Hydrotech Waterproofing Solutions Ltd v. Shun Yuen Construction Co Ltd

HCCT 44/2020

[2023] HKCFI 601

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 44 OF 2020

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BETWEEN

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D E C I S I O N

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Background

1.On 25 April 2022, this Court handed down Judgment, dismissing the claims made by the Plaintiff in these proceedings, with costs to be paid by the Defendant.

2.The nomenclature used in the Judgment is adopted below.

3.On 10 May 2022, the Defendant applied by its summons for leave to join, firstly McKee of the Plaintiff, and secondly Mr Mo Wai Kei (“Mo”), as 2^nd and 3^rd Plaintiffs for the purposes of costs, and to vary the order of costs made in the Judgment, that all the Plaintiffs should pay the Defendant’s costs of the action. The application for the third party or non-party costs order is made under section 52A of the High Court Ordinance. The Defendant also seeks variation of the costs order nisi under Order 22 rule 23 of the Rules of the High Court, to provide for the Defendant’s costs up to 22 December 2020 to be taxed on party and party basis; its costs after 22 December 2020 to be taxed on indemnity basis; and for interest on costs after 22 December 2020 at the rate of 4.5% per annum until the date of judgment.

4.On 18 August 2022, the Defendant further applied to join Hop Shing Engineering & Construction Co Limited (“HS”) (of which Mo is the sole director) as the 4^th Plaintiff for costs purposes.

5.There is no dispute that the application for non-party costs order is summarily assessed in 2 stages, the first as to whether a party should be joined for costs purposes; and the second as to whether the non-party should be made liable for costs. The 2 stages may be carried out together, as in the present case. McKee, Mo and HS were all represented at the hearing of the Defendant’s summonses for their joinder and in respect of their liability for the Defendant’s costs. Mr Talib accepted on their behalf that the Defendant’s summonses for joinder are not liable to be struck out at the first stage.

The non-party costs order

6.On behalf of the Defendant, Counsel contended that a third party funder who seeks to benefit from litigation which fails is “ordinarily”, “generally” and “normally” required to pay the costs of the successful party. Mr Talib for the Plaintiff sought to argue that it was still “exceptional” to make such an order. Reference was made by both Mr Baker and Mr Talib to Dymocks Franchise Systems (NSW) Pty Ltd v Todd & Ors [2004] 1 WLR 2807 (PC) and The Liberty Container [2007] 2 HKLRD 507 (CFA).

7.At paragraph 25 (3) of the judgment in Dymocks, the Court observed:

“(1) Although costs orders against non-parties are to be regarded as ‘exceptional’, exceptional in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. The ultimate question in any such ‘exceptional’ case is whether in all the circumstances it is just to make the order. It must be recognized that this is inevitably to some extent a fact-specific jurisdiction and that there will often be a number of different considerations in play, some militating in favour of an order, some against. (2) Generally speaking the discretion will not be exercised against ‘pure funders’, described in para 40 of Hamilton v Al Fayed (No 2) [2003] QB 1175, 1194 as ‘those with no personal interest in the litigation, who do not stand to benefit from it, are not funding it is a matter of business, and in no way seek to control its course’. In their case the court’s usual approach is to give priority to the public interest in the funded party getting access to justice over that of the successful unfunded party recovering is costs and so not having to bear the expense of vindicating his rights. (3) Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining assets to justice for his own purposes. He himself is ‘hope the real party’ to the litigation, a concept repeatedly invoked throughout the jurisprudence…” (Emphases added)

8.In The Liberty Container, the Court considered and applied Dymocks, and counsel for the Defendant highlighted paragraph 33 of the judgment of Bokhary PJ, where he stated that “justice will normally require that a self-interested funder whom the law can reach be ordered to pay the costs of the funded litigant’s successful opponent”.

9.There was also debate between Mr Baker and Mr Talib as to whether, in a case where the controlling director of a company is sought to bear the costs of the company on the basis that he had an interest to gain or was controlling the company or the litigation, it has to be shown that the company was insolvent. It was highlighted that in Dymocks, there was reference to a non-party promoting and funding “proceedings by an insolvent company” solely or substantially for his own financial benefit. Mr Talib pointed out that in this case, there is no evidence that the Plaintiff company is insolvent.

