, are well-settled.

9.Generally, security will be ordered where a foreign plaintiff is involved.  This is because that is ordinarily the fair and just order to make.  However, there is no inflexible rule and the court has a real discretion under Order 23.

10.In exercising that discretion, the court has to consider a host of factors, and will order security only if it is just to do so.  There should be no attempt to go into the merits of the case, unless it can be clearly demonstrated that there is a high degree of probability of success or failure.

11.A plaintiff can oppose an order for security for costs on the basis that any order of substantial security might stifle the claim.  But any argument that an order for security for costs would stifle a claim makes it incumbent on the plaintiff to adduce evidence in support showing not only itself but also its shareholders or other funding parties are unable (rather than merely unwilling) to provide the security if ordered.  Any such evidence produced by the plaintiff should be full and frank, and the court should scrutinise what it is told with a critical eye, and may draw adverse inferences from any unexplained gaps in the evidence.

12.A plaintiff may also oppose an order for security for costs on the basis that, in addition to the plaintiff’s claim, the defendant is making a counterclaim so that the defendant can be regarded as a “real attacker”.  As it is sometimes put, in some cases the claim and counterclaim are really two sides of the same coin.

13.Reference can be made to the case of BJ Crabtree (Installations) Ltd v GPT Communication Systems Ltd (1990) 59 BLR 43. That case involved a dispute between a small private company engaged in removing asbestos from the defendant’s premises.  The claim was for £78,000. The defendant contended that the work was defective and counterclaimed damages of £105,000.  The English Court of Appeal allowed the plaintiff’s appeal against an order for security.  Bingham LJ observed (at 54):

… it does not appear that [the judge] paid attention to the fact which seems most important to me, namely the fact that these two claims – the claim by the plaintiffs and the cross-claim by the defendants – raise essentially the same issues and are going to be fully litigated anyway so far as one can tell.

14.Parker LJ concurred and added (at 55), with what has subsequently been described as “irrefutable logic”:

Here, the situation is that, if the money is not paid into court and the plaintiff’s claim is therefore stayed, the defendant will still raise issues on the counterclaim which are precisely the same as the issues which he would raise on the claim.  In the result, findings might be made on the counterclaim which clearly showed that the plaintiff’s claim which had been stayed would be lifted and there would then be judgment for the plaintiff on the claim (notwithstanding the fact that he had not paid money into court) with appropriate orders as to costs.  This being the situation, it appears to me that the only effect of the application for security will be that, if the money is not paid in, the defendant has the right to begin rather than the plaintiff.  This seems to be nothing less than the use of the rule to obtain some tactical advantage rather than to obtain protection.

15.The Crabtree case has been followed frequently in Hong Kong: see, for example, Success Wise Ltd v Dynamic (BVI) Ltd (unreported, HCA 1463/2004, 1 December 2005); Wison (Shanghai) Chemical Engineering Co Ltd v Simmons & Simmons [2008] 2 HKLRD 72; and Ai Zhong v Metrofond Ltd [2010] 1 HKLRD 213.  However, it must be remembered that the Crabtree case involved a plaintiff whose claim would be stifled by any order for security, yet who would still face the counterclaim which would require full litigation of essentially the same issues.

16.In the Ai Zhong case, Yam J held that in any case where there was a counterclaim and an application for security for costs, it was important to ascertain who was the “real attacker” in the proceedings.  He identified (at §22) what he described as “rules” – but which I would respectfully describe as “guidance” – concerning the importance of that point, including:

(1)  The court has a discretion in all applications for security for costs, and it is not a question of merely considering whether the claim and counterclaim arise out of the same issue of fact, but a question of what is fair and just in all the circumstances.

(2)  An application for security for costs should be refused if it will prevent the plaintiff from pursuing its claim, but in the course of defending the counterclaim all the same matters would be canvassed as would be canvassed if the plaintiff were to pursue its claim.

(3)  The application should also be refused when the costs incurred by the defendant for the purposes of the defence might equally and perhaps preferably be regarded as costs necessary to prosecute the counterclaim.

(4)  The existence of a counterclaim arising out of the same matters as that in the plaintiff’s claim per se does not affect the court’s ability to order security for costs against the plaintiff.

(5)  It is pertinent to ask whether in the particular case the counterclaim is a cross-action or operates as a defence, that is to say merely operates as a defence.

(6)  In determining that question, the most important factor to consider is whether the claim by the plaintiffs and the cross-claim by the defendants raise essentially the same issues and are going to be fully litigated anyway.

(7)  Also relevant to that question might be any marked discrepancy in size between the amount claimed in the action and any much greater amount claimed by the cross-claim.

(8)  A defendant should not be required to give security for costs if he is only defending himself from the plaintiff’s claim.

(9) When both the plaintiff and defendant can be viewed as attackers, the treatment of both parties in security for costs should be the same.

17.As the first point identifies, and as the wording of Order 23 rule 1 specifies, the key issue is the question as to what is fair and just in all the circumstances.

18.The amount of any security awarded is in the discretion of the court, which will fix such sum as it thinks just, having regard to all the circumstances of the case.  It is settled that it is not always the practice to order security on a full indemnity basis.  Each case will be decided on its own circumstances, when making a discount to the sum claimed may or may not be appropriate.  Obviously, the provision of a skeleton bill of costs can afford a ready guide to enable the court to make the relevant assessment as to the amount of security it thinks just in the exercise of the discretion.

C.     Clearing Away Points

19.A number of points as might have arisen can now be cleared away.

20.First, the fact that there was a previous order relating to security for costs in A2939 is no impediment to the making of orders for security for costs on the current summonses (including a further order to security in A2939).  At the time, orders were made in each of the three Actions.  Applications for security for costs were ordered to be withdrawn in A2943 and A3040, and the sum of HK$3,333,333 was ordered to be provided as security for costs in A2939.  But all three orders dated 29 January 2019 expressly included that there be liberty to apply for further security.

21.Secondly, there is no issue that the plaintiff is ordinarily resident out of the jurisdiction.

22.Thirdly, Delco has indicated that it will not attempt to demonstrate a “high probability of success” of its claims as the basis to defeat the application for security for costs.

23.Fourthly, Delco does not suggest that an order for security for costs would stifle its claims.

D.     The “Real Attacker” Question

24.Therefore, Delco’s argument for resisting the applications for security for costs rests on the assertion that Fang/HWH are just as much the attackers as Delco.

25.Delco submits that, subject to the minor issues of discounts and adjustments in A2943 and A3040, there is no dispute that Fang/HWH owed the money claimed by Delco.  The primary issue at trial will be whether Fang/HWH can prove the existence of the Debts allegedly owed by Delco to them, totalling approximately HK$169 million being (a) the roughly HK$31 million Fang Debt, (b) the roughly HK$72 million HKM Metal Debt; and (c) the roughly HK$65 million Chern Debt.  (The Chern Debt is now relevant as a result of the Court of Appeal recent decision (“CA Decision”) relating to the material amendment: see [2020] HKCA 950.)

26.If the alleged Debts can be established, Fang/HWH aver that they should be set off against Delco’s claims, and they also claim the amount in excess of Delco’s claims, being approximately HK$17.25 million. So, Delco submits, it is clear that the claim and counterclaim rose substantially the same issues, namely the existence of the alleged Debts. Assuming Delco were to decide to drop its claims altogether, there is no suggestion that Fang/HWH would drop their counterclaim in respect of the Debts totalling approximately HK$169 million.  In pursuing the counterclaim, the same issues as to their existence would be litigated.

27.So, says Delco, viewed thus the costs incurred in defending Delco’s claims may equally be regarded as costs necessary for them to prosecute their counterclaim on the Debts.  So Fang/HWH are as much an attacker as Delco in A2943 and A3040, and no security for costs should be granted.

28.Fang/HWH submit that the “real attacker” point is wholly without merit, in light of the CA Decision.  Delco’s contention that the plea of set-off can only operate as a legal set-off has been rejected; the CA Decision states that it is quite clear that the plea is not in the nature of a legal set-off but is capable of operating as an equitable set-off.  It is, therefore, in the nature of a defence, and there is no self-standing claim or cross-claim for the Debts.

29.Secondly, the counterclaim arises only as a result of the defence of set-off.  In rejecting Delco’s contention that even if the amendment about the Chern Debt were allowed for the purpose of raising a defence of equitable set-off and estoppel by convention, Fang/HWH should not be allowed to raise a counterclaim on the basis that the Chern Debt would be open above Delco’s claims, the Court of Appeal held that this would be to diminish or emasculate the effect of an equitable set-off that is properly raised.