10.As the courts have endeavored to explain in the various cases cited by both Mr Baker and Mr Talib, there is no hard and fast rule, to be read and applied as if it was set out in a statute, to govern cases in which the court is asked to exercise its discretion to order a party to pay costs, or in deciding whether or not a party is “the real party” to the action to bear the consequences of the failed litigation. The consideration is fact-sensitive. Needless to say, the fact that a director in control of proceedings in one action had been made liable for costs, cannot mean that a director in control of a company and its litigation in another action should be made liable for costs in the other action.

11.The principles are best summarized by Lord Justice Coulson in Goknur v Organic Village [2021] EWCA Civ 1037, where he considered the relevant case law, and then concluded at paragraph 40:

“Without in any way suggesting that these authorities give rise to a sort of mandatory checklist applicable to a company director or shareholder against whom a s.51 order is sought, I consider that the relevant guidance can usefully be summarised in this way:

a) An order against a non-party is exceptional and it will only be made if it is just to do so in all the circumstances of the case (Gardiner, Dymocks, Threlfall).

b) The touchstone is whether, despite not being a party to the litigation, the director can fairly be described as ‘the real party to the litigation’ (Dymocks, Goodwood, Threlfall).

c) In the case of an insolvent company involved in litigation which has resulted in a costs liability that the company cannot pay, a director of that company may be made the subject of such an order. Although such instances will necessarily be rare (Taylor v Pace), s.51 orders may be made to avoid the injustice of an individual director hiding behind a corporate identity, so as to engage in risk-free litigation for his own purposes (North West Holdings). Such an order does not impinge on the principle of limited liability (Dymocks, Goodwood, Threlfall).

d) In order to assess whether the director was the real party to the litigation, the court may look to see if the director controlled or funded the company’s pursuit or defence of the litigation. But what will probably matter most in such a situation is whether it can be said that the individual director was seeking to benefit personally from the litigation. If the proceedings were pursued for the benefit of the company, then usually the company is the real party (Metalloy). But if the company’s stance was dictated by the real or perceived benefit to the individual director (whether financial, reputational or otherwise), then it might be said that the director, not the company, was the ‘real party’, and could justly be made the subject of a s.51 order (North West Holdings, Dymocks, Goodwood).

e) In this way, matters such as the control and/or funding of the litigation, and particularly the alleged personal benefit to the director of so doing, are helpful indicia as to whether or not a s.51 order would be just. But they remain merely elements of the guidance given by the authorities, not a checklist that needs to be completed in every case (SystemCare).

f) If the litigation was pursued or maintained for the benefit of the company, then common sense dictates that a party seeking a non-party costs order against the director will need to show some other reason why it is just to make such an order. That will commonly be some form of impropriety or bad faith on the part of the director in connection with the litigation (Symphony, Gardiner, Goodwood, Threlfall).

g) Such impropriety or bad faith will need to be of a serious nature (Gardiner, Threlfall) and, I would suggest, would ordinarily have to be causatively linked to the applicant unnecessarily incurring costs in the litigation.”

12.The director of an insolvent company who causes the company improperly to prosecute or defend proceedings, is one example of a case in which the court may decide, after considering the matter in the round, that it would be just to order the director to bear the costs of those proceedings. The director who acted in bad faith, to further his own interests and to seek a personal benefit, is another example where the court may exercise its discretion in the light of all the circumstances of the case. What is demonstrably clear, is that the mere fact that a director controlling a company had caused the company to bring or defend proceedings which the director funded and which ultimately failed is not sufficient to render the director liable for costs. In Re North West Holdings PLC and Anor [2001] EWCA Civ 67 (cited in the judgment in Goknur), the court explained that a crucial question is whether the relevant director held a bona fide belief that the company had an arguable defence, and that it was in the interests of the company for it to advance that defence.

13.Applying these legal principles to the facts of this case, I am not satisfied that either McKee or Mo should be made a party to bear the costs of the successful Defendant. The reasons are set out below.