30.Fang/HWH also emphasise that the Convention pleaded by them is that “if either party were to demand payment of its debts at any time, the receivables and payables would be immediately set off against each other and only the net balance would be payable”.  Therefore, it is Delco’s demands for payment of its debts which trigger the operation of the Convention.  In A2943, HWH pleaded in its defence the Convention, and by reason of its operational effect, the counterclaim.  Therefore, the counterclaim is incidental to, and arises only as a result of, HWH’s defence.  Had there been no demand by Delco for payment of its debts, or if it is somehow prevented from pursuing its claims, the Convention would not operate and the present counterclaims would not arise.  The Convention being an equitable set-off or an estoppel by convention, which is purely a defence, there is no other basis pleaded for the counterclaims.

31.Fang/HWH argue, therefore, that the reasoning in the Crabtree case is inapposite.  This is not a case where the claim and counterclaim are two sides of the same coin.  The counterclaim is inexorably linked to the defence; it is incidental to and arises only as a result of the defence.  The costs in defending the claims are precisely that, and they are not equally or preferably to be regarded as costs necessary to prosecute the counterclaim.

32.I agree.  If one poses the pertinent question whether in this case the counterclaim is a cross-claim or operates as a defence, the CA Decision has confirmed that the counterclaim operates as a defence.  The balance as might be held due to HWH on the counterclaim would simply be the arithmetic result of the operation of the defence of equitable set-off or estoppel by convention.

33.Looked at in that way, the claim by the plaintiff in this case and the counterclaim by the defendant do not raise essentially the same issues as would be fully litigated anyway.  Rather, this case is really one where the defendant should not be required to give security for costs, as it is only – or primarily – defending itself from the plaintiff’s claim.

34.I will, therefore, order security for costs. Such an order seems to me to be just in the particular circumstances of these Actions.

E.     Quantum

35.As to the appropriate quantum, I have pointed out that it is settled that an order for security of costs need not provide full security.  In any event, depending on the stage at which the order is sought, the quantum sought is bound to be based to a greater or lesser extent on estimates.

36.The court will ordinarily adopt a relatively broad brush approach in determining the amount of security, and will unlikely engage in a line by line evaluation of the schedule of estimated costs put forward to justify the claimed security.  The exercise is not one of quasi-taxation, but the court will not ignore the obvious arguments as might be put forward on any taxation.

37.As to the amount of costs for which security should be ordered on the Summonses, Fang/HWH point to the complexity of the proceedings, which fact has been recognised in a number of prior interlocutory judgments in the Actions.  Therefore, whilst there is a clear division of labour within the legal team, sometimes the nature of particular tasks requires each fee earner separately to incur time.  In that way, what sometimes looks like duplication is not in fact duplication, but rather the combined effort of more than one fee earner.  Fang/HWH criticise Delco’s allegation of duplication as being unjustified.

38.Fang/HWH say the reasonableness of the total amount of security sought in the sum of over HK$37.6 million should also be assessed against the following, so as to see that it is proportionate to the circumstances:

(1)  the actions have been ongoing for five years or more, and there has been “no shortage” of interlocutory applications and court hearings;

(2)  factual matters relevant to the proceedings span from 1999 through to 2015;

(3)  there is much at stake where Delco’s claims are “enormous”; the claims in A2943 and A3040 exceed HK$100 million, and the various claims in A2939 are estimated by Delco to be to the tune of hundreds of millions of dollars;

(4)  interlocutory applications have continued, and there has been an appeal;

(5)  the estimated time for trial is 15 days, which will require a significant amount of work for proper preparation.

39.Delco argues that the amount of security requested by Fang/HWH is grossly excessive.

40.First, for A2939 Delco says that the previous consent to the provision for security for costs was up to the PTR, so that Fang/HWH cannot have a second bite at the cherry in respect of costs before the PTR.  Whilst there have been some further interlocutory matters that may not have originally been envisaged, I think that costs orders have already been made primarily sufficient to deal with those.  Therefore, I agree that the claim now to security in A2939 should be limited to the period from the PTR up to the trial.

41.Delco more generally point to the ordinary rule that only one fee earner will be allowed for a particular item of work, yet the draft skeleton bill seems to reveal significant duplication, together with excessive time spent (such as on communications) and overlapping of work. Claims have also been made to costs arising from applications which are irrelevant to Delco, to the summary judgment application for which costs have already been assessed and paid, and Counsel’s fees are plainly excessive as well as being on the basis of the claim that there would be a certificate for three Counsel.

42.Taking the discounted approach that Delco suggests, the total amount of costs incurred and to be incurred would be approximately HK$15.4 million.  Delco suggests dividing that sum into thirds across each of the three Actions, but discounting the amount in A2939 to reflect the starting point of the PTR.  That would give sums of HK$5,119,765 in each of A2943 and A3040, and HK$1,978,667 in A2939.

43.Fang/HWH have responded to the individual points made by Delco, though I do not think I need to deal in detail either with the original point or the response.  Broadly, Fang/HWH identify the need to take a realistic view as to the time that would have been incurred, even on a broad brush basis.  For example, they say that permitting only about HK$500,000 per year on attendance is grossly unrealistic for the magnitude of this case.  Nevertheless, I do think the attendance hours put forward are at least on the high side, even looking at matters on a broad brush basis.

44.Nor, Fang/HWH say, is there any basis to discount arbitrarily the fees of Counsel by half, and a certificate for three Counsel is not untenable (see the CA Decision as an example).  As to the certificate, that may be right, but I am not sure that it necessarily justifies security being ordered now on the rather more speculative basis that there will be a certificate for three Counsel, rather than one for two Counsel.  In addition, the total for Counsel’s fees seems to me to be rather high (though I accept I have not been provided the detail of fees of other parties, against which to make a comparison).

45.Further, there do seem to me to be some merits in some of the other points made by Delco.  For example, even if there is not strict duplication, there would be occasions when work performed by one member of the team ought readily to have been able to be performed by a more junior (and cheaper) member of the team.  Further, some duplication is in practice likely inevitable when a large legal team is involved, sometimes with changes in the persons in the team.  That is not something which should be put at Delco’s door, at least not for present purposes.

46.Again, rather than conduct a more individual assessment of lines or items or parts of the costs claimed in the schedule, a rather more broad brush approach seems to me to be appropriate.  In that context, and despite the complexity of the litigation and size of the claims, I am not convinced that the overall figure for security for costs claimed is in fact proportionate.

47.In the overall circumstances, in the exercise of my discretion, it seems to me that the appropriate amounts to order by way of security for costs – which will be ordered on the usual terms – are as follows:

(1)  in respect of A2943, HK$9,000,000 (up to trial);

(2)  in respect of A3040, HK$9,000,000 (up to trial); and

(3)  in respect of A2939, HK$3,600,000 (from the time after PTR up to trial).

F.     Non-Compliance with Previous Costs Orders

48.I will deal with this point, though it has not formed any part of my determination of the Summonses.

49.Delco complains that Fang/HWH have blatantly and intentionally breached costs orders previously made against them.  Further, Delco says that the explanations for so doing, as offered by Fang/HWH, are disingenuous.

50.I tend to agree that the explanations do not absolve Fang/HWH from their misconduct in failing to pay costs orders.  That misconduct appears to me to be clear in the deliberate and intentional withholding payment, in the hope that a setting-off would be permissible at some point.

51.However, whilst the approach to previous costs orders has been regrettable, those orders have now been satisfied.  It does not seem to me to matter whether they have been satisfied so as to improve Fang/HWH’s chances on the Summonses.  At least by the time of the last submissions, and this Decision, the non-compliance has ceased to persist.

G.     Result

52.I make an order that Delco provide security for costs in the sums identified in paragraph 47 above, such order to be on the usual terms as to the consequence of a stay of the relevant action should there be any failure to pay that sum into court.  Bearing in mind the significant sums ordered, I require it to be paid within 28 days, that is by 5pm on 26 February 2021.

53.I also make a costs order nisi that the costs of the summonses shall follow the event, to be taxed if not agreed.  The nisi order will become absolute if no application for variation is made within 14 days.  Any variation application will be dealt with on paper submissions.

Mr Victor Dawes SC and Mr James Man, instructed by Clifford Chance, for the plaintiff in all cases
Mr Norman Nip and Mr Roger Phang, instructed by Stephenson Harwood for the defendant in HCA 2943/2015, the 2^nd defendant in HCA 3040/2015 and the 3^rd, 4^th defendants in HCA 2939/2016