McKee

14.There is no dispute that McKee was the sole director and shareholder of the Plaintiff. Nor does the Plaintiff dispute that McKee had the control of these proceedings, under the advice of the lawyers acting for the Plaintiff. The mere control and management of the Plaintiff’s litigation cannot by itself form the basis of any non-party costs order to be made against McKee (Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1BCLC 165, Myers Management Consulting Ltd v Topmix (International) Company Ltd & Ors [2022] HKDC 410). As Coulson LJ observed in Goknur (at para 46):

“A director who is controlling and funding the litigation to help preserve the company or advance its legitimate interests cannot usually be said to be seeking to gain personally from the litigation. He or she is merely doing what their duties as a director require them to do. Conversely, the director who is looking for a personal windfall from the litigation, or is seeking to preserve his personal position or reputation, knowing that the company has no money to pay the other side’s costs if they lose, is vulnerable to an order under s 51, because he or she is ‘the real party’ to the litigation.” (Emphasis added)

15.I am not satisfied on the evidence that McKee had acted mala fide, or otherwise than under the belief that it was in the best and legitimate interests of the Plaintiff, in the commencement and continuation of the Plaintiff’s proceedings against the Defendant. McKee had acted under legal advice, and genuinely believed on such advice that the Plaintiff had a viable cause of action against the Defendant, and that it was in the best interests of the Plaintiff to sue for recovery of the price due and payable for the works carried out under the Works Contracts.

16.If the Plaintiff had succeeded in the litigation and in the recovery of the sums claimed from the Defendant, it would have been able to pay off its creditors including HS. As Mr Talib pointed out, that would be of primary benefit to the Plaintiff company itself. I do not accept that the Plaintiff’s recovery of $1 million or $2 million of what was claimed from the Defendant would constitute profits which would ultimately accrue to McKee as a shareholder. There is no evidence that the Plaintiff had suspended all its business, such that it would not have to pay further operating costs, and that the outstanding sum due and sought from the Defendant would have ended up in McKee’s pocket. On the evidence, McKee drew a monthly salary of $35,000, and a housing allowance of $40,000 per month, and he had not drawn any dividends from his shareholding in the Plaintiff.

17.Even if it can be said that McKee had an interest, and even a financial interest, in the outcome of the litigation, in the sense that he would be able to continue to have the benefit of his salary or other drawings, that does not by itself warrant a non-party costs order to be made against him. There is nothing in the evidence which can lead me to the conclusion that McKee had acted solely or substantially for his own financial benefit, rather than in the interests of the Plaintiff company and its creditors. As Millett LJ explained in Metalloy Supplies Limited:

“It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified.” (Emphases added)

18.The fact that the company bringing the proceedings is insolvent is one of the circumstances which the court may take into consideration. If the director knew that the company had no genuine cause of action, and also knew that the company by virtue of its insolvency or financial state would be unable ultimately to pay the costs of the unsuccessful litigation, and still continued the proceedings for his own reasons, that would be a case in which a non-party costs order may be made against the director who can be said to have acted improperly and/or in bad faith. In this case, there is no clear evidence of the Plaintiff being insolvent or unable to pay costs, apart from the Defendant’s own speculation.

19.The fact that HS may not, according to Mo’s evidence, take action to pursue the debt due from the Plaintiff to HS, does not mean that HS is not a creditor, and there is no debt. The fact that the Plaintiff would be able to discharge its debt if it was successful in the litigation is a benefit for the Plaintiff.

20.Having considered the facts and circumstances of this case as outlined in the Judgment, and the further evidence filed in the application for the non-party costs order, I decline to make any costs order against McKee.

Mo and/or HS

21.As for Mo, there is no dispute that he was the sole director and majority if not sole beneficial shareholder of HS. The Defendant pointed out that in his evidence, Mo had admitted that he had assisted McKee and the Plaintiff in the Plaintiff’s works under the Works Contract, by providing financial and logistic support (such as providing and paying for workers and materials), providing upfront financial support for the operation of the Plaintiff’s works, was responsible for the general management and supervision of such works, was involved in the execution of the works, and had taken part in discussions with J and DSD concerning the delays in payment to the Plaintiff, and in the settlement discussions. In cross-examination, Mo and McKee had both admitted that they had agreed that the profits of the works under the Works Contract would be shared between them equally. According to Mo, HS had a “collaboration with the Plaintiff in the Works Contract”, and the two companies were “cooperating with each other” to engage in the works. It was also McKee’s evidence that Mo and HS were not subcontractors of the Plaintiff.

22.In Mo’s oral evidence, it was disclosed that as he had provided upfront financing for the Plaintiff’s completion of the works, under the arrangement agreed between McKee and himself to split the profits of the works 50/50, $3 million of the outstanding payments of $4 million due under the Works Contract was in fact owed by the Plaintiff to HS, and that if these proceedings had succeeded, McKee would have paid Mo his due share, as he had funded these proceedings.

23.On the Defendant’s case, costs are sought against Mo and HS on the basis that one or the other of them had funded these proceedings with a view to recovering $3 million of unpaid fees due from the Plaintiff to it in respect of the works carried out under the Works Contract. It was contended that as they were seeking the benefit of recovery from the Defendant in these proceedings, it would be unjust to allow them to evade the risk of the proceedings failing and to avoid the costs which have resulted.

24.It was emphasized that throughout his evidence, Mo had referred to himself as the party who had agreed with McKee to share the profits, and who had funded the litigation. It was only in the affirmation filed in opposition to the Defendant’s summons for the costs order, that Mo claimed that the financial and logistic support had been provided by HS to the Plaintiff, and that all the actions he had earlier described had been undertaken by him on behalf of HS, and as a director of HS, rather than in any personal capacity. Mo also claimed that the Plaintiff and HS are separate and distinct companies, that he was a director of HS, but he had no management or control of the Plaintiff or of its business affairs. He had been involved in various settlement negotiations, but in an advisory capacity only, and it was against the backdrop of McKee having had a stroke in 2016 and was recovering slowly in the period of time after that. For all settlement meetings and discussions, he had had discussions with McKee, had shared his views with McKee, but it was McKee who had made the final decisions as to what was in the best interests of the Plaintiff.

25.Mo’s evidence is that the $3 million in fees for the advancement of materials and resources was owed not to him personally, but to HS. The relevant invoices had been issued by HS to the Plaintiff, and payments had been made by cheques issued in the name of HS, and not Mo personally. The profits were shared between HS (and not Mo) and the Plaintiff.

26.I accept the evidence of McKee and Mo, that they had not contracted or been involved personally, but only on behalf of the Plaintiff and HS, and their oral testimony is to be considered from the perspective of a layman’s reference to the company of which he was director/shareholder. The evidence on invoicing and payment between the Plaintiff and HS supports the witnesses’ assertion, as to the arrangements having been made between the Plaintiff and HS, rather than between McKee and Mo in their personal capacities.

27.There is no sufficient basis to make any costs order against Mo personally.

28.As for HS, which had funded the litigation of the Plaintiff, I find on the evidence of the profit sharing arrangement and collaboration between HS and the Plaintiff in the Works Contract, and the evidence of the invoicing and payments, that HS indeed had a substantial financial benefit in the litigation against the Defendant. From the evidence, it seems clear to me that HS had financed the litigation in order to recover for itself the costs of the works it had funded and paid for under the Works Contract, and pursuant to the profit sharing arrangement between the Plaintiff and HS. Under such arrangement, HS was entitled to be paid, and the Plaintiff had agreed to pay, the $3 million of the sum recovered from the Defendant if the litigation was successful. In view of such profit sharing arrangement it is only fair and just that HS should pay its share of the costs of the litigation which ultimately failed, as it was one of the real parties in the action. HS can be said to be seeking to benefit, for itself, from the Plaintiff’s litigation.

29.On the facts and circumstances of this case, I make the order sought against HS, that it should be joined as a plaintiff and be ordered to pay, jointly and severally with the Plaintiff, the Defendant’s costs of the action.

Costs on indemnity basis and interest on costs

30.The Defendant’s application for costs on indemnity basis and interest on costs is made under Order 22 rule 23 RHC. The Defendant relies on the fact that on 24 November 2020, it had made sanctioned payment of $1,000, which was open for acceptance until 22 December 2020, and the Plaintiff had failed under the Judgment to do any better than the acceptance of the sanctioned payment.

31.The Plaintiff accepts that as a general rule, a plaintiff who fails to beat a sanctioned payment would have to pay costs on indemnity basis with enhanced interests under Order 22 rule 23(5), and that the Plaintiff bears the burden of showing why it would be unjust to make an enhanced costs order. Under rule 23(6), the Court shall take into account all the circumstances of the case including the matters set out therein. These include the terms of the sanctioned payment, the stage at which the sanctioned payment was made, the information available to the parties at the time, and “the conduct of the parties with regard to the giving or refusing to give information for the purposes of enabling the payment to be made or evaluated”.

32.The Plaintiff argued that bearing in mind its claim of over $4 million, the sanctioned payment of $1,000 was nominal, and cannot be regarded as being a genuine payment or offer. It contended that the sanctioned payment was made only 6 days after the service of the Plaintiff’s Reply, and there was not sufficient information at that stage, before discovery and exchange of witness statements, for the Plaintiff to review their cases and to decide whether or not to accept the sanctioned payment. The Plaintiff pointed out that the parties had made subsequent settlement attempts, and that the Plaintiff had (inter alia) on 2 June 2021 made a sanctioned offer of $3.6 million excluding interest and costs. Further sanctioned offers had been made by the Plaintiff and the Defendant respectively, and the Defendant’s subsequent offers had been substantially higher than the sanctioned payment made in November 2020. The Plaintiff also highlighted the fact that the Defendant had withheld and retained $1.3 million in its favour from the project.

33.I cannot find that the sanctioned payment of $1,000 was not genuine. If the Plaintiff had accepted the sanctioned payment, it would have been automatically entitled to its legal costs up to the acceptance, and that was a reasonable result if the Plaintiff had accepted the payment. In CEP Ltd v Wuxi Jiacheng Solar Energy Technology Co Ltd [2014] 4 HKLRD, the Court also found that a sanctioned payment for a nominal sum cannot be considered to be unreasonable or not genuine as an offer for settlement, bearing in mind the costs consequences.

34.I do not accept that the sanctioned payment was made at a stage when the Plaintiff did not have sufficient information to review the merits of its claims and the defence raised. Pleadings had been closed. The essential defence was that there was no contract between the Plaintiff and the Defendant, and that J was the Defendant’s subcontractor to carry out the relevant works. This was the stance maintained by the Defendant throughout, reflected in the correspondence before the Plaintiff’s commencement of proceedings in August 2020, at the time of the making of the sanctioned payment in November 2020 and until trial, and was the position accepted by the Court. Further, as explained at paragraphs 55 to 63 of the Judgment, the Plaintiff itself had throughout regarded the outstanding payments for the works to be due not from the Defendant, but from J, and it had approached the Defendant for assistance only to seek payment from J, as demonstrated in the Plaintiff’s own letters to the Defendant and to DSD in September 2017 and January 2018. As Counsel for the Defendant pointed out, Mo/HS had been aware of the Defendant’s stance, that the Plaintiff had contracted with J and not with the Defendant, as early as 18 July 2019, when DSD had relayed the Defendant’s request for a declaration to be signed acknowledging such contractual position.

35.Mo (acting as he maintained on behalf of HS and the Plaintiff) had taken part in the negotiations for payment and settlement, in November 2018, July 2019 and November 2019. He knew the amounts being claimed as outstanding, the amounts offered in settlement even before the commencement of proceedings, and consequently also knew the risks of litigating for the disputed sums.

36.Taking into consideration the role Mo had played in the Works Contract, the “cooperation” arrangement between the Plaintiff and HS and HS’ funding of this litigation, I accept the submissions made for the Defendant, that Mo/HS understood and had accepted under its arrangement with the Plaintiff that they (the Plaintiff and HS) would stand or fall together in this litigation, and that if the Plaintiff was successful, it would pay over $3 million to HS, and when the Plaintiff is unsuccessful in this joint litigation, there is nothing unjust to order HS to bear all the costs consequences, including costs on indemnity basis.

Disposition

37.In all the circumstances of the case including those set out in Order 22 rule 23(6), I order that the Plaintiffs (including HS as joined for costs) do pay the Defendant’s costs of the action up to 22 December 2020 on party and party basis, and on indemnity basis from 23 December 2020, together with interest on costs from 23 December 2020. No submissions were made for the Plaintiff on the rate of interest sought by the Defendant, which follows the “simplified” formula for assessing the cost of money to the successful party, used in Golden Eagle International (Group) Ltd v GR Investment Holdings Ltd [2010] 5 HKC 317. I will allow the claim for interest, at 4.5% per annum, from 23 December 2020 until the date of judgment.

38.The costs of the application for variation will be in the cause, with certificate for counsel.

Mr Mohammed Talib (Solicitor Advocate), of Pinsent Masons, for the plaintiff and the intended 2^nd to 4^th plaintiffs (Anthony Peter McKee, Mo Wai Kei and Hop Shing Engineering & Construction Co Limited)

Mr Josh Baker, instructed by MinterEllison LLP, for the defendant